Ar009

Source: GLOBAL PROJECT MANAGEMENT HANDBOOK
CHAPTER 9
MANAGING RISKS AND
UNCERTAINTY IN MAJOR
PROJECTS IN THE NEW
GLOBAL ENVIRONMENT
Roger Miller
École Polytechnique de Montréal, Montreal, Quebec, Canada
Brian Hobbs
Université du Québec à Montréal, Montreal, Quebec, Canada
Roger Miller is Jarislowsky Professor of Innovation and Project

Management at École Polytechnique in Montreal and a founding part-
ner of SECOR, a strategy consulting firm with offices in Montreal,
Toronto, and Paris. His work has focused on (1) strategy and industry
dynamics, (2) public policies in science and technology, and (3) project
management. He was the director of the International Program in the
Management of Engineering and Construction (IMEC) sponsored by 10
large international project developers. IMEC results were published by
MIT Press as The Strategic Management of Large Engineering
Projects: Shaping Risks, Institutions and Governance.
Dr. Miller is presently the director of the MINE Programme, the pur-
pose of which is to understand the management of innovation in the
context of the new economy. The data for this research consist in 240
case studies and a worldwide survey of 1500 chief technology officers.
The research is being conducted by a core team located in École
Polytechnique with partners at the University of Sussex, Torino, MIT,
Stanford, and Toronto.
Brian Hobbs holds a degree in industrial engineering, an MBA, and a

Ph.D. in management. He has been a professor at the University of
Quebec at Montreal in the master’s program in project management
for 20-some years. This program, of which he is a past director, is
accredited by PMI’s Global Accreditation Center. Dr. Hobbs is very
active internationally in both the project management professional
and research communities. He filled a three-year mandate on PMI’s
Standards Members Advisory Group (MAG) ending in 2002. He is a
reviewer for both the Project Management Journal and the
International Journal of Project Management. He has presented several
papers at both research and professional conferences organized by
PMI and other project management organizations worldwide. In
recent years, he has been a member of three teams of researchers that
have been awarded competitively bid research grants by PMI.
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MANAGING RISKS AND UNCERTAINTY IN MAJOR
PROJECTS IN THE NEW GLOBAL ENVIRONMENT
9-2 COMPETENCY FACTORS IN PROJECT MANAGEMENT
The global environment for large, complex projects has changed significantly in recent
years. The changes in context have produced important challenges and new approaches to
the development and delivery of major projects throughout the world. The roles of the
different players involved in the development and delivery of large projects have been
redefined during a period of intense experimentation and innovation. New development
strategies and delivery mechanisms have redefined and modified the distribution of risk
among project participants. The traditional risk management approaches and tools are
somewhat paradoxically more important than ever, whereas at the same time they are
showing their limits and the need to be supplemented with alternative strategies to cope
with uncertainty.
The first section of this chapter examines the nature of the forces behind the changing
environment and their impact on the management of major projects. The second section
of the chapter develops a framework for describing and analyzing the development and
delivery cycle of major projects in the new global context. The framework is focused on
the critical roles of the project sponsor/developer and the interaction with the institutional
context. The final sections examine the nature of risks in this context and the strategies
used to manage them.
THE NEW GLOBAL ENVIRONMENT FOR LARGE,

COMPLEX PROJECTS
Changes in the environment of large projects have been multifaceted and systemic. Since
the late 1980s and early 1990s, several forces have come into play. Over time, the inter-
actions among them have radically altered the way large, complex projects are managed.
In reality, the context of projects moved from institutional frameworks built on the
assumptions of rational management to ones based on shared governance (Miller and
Lessard, 2000).
As is always the case with systemic changes, there are many forces in play and many
interaction effects among them. The most evident manifestations of the changing envi-
ronment are globalization; the prominence of new models for project development and
delivery, such as design-built, build-operate-and-transfer (BOT), and concessions; a larger
role for private financing of public infrastructure; and more collaborative project struc-
tures. Many forces are at play to produce these more evident manifestations, each of
which, in turn, is among the forces participating in the systemic change. Several of these
forces are identified in Fig. 9.1 and are discussed below.
Ideological Shifts Favoring Privatization
Ideas are important if many people share them. Beginning with the era of Margaret
Thatcher and Ronald Reagan, emphasis was put on private competition, market
economies, reduced role of government, and privatization in the 1980s.
During the late 1980s and early 1990s, worldwide, most governments—national,
regional, and local—were very deeply in debt. Financial markets and international agen-
cies became more sensitive to the issue of public debt. Governments and publicly owned
organizations started searching for ways to finance public infrastructure without increas-
ing their debt load. A period of experimentation started with privatization as a significant
part of this trend. The search for new means of delivering new or revamped public infra-
structure with off-the-balance-sheet financing has had a very significant effect of the way
many major projects are delivered.

