Lecture # 26 PRM 702 Project Quality and Risk Management Ghazala Amin

1. Lecture # 26PRM 702Project Quality and Risk ManagementGhazala Amin

2. What is Risk? Risk and uncertainty are equivalent

3. Three Definitions • Risk • A possible future event which if it occurs will lead to an undesirable outcome. • Project Risk • The cumulative effect of the chances of an uncertain occurrence that will adversely affect project objectives. • Risk Management • A systematic and explicit approach for identifying, quantifying, and controlling project risk.

4. DEFINITION PROJECT RISK MANAGEMENT IS THE ART AND SCIENCE OF IDENTIFYING, ASSESSING, AND RESPONDING TO PROJECT RISK THROUGHOUT THE LIFE OF A PROJECT AND IN THE BEST INTERESTS OF ITS OBJECTIVES PROJECT RISK IS THE CUMULATIVE EFFECT OF THE CHANCES OF UNCERTAINOCCURRENCES ADVERSELY AFFECTING PROJECT OBJECTIVES

5. RISK MANAGEMENT PURPOSE IDENTIFY FACTORS THAT ARE LIKELY TO IMPACT THE PROJECT OBJECTIVES OF SCOPE, QUALITY, COST AND TIME QUANTIFY THE LIKELY IMPACT OF EACH FACTOR GIVE A BASELINE FOR PROJECT NON-CONTROLLABLES MITIGATE IMPACTS BY EXERCISING INFLUENCE OVER PROJECT CONTROLLABLES THE PMBOK ALSO POINTS OUT THAT RISK MANAGEMENT INCLUDES MAXIMIZING THE RESULTS OF POSITIVE EVENTS AND MINIMIZING THE CONSEQUENCES OF ADVERSE EVENTS.

6. ISSUES A RISK SHOULD ONLY BE TAKEN WHEN THE POTENTIAL BENEFIT AND CHANCES OF WINNING EXCEED THE REMEDIAL COST OF AN UNSUCCESSFUL DECISION AND CHANCES OF LOSING BY A SATISFACTORY MARGIN WHAT WILL BE GAINED? WHAT COULD BE LOST? WHAT ARE THE CHANCES OF SUCCESS (AND FAILURE)? WHAT CAN BE DONE IF THE DESIRED RESULT IS NOT ACHIEVED? IS THE POTENTIAL REWARD WORTH THE RISK? POTENTIAL FREQUENCY OF LOSS AMOUNT AND RELIABILITY OF INFORMATION AVAILABLE POTENTIAL SEVERITY OF LOSS MANAGEABILITY OF THE RISK VIVIDNESS OF THE CONSEQUENCES POTENTIAL FOR (ADVERSE) PUBLICITY WHOSE MONEY IS IT?

7. NATURE OF RISK MANAGEMENT WHEN SPEAKING OF RISK, THINK OF ONLY HAZARDOUS ONES EVERYDAY COMMON DAY ONES ARE IGNORED RARELY DO WE SYSTEMATICALLY IDENTIFY ALL RISKS INVOLVED HOWEVER, INCLINED TO CONSIDER RISK DIFFERENTLY RELATIVE TO FAMILY - VERY PRECIOUS AND LOTS OF POTENTIAL EXAMPLES: SMALL CHILDREN - STAY AWAY FROM ROAD - RISK ID & AVOIDANCE HOW DID DAY GO? - DO MORE TO HELP THEM - INFO FEEDBACK THESE ACTIONS ARE ESTABLISHING THE BASIC ELEMENTS OF MANAGING PROJECT RISK INTO OUR CHILDREN

8. PROJECT RISK MGMT IS PRO-ACTIVE CLASSIC SYSTEMS METHODOLOGY: INPUT PROCESS OUTPUT FEEDBACK LOOP THIS PROCESS VITAL TO EFFECTIVE PROJECT CONTROL, HOWEVER RISK IS DIFFERENT - - HAS TO DO WITH: UNCERTAINTY, PROBABILITY OR UNPREDICTABILITY, AND CONTINGENT PLANNING

9. REACTIVE vs. PRO-ACTIVE CRISIS MANAGEMENT -- REACTIVE MODE -- SELECT RESPONSE PRO-ACTIVE -- ANTICIPATE AND PLAN TO AVOID RISK & DECISION MAKING: TAKE RISK IF POTENTIAL BENEFIT AND CHANCE OF WINNING EXCEEDS COST OF UNSUCCESSFUL DECISION AND CHANCES OF LOSING BY A SATISFACTORY MARGIN (CLASSIC COST / BENEFIT ANALYSIS)

