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Risk management

This lecture explores the concept of risk management in project environments, discussing various definitions of risk, the importance of risk management, sources of risk, risk assessment, and mitigation techniques.

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Risk management

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  1. Risk management (lecture)

  2. Many definitions of risk • General: standard deviation • Finance: volatility of return and costs • Project management (Lockyer – Gordon):An uncertain event or set of circumstances that, should it occur, will have an effect on the achievement of the project objectives (prevent it proceeding according to the plan). The effect may be detrimental or present an unforeseen opportunity.

  3. Uncertainty vs. risk • Uncertainty: when even the possible events and their possibilities are not known. • Risk: when the possible events and their possibilities are known • Reducing uncertainty reduces risk

  4. Importance of risk management In relatively stable and simple environment: • Risks tend to be small • Risk manangement is a part of task management In changing environment: • Significant uncertainty and thus risk • If there is uniqueness of the work, the management of risk is harder • Risk management is more or less separated responsibility

  5. Sources of risk • Timing • Technology • People • Finance • Managerial • Political

  6. Risk from timing • All project activities are concerned • Two categories for risk minimisation: • Internally timed activities: • the task owner is responsible for carrying out the activity • duration estimation is done by the project team • sources of information are • past experience of similar work • knowledge/hunches of the project team: good communication is needed • external sources, secondary information • Externally timed activities

  7. Externally timed activities • Where some outside body sets the duration • The responsibility is of the procurement executive • After the order is placed, the delivery dates should be secured: • Systematical monitoring • Delivery performance must be recorded in the project log

  8. Risk from technology • The newer the technlogy, the greater the uncertainty and the risk • New application of a tested technology increase the risk, too

  9. Risk from people • Depends on people’s skill, expereience and motivation • Can be reduced by: • Good communications • Clear definition of tasks • Good training: preparing the team

  10. Risk from finance • Financial stability at every party involved • Stability of suppliers should be investigated by the procurement executive

  11. Managerial risk • Delegation:Does the project manager and other team members have the authority to effectively deal with every problem? (especially with cross-functional problems) • Intervening after delegation can be unnecessary and a source of conflict

  12. Political risk • Organisational politics of the parent organisation • International and national politics • Sometimes the distance increases the uncertainty

  13. Risk assessment Two separate components: • Quantitavely assessment: • Statistical analysis • Subjective (human risk) assessment • Harder to assess and quanitfy Two perception: • Project manager • Project sponsor Risk can give rise to benefits as well as adverse effects.

  14. Steps of risk management • Risk identification

  15. Risk identification • For the whole project lifetime • Try to identify as many areas of uncertainty as possible (build up a risk register) • Develop uncertainty into risks • A network plan can help the identification • Rank the risks in order of seriousness

  16. Fundamental questions of risk identification • What could go wrong? Techniques: • Brainstorming • Experience of past projects • Project networks (sources of risks & float time for mitigation) • How likely it is? • How will it affect the project?

  17. Risk register • List of identified risks • Explanation of the nature of each risk & the extent of damage or opportunity • Assessment: • Quantifying by assessing the probability • Sorting by the size of the problem: high, medium, low • Management methods or plans for each risk • Be aware of secondary risks: efforts to manage the promary problem can lead to a new one

  18. Response to risk • A part of the risk management plan • Must deal with every identified risks • Modifythe project objectives • Usealternativetechnologiesormethods • Usealternative project management • Increasemanagerialstrenth • Reduceinterdependency • Increaseresources • Increasingfelxibility

  19. Risk mitigation techniques • Risktransfer: tosomeone more capable (insurance is thesimpliest) • Riskdeferral: movingriskintime • Riskreduction: • Probability • Impact • Riskacceptance: reserveorcontingencyplan • Riskavoidance: changingtheriskyactivity

  20. Reading • Textbook chapter 7

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