Chapter 8 Managing Project Risk

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Chapter 8 Managing Project Risk
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The Importance of Project Risk Management

• The art and science of identifying, assigning,
  and responding to risk throughout the life of a
  project and in the best interests of meeting
  project objectives
• Improves project success by helping select good
  projects, determining project scope, and
  developing realistic estimates
• Understanding potential problems how they might
  impede project progress
• A form of insurance an investment

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Common Mistakes in Managing Project Risk

• Not Understanding the Benefits of Risk
  Management
• Not Providing Adequate Time for Risk Management
• Not Identifying and Assessing Risk Using a
  Standardized Approach

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Ok, so what is a risk?

• A project risk is a potential problem that would
  be detrimental to a projects success should it
  materialize
• Risk management is the identification and
  response to potential problems with sufficient
  lead time to avoid a crisis

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Types of Risk in Project Management

• External
• Mainly outside control of the project manager and
  organisation
• Cost
• Directly or indirectly under project managers
  influence
• Schedule
• Cause failure by missing or delaying a market
  opportunity
• Technology
• From a wide variety of circumstances
• Operational
• Within the organisation

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What Is Project Risk Management?

• The goal ? to minimize potential risks while
  maximizing potential opportunities.
• Major processes include
• Risk identification
• determining which risks are likely to affect a
  project
• Risk quantification / assessment
• evaluating risks to assess the range of possible
  project outcomes
• Risk response development
• taking steps to enhance opportunities and
  developing responses to threats
• Risk response control
• responding to risks over the course of the project

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IT Project Risk Management Process
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Step 1. Risk Planning

• Requires a firm commitment to risk management
  from all project stakeholders
• Ensures adequate resources to plan for and manage
  risk
• Focuses on preparation

Source Kulik, P. and Weber, C. (2001) Software
Risk Management Practices 2001 pg 4
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Step 2. Risk Identification

• Process of understanding what potential
  unsatisfactory outcomes are associated with a
  particular project.
• Threats opportunities
• Causes effects of each risk
• Effective strategies for responses to risk
• Tools
• brainstorming, checklists, flowcharts,
  interviews

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IT Project Risk Framework
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Step 3 Risk Analysis Assessment

• What is the likelihood of a particular risk
  occurring?
• What is the impact on the project if it does
  occur?
• Qualitative Approaches
• Focuses on a subjective analysis of risks based
  upon a project stakeholders experience or
  judgement.
• Quantitative Approaches
• Includes mathematical or statistical techniques
  that allow us to model a particular risk
  situation.

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Qualitative Approaches

• Expected Value probability weighted sum
• Payoff Table
• Decision Trees
• Risk Impact Table
• Tuslers risk classification scheme

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Quantitative Approaches

• Discrete Probability Distributions
• Binomial
• Continuous Probability Distributions
• Normal
• PERT
• Triangular
• Simulations

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Risk Quantification Example

• Some risk methodologies use a numerical formula
  or weighting which helps in quantifying the risk.
  
• Three areas are reviewed for each risk
• Likelihood of occurrence how likely is the
  risk?
• Severity of impact how severely will it impact
  the project?
• Level of controllability how controllable will
  the risk be?
• Managers assign a value from 1 to 5 for each area
  for each risk.
• Value of 1 Unlikely to occur
• Value of 5 Near certainty

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Risk Quantification Example continued

• Each risk is analysed in terms of these tables
  and values assigned to each
• Three values are multiplied together
• Risks are ranked

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Step 4. Risk Strategies / Response Development

• The following strategies / responses will not
  work!
• The ostrich approach ignoring and pretending
  they do not exist
• The prayer approach Looking to a higher being to
  solve or make problems disappear
• Denial Refusal to accept that risky situations
  will occur

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Strategy depends on

• The nature of the risk itself
• The impact of the risk on the projects MOV and
  objectives
• The projects constraints in terms of scope,
  schedule, budget, and quality requirements
• Risk tolerances or preferences of the various
  stakeholders

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Risk Strategy Alternatives

• 4 categories of response measures
• avoidance or removal eliminating a specific
  threat or risk, usually by eliminating its causes
• Acceptance or ignore accepting the consequences
  should a risk occur
• reducing or mitigation reducing the impact of a
  risk event by reducing the probability of its
  occurrence. Also known as developing
  contingencies (one or more action plans)
• transfer transfer ownership of the risk to
  someone else e.g. buy insurance, pay a price to
  reduce the potential impact, subcontract to
  someone who has more knowledge or expertise

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Step 5. Risk Monitoring Control

• Involves executing the risk management processes
  the risk management plan to respond to risk
  events.
• Risks must be monitored based on defined
  milestones decisions made regarding risks and
  mitigation strategies
• Use following methods/tools
• Risk Status Meetings
• Risk Reports
• Risk Reviews
• Risk Audits

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Step 6. Risk Response

• Involves committing resources taking action
  once a risk threat or opportunity is made known.
• Risk Response Plan should include

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Step 7. Risk Evaluation

• Involves evaluating responses to risks the
  experience gained provide keys to learning.
• Consider questions
• How did we do?
• What can we do better next time?
• What lessons did we learn?
• What best practices can be incorporated in the
  risk management process?

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Effective successful project risk management
requires

• Commitment by all stakeholders
• Stakeholder Responsibility
• each risk must have an owner
• Different Risks for Different Types of Projects

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HOMEWORK

• Complete the following End Of Chapter questions
• 4, - 24
• 8 - 33
• 10 - 34
• 11 - 36
• 12 - 37
• 13 - 40
• 14 - 41
• 23