MANAGING RISKS AND UNCERTAINTY IN MAJOR PROJECTS 9-3
Ideological shifts
Macroeconomic trends:
favoring privatization,
Public debt Deregulation
competition and withdrawal
Globalization
of governments
Changes to regulatory Emergence of a relational New competencies and

framework to venturing approach to the strategies in project
stimulate entry and development and delivery sponsorship and
competition of major projects development
New development models

BOT
New competencies in
Concession Technological change
financial engineering
Private finance
Collaborative development
FIGURE 9.1 The new global environment.
Deregulation and Globalization of Markets
Since the late 1980s, a global trend toward deregulation and a reduction in barriers to inter-
national trade has affected the world economy. Many industries have been deregulated, and
many public monopolies have been broken up or reduced in scope. Many markets
worldwide have become more accessible to foreign firms. Bilateral or multilateral trade
negotiations have been a major part of this trend to globalization. The result has been
tremendous increases in both international commerce and investment.
Regulatory regimes encourage investments. In addition to participating in trade nego-
tiations, some countries also have taken initiatives to stimulate interest in particular types
of projects by creating or modifying the country’s regulatory regimes. Conditions that
apply to foreign investment and regulatory regimes were modified to allow private
investment in what were previously areas reserved for state monopolies. Many countries
have set up regulatory regimes to facilitate particular types of projects, BOT projects in
particular.
Development of New Competencies
Responding to these initiatives, operators, concessionaires, and entrepreneurial compa-

nies from around the world became more active in many more markets than before. Over
the last two decades, many firms involved in major projects in different capacities have
been exploring new markets and new modes of project delivery. Many of these firms
have built competencies in the initiation, organization, development, financing, design,
execution, operation, or ownership of major projects.

Increased Project Scrutiny
During the 1990s, many governments promoted concession and BOT projects as a means
of building new public infrastructure without increasing public debt. Many projects were
financed through project finance, that is to say, financed by private financial markets
based on the forecasted revenue stream of the project and without significant guarantees
by either private or public participants in the project. Developing financing for projects
has become a major part of project development. The nominal placement of ownership in
private hands is insufficient for the financing of a project to be considered as being off
the balance sheet and thus not be counted as a part of public debt.
In order to be considered as being off the balance sheet, significant control and risk
must be assumed by the private party. The increased role of financial analysts subjects
projects to more scrutiny and places more emphasis on the analysis and allocation of risk.
The development of financial packages has increased in complexity, and financial engi-
neering has become a key competency in project development.
Collaborative Contracting
The new modes of project development and delivery typically involve many more organi-
zations in more interdependent roles than traditional projects organized by a dominant
owner and coordinated through rigid contracts. Many of the projects in the newer modes
of organization involve many specialized firms and public participants in situations of
mutual interdependence. Joint ventures, consortiums, and alliances of different kinds are
more often the basis for participation in major projects.
The ideal of collaborative involvement and working with alliances has been a power-
ful trend in organizations in all areas, not just in project management. The trend has been
manifest both within and between organizations. An example that is particularly relevant
to project management is concurrent engineering. This organizational arrangement has
replaced sequential development in isolated departments with the creation of multidepart-
mental teams bringing resources specialized in manufacturing and operations into the
early design of projects. Examples of collaborative and interdependent relationships
among organizations include alliances, joint ventures, partnering, and outsourcing.
Cospecialization
The trend toward more specialization among organizations is not restricted to the realm of
major projects. The dominant idea in the field of business strategy for more than a decade
has been the division of labor in areas where organizations have distinctive core compe-
tencies and of allocating nonstrategic activities to other organizations with distinctive com-
petencies in these areas. The ideals of the vertically integrated or widely diversified firm
are challenged by the value of outsourcing and cospecialization (Chesbrough, 2003).
These major trends in organization and in strategy are part of the general context in
which experimentation with new development and delivery modes were tested in the field
of major projects. The fact that these practices were popular in both private and public
administration legitimated and facilitated their adoption on major projects.
Technology
Some projects are in fact high-technology ventures. However, many projects implement
technologies that are less high-tech. Technology has played a less dramatic and subtler
role in such projects. Information and telecommunication technologies have facilitated