10. Positive and Negative Risk • Opportunities - Positive outcome • Threats - Negative outcome

11. Benefits of Risk Management • More and better information is available during planning and decision making • Project objectives are verified • Improved communications • Higher probability of project success • Proactive approach • Project might be canceled

12. Why Organizations don’t doRisk Management • Unwillingness to admit risks exist • Postpone the hard parts of the project until later • Risk management costs money • Up front investment of time • Can’t prove it’s necessary • Think health insurance

13. Why Organizations don’t doRisk Management • “Can Do” management style severely inhibits risk management • Risk identification can make you look like a whiner

14. Ways to AvoidRisk Management • “Managing risk is everybody’s business” • “There is only one risk: The project might fail. And we’re managing that by working real hard to assure that doesn’t happen.”

15. The Uncertainty Spectrum Complete Information NO Information Partial Information (Unknown unknowns) (Known unknowns) (Knowns) GENERAL UNCERTAINTY SPECIFIC UNCERTAINTY TOTAL UNCERTAINTY TOTAL CERTAINTY SCOPE OF PROJECT RISK MANAGEMENT* *Note: in this range the information to be sought is known

16. Project Risk Integration Communication Scope Project Risk Cost Time Quality Procurement Human Resources

17. INTEGRATING RISK PROJECT MANAGEMENT INTEGRATION INFORMATION / Life Cycle and SCOPE Environment Variables COMMUNICATIONS Ideas, Directives, Expectations Data Exchange Accuracy Feasibility PROJECT RISK HUMAN Availability Productivity Requirements Standards QUALITY RESOURCES Time Objectives, Services, Plant, Materials: Restraints Performance CONTRACT / Cost Objectives, TIME Restraints PROCUREMENT COST

18. Project Risk Management A subset of project management that includes the processes concerned with identifying, analyzing, and responding to project risk.

19. Risk Management Objectives • Reduce the number of surprise events • Minimize consequences of adverse events • Maximize the results of positive events

20. Risk Classification • Business risks vs. pure (insurable) risks • Classified by uncertainty (business risks) • Classified by impact on project elements • Classified by their nature • Classified by their source • Classified by their probability to occur and amount at stake

21. Consequences of Risk Analysis Positives • greater information is made available during the course of planning and decision making • project objectives are verified • better communications • better probability that project realization will be optimal • increased chance of project success

22. Consequences of Risk Analysis Negatives • belief that all risks have been accounted for • project could be shut down

23. Some Considerations • Real information is the key. • The relationship between uncertainty and information is inverse. • For the project manager, conditions of relative uncertainty (partial information) are the rule. • There is a natural resistance to formal risk analysis. • Risks should only be taken to achieve a project objective.

24. SUMMARY PROJECTS ARE LAUNCHED TO TAKE ADVANTAGE OF OPPORTUNITIES, BUT OPPORTUNITIES ARE ASSOCIATED WITH UNCERTAINTIES WHICH HAVE RISKS ATTACHED RISK CAN NEVER BE 100% ELIMINATED FOR THE PROJECT TO BE VIABLE, THE EXPECTED VALUE RESULTING FROM A FAVORABLE PROBABILITY OF GAIN MUST BE HIGHER THAN THE CONSEQUENCES AND PROBABILITY OF LOSS THEREFORE, THE RISKS ASSOCIATED WITH A PROJECT MUST RECEIVE CAREFUL EXAMINATION IN THE CONTEXT OF THE ORGANIZATION'S WILLINGNESS OR AVERSION TO TAKING RISKS THIS IS THE DOMAIN OF PROJECT RISK MANAGEMENT, WHICH FORMS A VITAL AND INTEGRAL PART OF PROJECT MANAGEMENT

25. When Should Risk Assessments be Carried Out? Risk assessments should be carried out as early as possible and then continuously.

26. Don’t take the risk if... • the organization cannot afford to lose. • the exposure to the outcome is too great. • the situation (or project) is not worth it. • the odds are not in the project’s favor. • the benefits are not clearly identified. • there appear to be a large number of acceptable alternatives.

27. Don’t take the risk if... • the risk does not achieve the project objective. • the expected value from baseline assumptions is negative. • the data is unorganized, without structure or pattern. • there is not enough data to understand the results. • a contingency plan for recovery is not in place should the results prove unsatisfactory.