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Project ManagementSession 10Project ManagementSession 10

Risk ManagementRisk Management

Dr. M. Sepehri

FAll 1390

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Project RiskProject Risk

An uncertain event or condition that, if it occurs, has a positive or negative impact on a project objective

An uncertain event or condition that, if it occurs, has a positive or negative impact on a project objective

External: unpredictable External: predictable Internal: non-technical Internal: technical Legal Business risks

External: unpredictable External: predictable Internal: non-technical Internal: technical Legal Business risks

Insurable risk– Direct property

damage– Indirect

consequential loss– Legal liability– Personnel

Insurable risk– Direct property

damage– Indirect

consequential loss– Legal liability– Personnel

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Risk ContinuunRisk Continuun

UnknownUnknowns

KnownUnknowns

Knowns

NoInformation

PartialInformation

CompleteInformation

Total Risk

Uncertainty

No Risk

Scope of Risk Management

FeasibilityStudies

CloseoutReports

Enter NewMarkets

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Definition of RiskDefinition of Risk

Risk = f(Likelihood, Impact)

• Likelihood is the probability of occurrence

• Impact is the amount at stake

event

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Components of RiskComponents of Risk

ImpactP

roba

bili

ty• Risk Event

• Risk Probability

• Impact

• Timing

• Tolerance

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Rating Impacts for a Risk

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Variation through the Project Life Cycle?Variation through the Project Life Cycle?

Time along project life cycle

Risk Event Probability?

Amount at Stake?

Cost to makeChanges?

Familiarity Mitigation?

Amount to complete?

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RISK MANAGEMENTRISK MANAGEMENT

Why bother with Risk Management?Why bother with Risk Management?

Arguments AGAINST

Arguments AGAINST

Arguments FOR

Arguments FOR

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Risk ManagementRisk Management

Risk management focuses on the future

Risk and information are inversely related

Risk management focuses on the future

Risk and information are inversely related

Historically, we focused our attentions on schedule & cost risk management.

Today, our primary emphasis is on technological risk management:– Can we design it and build it?– What is the risk of obsolescence?

Historically, we focused our attentions on schedule & cost risk management.

Today, our primary emphasis is on technological risk management:– Can we design it and build it?– What is the risk of obsolescence?

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Basic ConceptBasic Concept Risk management focuses on:

– Known unknowns– Proactive management

Risk management focuses on:– Known unknowns– Proactive management

The alternative to proactive management is reactive management, also called crisis management.

This requires significantly more resources and takes longer for problems to surface.

The alternative to proactive management is reactive management, also called crisis management.

This requires significantly more resources and takes longer for problems to surface.

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Preparing for Possibilities

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Risk ManagementRisk Management

The systematic processes of identifying, analyzing & responding to project risks

A formal approach to the process as opposed to an intuitive one.

– Define objectives– Identify Risk– Qualify/Quantify Risk– Develop Response– Risk Control

The systematic processes of identifying, analyzing & responding to project risks

A formal approach to the process as opposed to an intuitive one.

– Define objectives– Identify Risk– Qualify/Quantify Risk– Develop Response– Risk Control

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با پروژه مديريت مراحل بين رابطهپروژه ريسكمديريت

با پروژه مديريت مراحل بين رابطهپروژه ريسكمديريت

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Risk Management (PMBOK)Risk Management (PMBOK)

The systematic processes of identifying, analyzing & responding to project risks

A formal approach to the process as opposed to an intuitive one.

1. Divide/define objectives

2. Identify Risk (to objectives)

3. Qualify/Quantify Risk

4. Develop Response

5. Risk Control

The systematic processes of identifying, analyzing & responding to project risks

A formal approach to the process as opposed to an intuitive one.

1. Divide/define objectives

2. Identify Risk (to objectives)

3. Qualify/Quantify Risk

4. Develop Response

5. Risk Control

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1- Define Objectives1- Define Objectives

Divide and then define– Subdivide by stakeholders

– Subdivide by PM knowledge area

– Subdivide by OBS (departments)

– Subdivide by WBS (work package)

– Subdivide by constraints

Divide and then define– Subdivide by stakeholders

– Subdivide by PM knowledge area

– Subdivide by OBS (departments)

– Subdivide by WBS (work package)

– Subdivide by constraints

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Define Objectives, Sub-divide Objectives

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Risk Types at BoeingRisk Types at Boeing

Financial risks

Market risks

Technical risks

Production risks

Financial risks

Market risks

Technical risks

Production risks

Risk >>> Mitigation strategies

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Financial RisksFinancial Risks

Up-front funding and payback period based upon number of planes sold– Mitigation strategies

Funding by life cycle phase Continuous financial risk

management Sharing risks with subcontractors Risk reevaluation based upon sales

commitments

Up-front funding and payback period based upon number of planes sold– Mitigation strategies