the interdependent involvement of more players in project design and execution, often at
a distance. In many cases technology facilitates the adoption of alternate modes of project
development and delivery but is not a major driving force.
Experimentation and Innovation
Concessions and project finance are not new ideas. However, they had not been in wide-
spread use prior to the 1980s. Few organizations, therefore, had significant expertise in
these types of projects. This lack of expertise, combined with the ideological conviction
of the natural superiority of private over public organizations, led to private firms,
investors, and financial institutions assuming considerable risk and to spectacular losses
on projects that failed.
This period of relatively intense experimentation, with its collection of both very suc-
cessful and very unsuccessful projects, facilitated leaning by individual organizations and
the development of their distinctive competencies. It also facilitated institutional learning
as organizational fields became better structured and as regulatory regimes became more
refined. Alternative modes of project development and delivery, such as BOT, conces-
sions, and project finance, have become part of the repertoire of available alternatives for
those initiating major projects and for those seeking to participate in them.
UNDERSTANDING THE DYNAMICS OF MAJOR PROJECTS
This second section presents a framework that describes the organization of major projects
in this new environment. This framework is based on a reexamination and a further elabo-
ration of the results of a major research program, the International Research Program on
the Management of Large Engineering and Construction Projects (IMEC) (Miller and
Lessard, 2000; Miller and Hobbs, 2002) and on more recent investigations by the authors.
The aim of the IMEC was to better understand the dynamic patterns that were emerg-
ing in the ways projects are structured and managed and in the approaches that are
associated with successful or less successful projects. The program produced and ana-
lyzed 60 case studies of large engineering projects in both developed and developing
countries on four continents that were using an approach based on grounded theorizing.
The case studies documented the evolutionary dynamics of projects from the earliest
phase of inception through to commissioning and the start of operations. The average
duration of these projects was 10 years, of which 6 to 7 years were devoted to front-end
development phases and only 3 to 4 years to design and construction phases. Figure 9.2
sketches an archetypal representation of the dynamics of projects over the main periods
of their life cycle.
The Beginning of the Project: The Search Period
Search refers to the original efforts to match needs, solutions, and opportunities. A pri-
vate or public owner may signal interest in or receptivity to proposals for a project either
by a policy statement or a call for proposals. Often the original show of interest is the
result of a long preproject process of discussion and lobbying by different interest
groups. Private sponsors/developers also initiate proposals for projects in their search for
project opportunities.
Projects go through a long period during which both the problem and some elements
of its solution are sorted out. The process is a search for solutions to poorly defined

Institutional framework
Supporting
Buttressing
Potential
political
participants
coalition
Information search
Lobbying for anchoring

Restructuring if needed
Strategic system
Project Owner/sponsor Risk Commissioning

opportunity coalition identification and ramp-up
Detailed design
9-6
and execution
Robustness & resilience

Project
concept
Sponsor’s strategic shaping

Information search
Emergent risks
Reactions: market & social

Search Strategic shaping Design and execution Ramp-up
Project context
FIGURE 9.2 The life cycle of large complex projects. (Adapted from Miller and Hobbs, 2002, p. 209; printed with permission of PMI.)

problems that become better defined as the process unfolds. Politicians may be searching
for political opportunities, whereas contractors may be searching for business opportuni-
ties. Potential sponsors from diverse fields are also searching for opportunities at the
same time. This early project phase therefore has been called the search period.
It is often difficult to know when exactly a project starts. In retrospective, it is possi-
ble to trace the project back to its beings, the time when serious effort was first put into
what would become the project concept. The search process is very nonlinear and episodic.
Often the project will have been considered on different occasions over a long period of
time. For example, many transportation infrastructure projects and facility development
projects are in the air for decades before the timing is right to move to some form of con-
crete proposal for action. After all, Napoleon did start work on a tunnel under the English
Channel.
The existing institutional framework or a proposed new institutional framework will
define to a large extent who the main project actors can be. Regulations typically set out
who can undertake particular types of projects, particularly in areas such as transportation
infrastructure. Many examples have been seen over the last 20 years of governments sig-
naling their interest in alternative project-delivery methods by indicating changes to be
made to the institutional framework.
The project sponsor brings closure to the process of searching for a preliminary con-
cept and for the organizations that could play a part in developing and delivering the proj-
ect by signaling a choice. The sponsor identifies the critical issues that must be addressed,
the general strategies for addressing them, and the participant organizations that can con-
tribute to their resolution.
The Strategic Shaping Period
In order for a project to be viable, many pieces of the puzzle must come together. A proj-
ect concept must be developed. A sponsor/owner coalition must be formed and structured.
Political support must be mustered. The project must be anchored into the institutional
framework. And project risks must be identified and a mechanism put in place for their
management. The project sponsor plays a key role in moving the project opportunity
forward.
A preliminary concept is developed, and a preliminary coalition is formed. The spon-
sor often will initiate a small number of alternative concepts in a search for a viable proj-
ect. The project concept or concepts are tested in different arenas and found to be wanting
in many respects. The concepts and the coalition therefore must be modified and retested.
Negotiations take place with many stakeholder groups and particularly with regulator
agencies and political representatives in an effort to modify and stabilize the regulatory
regime or institutional framework. The project concepts, the environment, and the institu-
tional framework are subjected to intense scrutiny from many different points of view.
The sponsor plays a critical role in identifying the relevant points of view and in setting
up a structure that will make certain that the relevant issues are addressed. As the issues
are addressed, the concept again must be modified and retested.
Not only are the problem or opportunity and the solution being sorted out, coalitions
of players are also taking form. The rhythm is broken and sporadic. Projects often go into
limbo after periods of considerable exploratory activity. Exploratory processes often lead
to dead ends and are abandoned, at least temporarily. Major setbacks are not uncommon
because this protracted process is vulnerable to significant and unforeseen changes in the
project environment. Timing is key.
This iterative process, called strategic shaping, molds not only the project concept but
also the project organization and the way it is anchored into the institutional framework

