Chapter 10 Risk and opportunities management

1. Chapter 10 Risk and opportunities management • Introduction • The nature of risk and risk management • Qualitative and quantitative approaches • Opportunities management • Summary Project management in practice: It’s a risky business

2. Introduction • Uncertainty distinguishes projects from repetitive operations, key • Risk is complex in nature and it may (or may not) be manageable • Elements of management may be beyond the single project • These often reflect political, social and other organisational issues • Evaluation of risk is important, it indicates whether a project is viable • There are well-developed procedures for managing risks • Management of the process and outcomes • Identifying eventualities in advance allows PM to choose actions • Opportunity also a part of uncertainty, consider at • Project level: new capabilities or unexpected uses of outcome • Task level: an early finish allows next project to start early or development of a better method

3. 10.1 The nature of risk and risk management • Definitions of risk: • The possibility of suffering harm or loss [PMI BoK 2004] • Uncertainty inherent in plans and the possibility of something happening (i.e. a contingency) that can affect the prospects of achieving business or project goals [BS 6097 (2000) Part 3: Guide to the Management of Business Related Project Risk] ‘Known knowns’ form the basis of planning ‘Known unknowns’ are uncertainties ‘Unknown unknowns’ are not known in advance

4. 10.1 The nature of risk and risk management (Continued) • Risk management incorporates a process for • Identifying potential risks • Analysing them • Managing the significant ones • Project planning looks into the future; there is always uncertainty • Objective is not necessarily to eliminate all uncertainty • Risk is proportional to return, view as trade-off • Saving money on one activity may mean an increase in risks • Individuals have different perspectives on risk • Individuals are prepared to accept different cost/benefit levels • Individuals will choose different levels of risk • Treatment of risk is based on partial knowledge and instinct

5. 10.1 The nature of risk and risk management (Continued) • Framework for risk management Figure 10.1 Risk management schema

6. 10.1 The nature of risk and risk management (Continued) • Risk Identification • The process of prediction of the key risk outcomes • Indicators that something is going/may go wrong in a project • How to identify risks • By brainstorming • By consultation activities • Seek the wider stakeholder views • Seek the view of experts • Refer to the WBS • Look to time, cost and quality plans

7. 10.1 The nature of risk and risk management (Continued) • Categories of risk identification • Consider what might happen • The possibility of missing key objectives • Unexpected changes demanded by stakeholders • Technological problems • Staffing changes • Behaviour that would conspire to cause failure • Particular aspects • Time: critical path, critical chain • Cost: how good are the estimates?

8. 10.1 The nature of risk and risk management (Continued) • Quality: assurance for all processes or are some out of the projects control? • Health and safety • Legal or financial standing of the organisation • Check key assumptions • Will changes made to save money increase costs elsewhere? • Will changes produce further risks? • Have the risks become ‘normal’?

9. 10.1 The nature of risk and risk management (Continued) Response control or mitigation (1) • Procedures are required to ensure • Either the likelihood of the event occurring is reduced • Or effects can be managed or mitigated • Consider • Corrective action • Contingencies and reserves • Outsourcing the risk to contractors, experts or insurance • Conducting limited trials (fundamental to agile/extreme approaches) • The top 20 percent of risks are likely to cause 80 percent of delays or over-runs • For these significant risks make contingency plans • Put contingency plans into the project proposal

10. 10.1 The nature of risk and risk management (Continued) Response control or mitigation (2) • Formal techniques may be required by • Organisation policy • Client demand • Benefits • Improvements to plans, better reflecting reality • Highlighting areas that need attention and contingency planning • Harnessing the ‘gut-feel’/intuition element • Allowing factors/events to be traced historically • Building up experience in a structured way

11. 10.1 The nature of risk and risk management (Continued) Response control or mitigation (3) • Benefits from ongoing process through the project • Support documentation • the risk register or the risk log • Risk register/risk log: • List identified risks • Their occurrence • Actions taken to mitigate them • Results of the actions taken • Add new risks as they become apparent • Remove expired risks • Beneficial as highlights ongoing process

12. 10.2 Qualitative and quantitative approaches • How risky is an event or activity? • How likely is it to occur, what is the probability? • Improbable to highly likely • What might be the effect (impact/severity) of the event? • Critical – will cause total failure • Major – will hold up or increase costs in one or more areas • Minor – will only cause inconvenience

13. 10.2 Qualitative and quantitative approaches (Continued) • Qualitative approaches • Gather peoples’ perceptions as to probability and impact • Use scales • Low–medium–high; 1 to 3; 1 to 5 (APM); 1 to 10 (PMI) • Ratings based on opinion or perception • Chart on matrix • Visual identity of high risks needing attention

