Advanced Project Management Project Risk Management

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Advanced Project ManagementProject Risk
Management
Ghazala Amin
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Project Risk Management

• Reference study materials
• A guide to the Project Management Body of
  Knowledge (PMBOK Guide), Chapter 11
• Study notes
• Dr. Kerzners book, Chapter 17

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Project Risk Management

• What to Study
• Risks with various qualifiers
• The three components of risk Risk Event,
  Probability of Risk Event and Impact of Risk
• Probability-Impact Matrix
• Risk assessment using decision trees and expected
  monetary values
• The relationship of risk and the project life
  cycle

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Project Risk Management

• Key Definitions
• Certainty, Risk, Uncertainty
• Business Risk, Insurable(Pure) Risk
• Technical Risks, Project Management Risks,
  Organizational Risks, External Risks, Internal
  Risks,, Legal Risks
• Known Risks, Unknown Risks
• Expected Monetary Value (EMV)
• Trigger (a.k.a Risk symptom or Warning sign)
• Contingency Plan, Fallback Plan
• Contingency Reserve, Management Reserve

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What is a risk?

• A risk is a potential event or a future situation
  that may negatively affect the project.
• Risks are identified, described and analyzed in
  terms of
• Probability that they will occur
• Effects or consequences if they do happen
• Time frame within which their consequences might
  occur
• Examples of few risks to the project
• Technology not easily available
• Resources not committed to the project
• Sponsor does not show up for meetings
• Unidentified end users etc. etc.

• Source/Reference IBM Learning Centre for
  development of PM Curriculum

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Project Risk Management

• Risk Management is the systematic process of
  identifying, analyzing, and responding to project
  risk
• It is continuous process of identifying,
  analyzing, and planning for risks.
• It is the most effective means of preventing
  and/or minimizing exposure to your project.

Risks associated with project integration are
usually the smallest during the
projects initiation and charter approval phase
of the project life cycle.
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Project Risk Management

• Risk Management process include
• Formal planning activity,
• Analysis to quantify the likelihood and predict
  impact on the project,
• Handling strategy for selected risks,
• Ability to monitor progress in reducing these
  risk to the level to minimize impact on the
  project.

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Project Risk Management

• Project Risk Management Processes (PMBOK)
• Plan Risk Management
• Risk Identification
• Qualitative Risk Analysis
• Quantitative Risk Analysis
• Risk Response Planning
• Risk Monitoring and Control

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Project Risk Management Processes (PMBOK)
Process Groups Initiation Planning Execution Control Closing
Knowledge Areas          
Risk Management   Risk Management Planning   Risk Monitoring and Control  
    Risk Identification      
    Qualitative Risk analysis      
    Quantitative Risk analysis      
    Risk Response Planning      
Project Risk Management is the process of being
proactive rather than reactive.
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Risk Preference and Utility Theory

• Utility which can be defined as the amount of
  satisfaction or pleasure that the project manager
  receives from a payoff (This is also called
  project managers tolerance for risk).
• PM must use expert judgment and tools to deal
  with risks.
• The ultimate decision on how the PM deals with
  risk is based on his/her own tolerance for risk.

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Types of Risk Takers

• Risk Averter (Risk Avoider)
• Utility rises at the decreasing rate
• When more money is at stake, project managers
  satisfaction or tolerance decreases
• Prefers certain outcome and demand premium to
  accept risks.

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Types of Risk Takers

• Risk Neutral
• The slope of utility curve is constant

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Types of Risk Takers

• Risk Seeker (Risk Lover)
• The utility rises at the increasing rate
• The project managers satisfaction increases when
  more money is at stake
• Prefers uncertain outcome and willing to pay
  penalty to take risks

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Risk - Definitions

• Decision making falls into the following
  categories
• Certainty
• All information for making the right decision is
  available
• Can predict the outcome with confidence
• Risk
• The totality of the occurrence can be described
  within established confidence limit
• Expected payoff can be mathematically calculated
• Uncertainty
• Meaningful assignments of probabilities are not
  possible
• Management decision can be made applying one of 4
  criteria

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Decision Making Under Risk Expected Value

• Expected value is the product of two numbers
• Risk Event Probability (states of nature)
• An estimate of the probability that a given risk
  event will occur.
• Risk Event Value (Payoff for strategies)
• An estimate of the gain or loss that will be
  incurred if the risk event does occur.

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Decision Making Under Risk Expected Value

• Expected monetary value
• Mathematically
• E i S Pij pj,
• Where
• E i expected payoff for strategy i
• P Payoff element
• p Probability of event
• E 1 (50)(0.25)40(0.25)90(0.5) 67.50
• E 2 (50)(0.25)50(0.25)60(0.5) 55
• E 3 (100)(0.25)80(0.25)(-50)(0.5) 20
• Based on the Expected payoff value, Strategy 1
  should be used.

N
j 1
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Decision Making Under Uncertainty

• Hurwicz Criterion (Maximax)
• The decision maker is always optimistic and
  attempts to maximize profits by a go-for-broke
  strategy
• Wald Criterion (Maximin)
• The decision maker is concerned with how much
  he/she can afford to lose. In this criteria, a
  pessimistic approach is taken
• Savage Criterion (Minimax)
• The project manager attempts to minimize the
  maximum regrets
• Laplace Criterion
• Transforms decision making under uncertainty into
  decision making under risk

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Decision Trees

• A decision tree is a diagram that depicts key
  interactions among decisions and associated
  chance events as they are understood by the
  decision makers
• The branches of the tree represent either
  decisions (shown as boxes) or chance events
  (shown as circles)

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Decision Tree - Example

• A product can be manufactured using Machine A or
  Machine B
• Machine A has a 40 chance of being used and
  Machine B has a 60 chance of being used
• When Machine A is selected, Process C is selected
  80 of the time and Process D 20 of the time
• When Machine B is selected, Process C is selected
  30 of the time and Process D 70 of the time
• What is the probability of being produced by the
  various combinations?

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Decision Tree - Example
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Decision Tree - Example