to produce a viable project (Miller and Olleros, 2000). The results of the IMEC clearly
indicate that the strategic shaping process is the most critical aspect of the management of
major projects. If this process produces a satisfactory result, the project has considerable
chance of success.
The Design and Execution Period
In most major projects, a time can be identified when most, if not all, the pieces come
into place and when significant and irreversible commitments are made. This is typically
the time when major contracts are signed and financing is secured. This point marks the
end of the strategic structuring phase and the beginning of the design and execution
phase.
From this point, the management of the project is more in line with conventional proj-
ect management theory and practice, which does not mean that it is issue-free but that the
issues and their management are more in line with well-established project management
practice.
Commissioning and Ramp-up Period
Ramp-up is the moment when assumptions become reality and revenues flow in as
expected or not. At the time the artifact is put into service, many projects face severe
crises because revenues are unable to cover capital and interest payments. By assuming
more responsibility for the operational success of their projects, many have discovered
that building the artifact is only part of the task to be mastered and that other, sometimes
more challenging tasks are associated with early operation after delivery.
Under traditional procurement practices, the functioning of the artifact after com-
missioning has been of little or no concern to those responsible for design and delivery.
However, more and more often, those executing major projects are taking on the
responsibility for the effective operation of the projects in service. In concession and
BOT projects, the project developer and builder also have the role of owner and opera-
tor, at least for several years. In these types of projects, the financial viability relies on
early positive market reaction. Transportation infrastructure projects that rely on toll
revenues and projects that depend on demand in a market that has historically been
cyclical or unstable, such as the energy and natural resource sectors, are examples of
capital-intensive projects that are vulnerable to low demand in the period immediately
following commissioning.
In many transportation concession projects built over the last 15 years, usage levels
have been lower than forecasted, particularly during the first few years of operations.
Users often take time to adopt the new service. Early market responses to this type of ser-
vice in areas where tolls have not been an established practice are very hard to predict. In
extreme cases, the shortfall in early revenues has lead to insolvency. Many times the state
has had to step in because of the bankruptcy of the concessionaire and the obvious social
value of operating the artifact.
In many infrastructure projects, problems have come from adjacent systems. In some
instances, the feeder systems that other parties were committed to install were not fin-
ished as planned. In other situations, a competing system was built alongside the conces-
sion. In yet other situations, governments have reneged on their commitments because of
protests by pressure groups. In some cases projects have been taken over by the state
because the project was too successful and the concessionaire was seen as making unrea-
sonable profits from a public service.

MANAGEMENT OF RISK AND UNCERTAINTY
In order to fully grasp the reality of risk management in this context, a distinction needs
to be made between two broad types of risks. First, there are risks that can be anticipated,
and second, there are risks that merge over time and cannot be easily anticipated. The
expressions known-unknown and unknown-unknown can be used to describe each. Risk
management as it is practiced in the project management community is a methodology
for dealing with anticipated risks. However, the specific dynamics of projects in this new
global environment require different and more explicit methods for managing both antici-
pated and emergent risk.
Economists have made the distinction between these two types of risk for some time.
(Knight, 1921; Keynes, 1973; Adams, 1995, all quoted in Froud, 2003) For these authors,
a risk is a future event or state that, if it materializes, will have a negative or positive
impact on the project. The future event is not completely known but at least can be identi-
fied or modeled. With enough effort, the probability of occurrence and the potential
impact on the project can be forecasted. This definition and treatment of risk are identical
to those found in the field of project management.
Uncertainty refers to the possibility of emergent indeterminate events. Under condi-
tions of low uncertainty, approximate forecasts still can be made. High uncertainty entails
conditions of indeterminacy where future events are neither identifiable nor amenable to
calculation. The strategies for managing risks and uncertainty are quite different.
Traditionally, the project management community has focused on what economists have
called risk and has tended not to deal explicitly with uncertain emergent and unforeseen
events.
The results of the IMEC show that large, complex projects face an average of four major
unexpected and potentially catastrophic risk events despite the systematic application of
very good risk management practice. Examples of emergent events are (1) a partner’s
bankruptcy, (2) a radical drop in demand triggered by a distant cause, (3) a noncoopera-
tive attitude by ministerial officials, and (4) a political turnaround.
The emergent risks can be both endogenous, or internal to the project, and exogenous,
coming from the project environment. The significant exposure to emergent risk has
many causes: (1) duration and scope of projects, (2) large number of stakeholders with
diverse and often conflicting interests, (3) their visibility, (4) the irreversibility of many
decisions, and (5) the systemic effects found in such large complex projects.
For instance, concession and BOT projects have even more exposure because their
financial viability depends on a revenue stream going out as much as 35 years. It is not
possible to anticipate all the major events over a 10-year period and even less so for a
35-year period. The scope of these projects includes many different dimensions in terms
of both their technical content and the areas of responsibility that must be managed.
The management of risk and uncertainty in the face of this dynamic unfolding has to
go much beyond risk management as it is traditionally conceptualized and practiced in
the field of project management. Risks and opportunities appear over the 10-year period
during which the dynamics of projects unfold. Risks and uncertainties can be regrouped
under such categories as (1) market, (2) institutional, and (3) design and construction.
Risk can emerge endogenously or crop up exogenously.
Sociopolitical Impacts
Large projects tend to produce large economic, environmental, and sociopolitical impacts,
both positive and negative. These impacts will affect a wide variety of stakeholders with