14. 10.2 Qualitative and quantitative approaches (Continued) • Risks in the pink boxes need to be actioned Figure 10.2 Probability impact chart

15. 10.2 Qualitative and quantitative approaches (Continued) Failure mode effect analysis (FMEA) • Consider three elements of each activity or path through the activities: • Likelihood, severity and hideability • Estimate each on a scale of 1–10 • Total risk is product of all three: likelihood × severity × hideability Table 10.1 FMEA analysis

16. 10.2 Qualitative and quantitative approaches (Continued) Quantitative approaches • Mathematical models of the scenario • Enables a large number of variablesto be considered • Useful guides for decision making • Four models shown: 1. Expected Value • The expected value of the event • is the possible outcome multiplied by • the probability of its occurrence • Useful for comparing several projects or alternatives • Percent chance (probability) can be estimated or calculated using Monte Carlo analysis.

17. 10.2 Qualitative and quantitative approaches (Continued) 2. Sensitivity analysis • Use expected, optimistic and pessimistic value of inputs (e.g. costs) • Shows effect on the outcome of a change in the variable • Shows where management attention and control is needed • Example • Prices on materials and labour likely to fluctuate • Contract price is fixed in advance • Need to see effect of fluctuations on profit • Costs of materials say £0.6m • Costs of direct labour say £0.2m • Contribution to say 175 percent of direct labour • Revenues: fixed at £1.2m • Profit = revenue – material costs – (labour + overheads)

18. 10.2 Qualitative and quantitative approaches (Continued) • This shows when the project will make a profit or a loss • Should materials increase by 10 percent, unless there is a drop in labour costs, the project will make a loss Table 10.2 Sensitivity analysis

19. 10.2 Qualitative and quantitative approaches (Continued) 3. Monte Carlo simulation • Practicable if use computer (extension to popular spread sheets) • Use range of values of distribution apply to time, cost and other estimates • Shows effect on finances or other critical factors

20. 10.2 Qualitative and quantitative approaches (Continued) • Example • Revenue stream to be generated: in the range of £.75m to £1.15m • Equally likely to be any value • Materials costs: £.25m most likely • could be considerably more, unlikely to be less • Labour costs: £.55m • Could be more, could be less • Profit • Normally = revenue–materials–labour = £.15 • Uncertainties suggest otherwise

21. 10.2 Qualitative and quantitative approaches (Continued) Figure 10.3 Examples of the use of Monte Carlo analysis

22. 10.2 Qualitative and quantitative approaches (Continued) 4. PERT: Programme evaluation and review technique • Likely a single value for ‘time for completion’ will have an error • Three estimates for each activity are required • Optimistic (o) – if conditions are ideal • Most probable (m) – if conditions are ‘normal’ • Pessimistic (p) – if things go wrong • Expected time is (o + 4m + p)/6 • Use expected time in critical path analysis • May effect the duration, may change the critical path • The downside • Shows outcome (partial picture) but does not indicate probability • Additional complexity may not be justified by a return in accuracy of the plans • Relies on people being accurate in their forecasting

23. 10.2 Qualitative and quantitative approaches (Continued) Figure 10.4 Network showing optimistic, most probable and pessimistic times

24. 10.2 Qualitative and quantitative approaches (Continued) Figure 10.5 Distribution of estimated times for an activity

25. 10.2 Qualitative and quantitative approaches (Continued) Table 10.3 Three-point estimates for tasks

26. 10.2 Qualitative and quantitative approaches (Continued) Table 10.4 Three-point estimates and variances for tasks

27. 10.2 Qualitative and quantitative approaches (Continued) Table 10.5 Probabilities of completing tasks

28. 10.3 Opportunities management ‘On a recent project, my team spent two days trying to reducea £50 000 risk. I would much rather they spent that time looking to see how the project could yield an extra £50 000 of business benefit’ [Project Director, Rolls-Royce] • Many ideas are lost because there is no route to exploit them • Rare that great innovative products are the result of a development process that started out with that objective in mind • A route to exploit opportunities is essential • One framework: • Negative to positive: a risk that doesn’t materialise is a benefit • Opportunities of response: a high risk that is mitigated presents an opportunity • Random good fortune: opportunities presented by a breakthrough • Qualitative process for managing opportunities similar to that of managing risks

29. Summary • The issue of risk is central to projects • How risk is managed will impact on project success • A basic process provides a structure • Identification, quantification and mitigation • Use ‘enterprise risk management’ to establish a ‘risk portfolio’ • Inclusion of high and low risk projects • Using a risk management framework is strongly recommended • Practice and reflection is essential • Do risk processes work? • Recent research suggests that success is limited • Risk an opportunity management only part of the process • Important how organisations respond • Consideration of process necessary • As is attention to behaviour