Funding by life cycle phase Continuous financial risk

management Sharing risks with subcontractors Risk reevaluation based upon sales

commitments

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Market RisksMarket Risks

Forecasting customers’ expectations on cost, configuration, and amenities based upon a 30-40 year life of a plane– Mitigation strategies

Close customer contact and input Willingness to custom-design per

customer Development of a baseline design

that allows for customization

Forecasting customers’ expectations on cost, configuration, and amenities based upon a 30-40 year life of a plane– Mitigation strategies

Close customer contact and input Willingness to custom-design per

customer Development of a baseline design

that allows for customization

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Technical RisksTechnical Risks

Because of the long lifetime for a plane, we must forecast technology and its impact on cost, safety, reliability and maintainability– Mitigation strategies

structured change management process Use of proven technology rather than

high risk technology Parallel product improvement and new

product development processes

Because of the long lifetime for a plane, we must forecast technology and its impact on cost, safety, reliability and maintainability– Mitigation strategies

structured change management process Use of proven technology rather than

high risk technology Parallel product improvement and new

product development processes

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Production RisksProduction Risks

Coordination of manufacturing and assembly of a large number of subcontractors without impacting cost, schedule, quality or safety– Mitigation strategies

Close working relationships with subcontractors

A structured change management process Lessons learned from other new projects Use of learning curves

Coordination of manufacturing and assembly of a large number of subcontractors without impacting cost, schedule, quality or safety– Mitigation strategies

Close working relationships with subcontractors

A structured change management process Lessons learned from other new projects Use of learning curves

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2- Risk Identification 2- Risk Identification

Start with each objective• Cause to effect• Effect caused by

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Risk IdentificationRisk Identification

Historical data/closeout reports Structured questionnaires Structured interviews Brainstorming Structured checklist (WBS) Flow charts (build methods) Judgment based on experience System Analysis Scenario Analysis

Historical data/closeout reports Structured questionnaires Structured interviews Brainstorming Structured checklist (WBS) Flow charts (build methods) Judgment based on experience System Analysis Scenario Analysis

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Why Projects FailWhy Projects Fail

Innovation Concurrency Stakeholders Communication Scope of work Poor estimating Poor planning

Innovation Concurrency Stakeholders Communication Scope of work Poor estimating Poor planning

Insufficient reviews Insufficient control Lack of commitment Incomplete and/or in-

accurate information Lack of support

from team members . . . .

Insufficient reviews Insufficient control Lack of commitment Incomplete and/or in-

accurate information Lack of support

from team members . . . .

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3- Risk Qualification3- Risk Qualification

For each risk, identify the risk degree,qualify by experts, and quantify!– Subjective

– Objective

For each risk, identify the risk degree,qualify by experts, and quantify!– Subjective

– Objective

• Probability• Expected Value• Variance

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Consequence, Priority Consequence, Priority

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4- Risk Response4- Risk Response• Eliminate Risk

Remove early

• Mitigate Risk Reduce probability/impact

• Deflect Risk Transfer to another party

• Accept Risk Avoidance Control (mitigation) Transfer Assumption (retention)

Avoidance Control (mitigation) Transfer Assumption (retention)

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How Much Risk is Acceptable?How Much Risk is Acceptable? High tolerance for risk

Medium tolerance for risk

Low tolerance for risk

High tolerance for risk

Medium tolerance for risk

Low tolerance for risk

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Pro

ject

Pro

cedu

ral

Doc

um

enta

tion

Pro

ject

Pro

cedu

ral

Doc

um

enta

tion

GuidelinesGuidelinesHighHigh LowLow

Tolerance for RiskTolerance for Risk

RigidPolicies/

RigidPolicies/

Procedures Procedures

AssumptionAssumption

ReductionReduction

TransferTransfer

AvoidanceAvoidance

Which Method to Use?Which Method to Use?

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Developing Contingency PlansDeveloping Contingency Plans

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Problem-SolvingProblem-Solving

Idea Generation:Brainstorming

Idea Generation:Brainstorming

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5- Risk Control5- Risk ControlImplements Risk Management plan to make it

happen. Most neglected, but most important.

Includes communication, training, practice runs. Develop company culture & attitude.

Risk Management plan is monitored/updated on a regular basis to include any changes:– Changes in the scope of work– Changes in the build method– Changes in the team members– Changes in the suppliers

Implements Risk Management plan to make it happen. Most neglected, but most important.

Includes communication, training, practice runs. Develop company culture & attitude.