varying and often conflicting interests. Infrastructure projects are particularly vulnerable
to emergent risks from stakeholder groups because of both their physical and social visi-
bility. Physical infrastructure projects attract a great deal of media and public attention
because of their size, impact, and visibility. In addition, infrastructure projects provide
services to which many constituents feel they have a right and can become the subject of
political debate and claims from diverse stakeholder groups. Major projects are particu-
larly vulnerable to being held hostage by pressure groups because beyond a certain point
the decision to invest in the creation of the artifact becomes irreversible. It is difficult to
halt or downsize the construction because when it is partially completed, it is worth very
little. Once it is completed, it can be used for little else than its intended purpose. For all
these reasons, large projects are vulnerable to both anticipated and emergent claims from
stakeholders, and infrastructure projects are particularly vulnerable.
Redefinition of Roles
Projects that redefine the role of the state and participants from the private sector, both
national and foreign, are even more vulnerable because they can provoke debates, claims,
and protests on a very wide number of issues. These projects can be the object of debates
and protests about privatization and globalization. It is difficult to anticipate all the issues
that the different stakeholders might evoke when logging a claim against the project.
Unforeseen claims are likely to emerge from the project environment despite the best
efforts toward stakeholder and risk management.
Opportunism
Project structures such as those that have been described in this chapter involve many
participants in networks of interdependent relations. Thus they are more vulnerable to
endemic emergent risks related to participant behavior. Multiple interdependencies are
both a cause and an effect of emergent risk. Interdependency and the increased number of
relations obviously increase vulnerability to endemic emergent events related to partici-
pant behavior. On the other hand, because of higher levels of emergent risk, it is not pos-
sible to specify everything in advance, and participants are forced to accept some degree
of indeterminacy and interdependency in order to maintain the flexibility that response to
emergent risk requires. Overall, large projects are vulnerable to exogenous emergent risks
related to stakeholder behavior. Projects that are organized as relational ventures are
more vulnerable to both endogenous and exogenous emergent risks related to stakeholder
behavior.
Interdependencies
A complex system is a system with many interdependent components. Large projects are
certainly complex systems. Projects organized as relational ventures are more complex
because they have more components that are more interdependent. All the project charac-
teristics described earlier contribute to complexity. Because of nonlinear interaction
effects, it is very difficult, if not impossible, to predict the behavior of complex systems.
The more complex the system, the more emergent events are likely to manifest them-
selves. In complex systems it is also more difficult to predict the chain of events that any
emergent event will produce. There is thus a nonlinear increase in emergent properties
as systems become more complex. Because of the large number of interdependencies,

complex systems are more likely to “unravel.” Relatively small disturbances can provoke
chain reactions that can cause substantial damage and even cause the system to collapse.
Because unraveling is the result of complex interactions that are difficult to apprehend or
predict, the appearance of symptoms of unraveling are perceived as emergent events.
Complex systems in general and relational venturing projects in particular therefore are
considerably more exposed to emergent risk. Their management must introduce mecha-
nisms for dealing with emergent risk.
MANAGEMENT OF ANTICIPATED RISKS
Risk management is an integral part of project management; witness the risk management
knowledge area in recent versions of the Project Management Institute’s (PMI’s) Project
Management Body of Knowledge (PMI, 2004). Risk management as it exists in the field
of project management involves identifying future probable events, analyzing the events
to determine their probability of occurrence and potential impact on the project, and elab-
orating strategies for managing the risks. Good management of projects, therefore,
requires good risk management. The best sponsors show an ability to manage risks more
effectively, which, in turn, contributes to making projects more successful.
Anticipated risks are amenable to analysis, both qualitative and quantitative. The dis-
ciplines of management science and scenario building form the backbone (Miller and
Lessard, 2000). The keys to effective risk management are the identification of risks,
their analysis, and the elaboration of effective strategies for managing them. Rigor and
discipline also are necessary to act on this information. Effective risk management relies
on the identification of risks particularly in the early phases before the project concept
has been elaborated. In the early phases, it is more important to identify all the potential
types and sources of risk than to actually identify individual risk events.
Competent sponsors are very good at identifying the issues that will need to be
resolved, and putting in place mechanisms to resolve them. Effective sponsor organiza-
tions rely a great deal on their own experience for this, but they also know who to involve
in the risk management process. A wider variety of points of view is likely to be better at
identifying more areas that should be of concern and will have more information and
competency to draw on in all the steps of the risk management process. Having a rich
coalition of project participants and a large network external to the project that the spon-
sor can draw on in the search for information and solutions are keys to effective identifi-
cation and management of risks.
As a project gets closer to the point were commitments will be made, sponsors often
organize risk management workshops where risks, risk management strategies, and the
allocation of risks are reviewed for completeness and acceptability prior to commitment.
Many points of view are brought to these workshops.
Effective management of risks requires the courage to withhold commitment until
risks have been dealt with adequately. In the enthusiasm and drive to move projects for-
ward, some sponsors and other participants tend to neglect downside risks, that is, risks
with low probabilities but large impacts. People with a background in finance tend to be
very sensitive to these types of risk and often will withhold their approval and commit-
ment until they are dealt with. The presence of people with this type of background and
this attitude is often associated with project success. It is the sponsor’s role to identify the
need for such scrutiny and to engage the right people.
In general, successful projects undergo more scrutiny than less successful projects.
They are scrutinized from more points of view, in more detail, and more rigorously than
less successful projects. Scrutiny is applied throughout the project development process

and the project execution process. It is the sponsor’s role to identify the issues that need
scrutiny and the points of view that are relevant to each issue and to put a project organi-
zation in place that will ensure that issues are addresses as completely and as rigorously
as possible.
Risk management is more than applying a method to identify and analyze risks.
Project organization is an important risk management tool in large, complex projects.
Effective risk management requires that the project organization include the right combi-
nation of participants and that it structures them to ensure that risks are identified and
dealt with effectively. Establishing an effective project structure means identifying the
issues that need to be resolved, as well as the participants with the competence and
resources to deal with them, and setting up a structure that forces issues to resolution.
Aligning participant roles with their particular competencies and interests in the project is
a key element of the design of the project structure and of risk management. As can be
seen from this description, the effective management of anticipated risks in large, com-
plex projects in general and in relational venturing in particular goes much beyond the
steps in the risk management methodology of traditional project management.
MANAGEMENT OF POTENTIAL EMERGENT RISKS
The effective management of anticipated risks actually reduces the number of risks that will
be perceived as being emergent events or surprises. However, despite best efforts, emergent
risks still are likely, and the project organization must be designed to manage them.
Design to withstand and manage emergent risks must be done from a complex sys-
tems perspective. The objective is to build in institutional, organizational, or governance
properties that will increase the chances that responses or reactions will allow survival in
the face of unforeseen events and situations. Control of emergent risks is usually indirect.
In a nutshell, project design must build on the ability to imagine emergent risks early and
to create a stable and supportive project environment, as well as a project governance
framework that can withstand and respond to emergent risk. Several strategies for build-
ing governance properties are discussed below.
ANCHORING THE PROJECT INTO ITS

INSTITUTIONAL ENVIRONMENT
The environment of a large, complex project and the interrelationships and interdepen-
dencies between the project and its institutional context are molded over a long period of
time. Effective sponsors invest considerable time and effort into shaping the project and
its context. There are two important aspect of the relationship between the project and its
context. First, the project is developed, delivered, and eventually operated in an institu-
tional framework composed of laws and regulations. Second, the project interacts with a
wide array of external stakeholders. Each of these must be managed so as to stabilize the
context and make it as supportive of the project as possible.
The results of the IMEC showed very clearly that the anchoring of a project into its
institutional context is one of the most critical aspects of managing a large, complex project.
This is a very active process in which the sponsors are very highly involved. The process is
often very drawn out, taking several years to put in place. The process involves educating
and lobbying legislators and regulatory authorities and possibly bringing pressure to bear
on them. At the same time, the project concept is being elaborated and tested. There is a
coevolution of the project concept and the laws and regulations that make it viable.

The level of development, stability, and specific content of regulatory regimes vary
enormously from one country to the next. In countries with very weak regulatory
regimes, anchoring the project and stabilizing the regulatory context may require actions
that are very proactive and that would seem exceptional in other countries. Even in coun-
tries with highly developed regulatory regimes and where the rule of law is well estab-
lished, anchoring of the project and stabilization of the context often require modification
of existing laws and regulations or the creation of new laws and regulations. Laws and
regulations provide guarantees for certain rights and privileges or can place limits on the
future actions of certain parties, including the government itself. In countries where the
rule of law is well established, they are enforceable in the courts.
Beyond their strictly legal implications, supporting legislation, laws, and regulations
provide a great deal of legitimacy to projects. Once the supporting laws have been passed
and the regulations have been put into place, stakeholders are much less likely to contest
the project. By passing legislation, the government publicly commits itself to supporting
the project and is more likely to come to the project’s rescue in case of severe unforeseen
difficulty. There are many examples of governments stepping up to save projects from
collapse. This is more likely if the government’s support for the project has been clearly
signaled at some earlier stage and if the project provides significant public service or eco-
nomic or political benefit. Anchoring to the institutional framework, therefore, has the
effect of reducing the likelihood of unforeseen risk events but also increases the project’s
legitimacy and the likelihood of its receiving support if faced with unforeseen difficulties.
Sponsors that venture into areas previously reserved for government monopolies can
evoke such a wide variety of issues over such a long period of time that it is not possible
to identify all the potential stakeholders and their actions that could pose threats to the
project. Successful projects show exceptional stakeholder management. However, the
management of unknown stakeholders and their unforeseen actions requires measures in
addition to good stakeholder management. Instilling legitimacy and momentum to the
complex system that is the project can render it less likely to be attached and can increase
its chances of survival.
Anchoring the project into the institutional framework confers considerable legitimacy.
An effective communication plan also will be an essential ingredient in building the proj-
ect’s legitimacy and in creating momentum. Effective sponsors often go beyond these
actions by deploying proactive cooptation strategies with potential opponents and/or
opinion leaders. Early in the life of the project, before stakeholders have taken a public
position with respect to the project, it is often possible to identify stakeholders that are
only partially antagonistic to the project and are potential opinion leaders. If a group of
affected parties or a pressure group is brought into the project development and approval
process and eventually supports the project, their presence and actions confer significant
legitimacy to the project. This not only virtually removes the possibility of opposition
from these groups but also provides sufficient legitimacy and momentum to reduce the
likelihood of other groups being mobilized in opposition to the project.
CREATING A PROJECT CONCEPT AND ORGANIZATION