Risk Management plan is monitored/updated on a regular basis to include any changes:– Changes in the scope of work– Changes in the build method– Changes in the team members– Changes in the suppliers

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Decision-Making CategoriesDecision-Making Categories Complete uncertainty Relative uncertainty (partial information) Complete certainty

Complete uncertainty Relative uncertainty (partial information) Complete certainty

Risk avoider Risk neutral Risk lover

Risk avoider Risk neutral Risk lover

Tolerance For RiskTolerance For Risk

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FIVE STEPS TO DEVELOP PAYOFF TABLEFIVE STEPS TO DEVELOP PAYOFF TABLE

List all the alternatives. List the future consequences of each

alternative. Identify the payoffs associated with each

combination. Assess the degree of certainty that these

combinations will materialize Decide on a decision criterion.

List all the alternatives. List the future consequences of each

alternative. Identify the payoffs associated with each

combination. Assess the degree of certainty that these

combinations will materialize Decide on a decision criterion.

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Maximin ApproachMaximax ApproachMinimax regret ApproachInsufficient Reason Approach

Developing and Using Payoff TablesDeveloping and Using Payoff Tables

Establishing the procedure to follow

Construct thePayoff table

Decision-makingunder certainty

Decision-making under completeuncertainty

Decision-makingunder risk

Expected Monetary Value (EMV) ApproachExpected Opportunity Loss (EOL) ApproachExpected Value of Perfect Information (EVPI) Approach

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Risk QuantificationRisk Quantification

STAGE I STAGE II GUID-ANCE

WARHEAD

COST

MANU.

TEST

DESIGN

HIGH

MEDIUM

LOW

LEGEND

PROGRAMSUMMARY

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Future RisksFuture Risks

Customer’sKnowledgeCustomer’sKnowledge

ExperiencedExperienced

InexperiencedInexperienced

SimpleSimple ComplexComplex

Contract TypeContract Type

INCREASING RISKS

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Degrees of Downstream RiskDegrees of Downstream Risk

R&DR&D

ManufacturingManufacturing

MarketingMarketing

TimeTime

Low Risk

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Degrees of Downstream RiskDegrees of Downstream Risk

R&DR&D

ManufacturingManufacturing

MarketingMarketing

TimeTime

High Risk

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Prioritization of RisksPrioritization of Risks

ScheduleSchedule CostCostTechnical

Performanceor Quality

TechnicalPerformance

or Quality

First (Highest)Priority

First (Highest)Priority

Second PrioritySecond Priority

ThirdPriorityThirdPriority

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Risk IntensityRisk Intensity

RadicalBreakthrough

RadicalBreakthrough

ProductChangesProductChanges

NextGeneration

NextGeneration

Add-ons &Enhancements

Add-ons &Enhancements

Additionto FamilyAdditionto Family

NewProcess

NewProcess

ProcessChangesProcessChanges

NextGeneration

NextGeneration

Fine-Tuning& IncidentalsFine-Tuning

& IncidentalsChanges and

UpgradesChanges and

Upgrades

Risk TypeRisk Type

· Market

· Technical

· Timing

· Cost

· Price

· Quality

· Market

· Technical

· Timing

· Cost

· Price

· Quality

· High

· High

· High

· Low

· Medium

· Medium

· High

· High

· High

· Low

· Medium

· Medium

· High

· High

· High

· Medium

· Medium

· Medium

· High

· High

· High

· Medium

· Medium

· Medium

· Medium

· Medium

· Medium

· Medium

· Low

· Medium

· Medium

· Medium

· Medium

· Medium

· Low

· Medium

· Medium

· Medium

· Low

· Low

· Low

· Low

· Medium

· Medium

· Low

· Low

· Low

· Low

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Risk Control MeasuresRisk Control MeasuresIn

ten

sity

of

Con

trol

sIn

ten

sity

of

Con

trol

s

Risk IntensityRisk Intensity

StandardControlsStandardControls

HighHigh

Range of ControlsRange of Controls

LowLowLowLow

ExtremeExtreme

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The Risk-Reward MatrixThe Risk-Reward Matrix

LowLow HighHigh

RewardRewardMediumMedium

RiskRisk

HighHigh

LowLow

MediumMedium

Quality

of

Resou

rces

Nee

ded

Quality

of

Resou

rces

Nee

ded

LowLowM

edium

Med

iumHighHigh

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Specification LimitOn Characteristic BSpecification LimitOn Characteristic B

Interacting RisksInteracting RisksP

rodu

ct F

eatu

re A

Pro

duct

Fea

ture

A

Product Feature BProduct Feature B

DesirableDesirable

UndesirableUndesirable

UndesirableUndesirable DesirableDesirable

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Poor Risk ManagementPoor Risk Management

Risk PlanningRisk Planning

TechnicalInabilityTechnicalInability

Customer

Expectati

ons

Customer

Expectati

ons

Actual Performance

Actual Performance

Per

form

ance

Per

form

ance

TimeTime

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You never knowYou never know