TO ENHANCE GOVERNABILTY
Creating a project organization that will be able to face unforeseen difficulties and capture
yet unknown opportunities can be likened to building a team to do the same. In building
the team, the sponsor must choose and motivate the members, establish the network of
interdependent relationships among them, and allocate roles, responsibilities, and risks.
The team will need to remain cohesive and to attack emergent issues as problems to be
solved. To solve the future problems, they will need to have the incentive and motivation

to work together. To be able to solve the yet unidentified problems, they will need to
make creative use of the diverse and rich set of skills and resources they bring collectively
to the project. In solving the emergent problems, both the project concept and the project
organization may need to be modified or adapted. Flexibility in the organization and the
concept will facilitate the necessary adaptation.
Inversely, a project organization in which the members have no real incentive to solve
collective problems but are motivated to exit the project or escalate internal conflicts is
more likely to unravel in the face of an emergent crisis. Project teams and project plans
that have been optimized in terms of material resources and competencies to meet the
anticipated project requirements and risks are likely to fall short in attempts to solve
emergent problems. Likewise, rigid project organizations and concepts are less likely to
be adaptable to unforeseen situations.
Projects as complex systems need to be instilled with the properties of cohesion and
resilience in order to perform well in unforeseeable situations. As complex systems, they
must have the requisite variety to deal with the situations they will face. In other words,
their repertoire of possible responses must be at least as rich as the set of situations they
will face. In practical terms, this means that the project organization must have a rich set
of competencies and resources at its disposal if it is to be able to solve future problems.
This is best accomplished by having an organization whose members have diverse com-
petencies and backgrounds and also have surplus professional and material resources that
they can draw on if needed.
Having the professional and material resources to solve problems is insufficient. Team
members must have the motivation and incentive to do so. This is best accomplished through
ownership in both the psychological sense of commitment and in the sense that the team
members have a material incentive to make the project a success. In structuring the project,
the sponsor must establish a project organization in which all the key players have the moti-
vation and the incentive to solve problems creatively and make extra efforts if the project
gets into difficulty. Creating a project organization whose members have the incentives and
the means to solve problems will instill flexibility and responsiveness into the system.
Effective sponsors take additional measures to instill flexibility into their projects. The
project front-end development takes several years, and it is not possible to foresee the
exact situation that will prevail when the final concept is chosen. Developing alternate
scenarios and concepts and delaying commitment to the final concept give the project
more flexibility. In some projects, it is possible to use modular designs that allow partial
execution or more flexibility, but this is only possible on certain projects. Instilling flexi-
bility gives a project more resilience in the face of emergent risks, but there is a cost to
flexibility. Developing alternate scenarios and delaying concept selection generate costs
and delays and can lead to suboptimal design.
Creating a project concept and organization to deal with emergent risk is a very active
and very lengthy process. The project sponsor exercises influence on the project context
and anchors the project into this context. The sponsor also conceptualizes the project as a
complex system and builds a cohesive, resilient, and responsive organization. In so doing,
the sponsor goes much beyond the management methods that are effective for the man-
agement of anticipated risks.
COPING WITH TRADEOFFS IN THE MANAGEMENT

OF ANTICIPATED AND EMERGENT RISK
The approaches used by effective sponsors to manage anticipated and emergent risks are
often complementary, but in some cases they create paradoxes. Tradeoffs are necessary.

The management of both anticipated and emergent risks relies on rigorous and continuous
scrutiny of the project and its environment, which, in turn, relies on the competencies and
incentives of both the project participants and the networks to which they have access.
Being able to draw on diverse points of view and skill sets in the analysis of a risk and in
the elaboration of a response will be of great value whether the risk is anticipated or not. A
project structure that allocates risks to those parties with the means to control and respond
will be more effective in dealing with risks, whether they are anticipated or not.
However, there are two important paradoxes in attempting to establish a project con-
cept and organization that will anticipate risks and manage them effectively and at the
same time be resilient and responsive in the face of unforeseen events. First, an organiza-
tion that does a very good job of anticipating risks must realize that its job is only partly
done and that no amount of anticipatory risk management will prepare it well to deal with
emergent risk. Somewhat paradoxically, the organization must plan for the future while
knowing that the future will be different from that which it plans.
Second, the most efficient and effective means for dealing with anticipated risks can
introduce rigidities that reduce cohesion and responsiveness in the face of emergent
events. A rigid allocation of risks may create a situation in which project participants
have no motivation or incentive and limited possibilities to solve problems collectively.
Rigid contracts may be very efficient for the management of anticipated risks, but their
highly specified nature introduces rigidities that may hamper efforts to modify a project
and adapt to an emerging situation. There is a paradox between contractual efficiency in
the management of anticipated events and the provision of flexibility to respond to emer-
gent situations, often through contingent contracts. Striking a balance between the two
requires considerable judgment on the part of the project sponsor and participants.
CONCLUSION
Project sponsors and owners must create a project system that will effectively identify
and manage risks, applying excellent risk management as it is conceived and practiced in
the project management community to a very wide array of risks. However, the indeter-
minate nature of this complex system requires that the project organization also be
designed to face unanticipated or emergent risk as effectively. Infusing the project orga-
nization with the properties of cohesion and resilience requires an approach that goes
beyond the risk management approach currently practiced in the field of project manage-
ment. To face uncertainty, successful sponsors and owners must expend much greater
resources on imagining and creating futures than a traditional model would suggest.
Good sponsors and owners become project champions that
Dream big but willingly submit to discipline and due diligence. Good project champi-
ons make daring acts of faith and sketch utopias as wonderful, compelling possibili-
ties. During the front-end period, creative ideas need to predominate. Nevertheless,
projects must be submitted to tests periodically. Without discipline, erroneous com-
mitments may be made or projects may be abandoned prematurely. Worse, the
wrong projects may be built efficiently.
Avoid locking in too early or too late. Good sponsors and owners are cautious in mak-
ing irreversible commitments, but they recognize that eventually they must make such
commitments. Sponsors must avoid making irreversible commitments until they gain
enough knowledge to make reasoned choices. Effective sponsors cannot remain flexi-
ble indefinitely; eventually, bold actions and large investments are necessary. By con-
trast, during the engineering and construction period, committing as fast as possible to

build and operate the project will generate flows of revenue early. Flexibility at this
stage usually will not make sense; full commitment is necessary.
Shaping the future rather than planning in detail. If the future could be predicted ade-
quately, contracts could be designed to lock in on the most rational options.
Unfortunately, the future is often unknowable in advance. The longer the development
time, the higher is the likelihood that projects will be affected by turbulence. If events
go unchecked by the timely actions of sponsors, degenerative processes may ensue.
Effective sponsors recognize explicitly that projects are not once-and-for-all decisions
but rather journeys characterized by multiple decision episodes. During the front-end
period, the role of the sponsor is first to foster multiple perspectives by enlarging the
boundaries of groups participating in the project and shaping moves to break indetermi-
nate situations. As uncertainty reveals itself, leverage can be applied to make desired
futures happen. Reasoned commitments thus are made in the face of uncertainty.
REFERENCES
Chesbrough H. 2003. Open Innovation: The New Imperative for Creating and Profiting from
Technology. Boston: Harvard Business School Press.
Froud J. 2003. The private finance initiative: Risk, uncertainty and the state. Account Organ Soc
28:567–589.
Miller R, Hobbs B. 2002. A framework for analyzing the development and delivery of large capi-
tal projects, in D Slevin, D Cleland, J Pinto (eds.), The Frontiers of Project Management
Research. Newtown Square, PA: Project Management Institute, pp. 201–210.
Miller R, Lessard DR. 2000. The Strategic Management of Large Engineering Projects: Shaping
Institutions, Risks and Governance. Cambridge, MA: MIT Press.
Miller R, Olleros X. 2000. Project shaping as a competitive advantage, in R Miller, DR Lessard
(eds.), The Strategic Management of Large Engineering Projects: Shaping Institutions, Risks
and Governance. Cambridge, MA: MIT Press, pp. 93–112.
Projevt Mmanagement Institute (PMI). 2004. A Guide to the Project Management Body of
Knowledge (PMBOK Guide), 3d ed. Newtown Square, PA: Project Management Institute.


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Source: GLOBAL PROJECT MANAGEMENT HANDBOOK

Roger Miller is Jarislowsky Professor of Innovation and Project

Brian Hobbs holds a degree in industrial engineering, an MBA, and a

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THE NEW GLOBAL ENVIRONMENT FOR LARGE,

Ideological Shifts Favoring Privatization

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Changes to regulatory Emergence of a relational New competencies and

New development models

FIGURE 9.1 The new global environment.

Deregulation and Globalization of Markets

Development of New Competencies

Responding to these initiatives, operators, concessionaires, and entrepreneurial compa-

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Increased Project Scrutiny

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Experimentation and Innovation

UNDERSTANDING THE DYNAMICS OF MAJOR PROJECTS

The Beginning of the Project: The Search Period

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Lobbying for anchoring

Project Owner/sponsor Risk Commissioning

Robustness & resilience

Sponsor’s strategic shaping

Any use is subject to the Terms of Use as given at the website.

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The Strategic Shaping Period

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The Design and Execution Period

Commissioning and Ramp-up Period

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MANAGEMENT OF RISK AND UNCERTAINTY

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MANAGEMENT OF ANTICIPATED RISKS

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MANAGEMENT OF POTENTIAL EMERGENT RISKS

ANCHORING THE PROJECT INTO ITS

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CREATING A PROJECT CONCEPT AND ORGANIZATION

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COPING WITH TRADEOFFS IN THE MANAGEMENT

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