Lecture week 9

LEARNING OUTCOMES

At the end of the session, you should be able to:

• Describe the Risk Management Plan.

• Understand how to identify Project Risks.

• Understand how to quantify Project Risks.

• Understand how to respond to Project Risks.

• Understand how to control Project Risks.

INTRODUCTION

• Project Risk Management is frequently overlooked, yet it is one of the more critical elements to
successful project delivery. Generally, delivering a project’s defined scope on time and within budget are
characteristics of project success (KPMG, 2014).
• Unfortunately, these success factors are often not achieved, especially for large complex projects where
both external influences and internal project requirements may change significantly over time.
• Project Risk Management is a continuous process of identifying, analysing, prioritising and mitigating
risks that threaten a project’s likelihood of success in terms of cost, schedule, quality, safety and
technical performance.
• Organisations and owners often consider project risk management activities as “nice to have” on a
project rather than as a core component of project controls.
• Additionally there is some confusion between organisations and project teams as to what exactly
constitutes risk management activities.
RISK MANAGEMENT OVERVIEW: WHAT IS
RISK?
• The set of hindrances that threaten the pursuit of business objectives (PMI BoK, 2004).
• Uncertainty inherent in plans and the possibility of something happening (i.e. a contingency) that can
affect the prospects of achieving business or project goals (Gaudenzi and Borghesi, 2013).

• Risk taking in projects is inevitable since projects are enablers of change; and change introduces
uncertainty, hence risk. It consists of a combination of the probability of a perceived threat or
opportunity occurring, and the magnitude of its impact on objectives, where:
VENTURE OUTCOME
(Project) (Products)
FAVORABLE
(Opportunity)

–Threat is used to describe an uncertain event that UNKNOWN

S
could have a negative impact on objectives. (Uncertaint UNFAVORABL
E
y)
(Threat)
–Opportunity is used to describe an uncertain
event that could have a favourable impact on
objectives.
 PROJECT LIFECYCLE
RISK VS. AMOUNT AT STAKE
I
N CONCEPT DEVELOPMENT IMPLEMENT CLOSE
C PHASE PHASE PHASE PHASE
R
RISK
E
$
A
S
PERIOD WHEN V
I
HIGHEST RISKS A
N
ARE INCURRED L
G
U
E
R PERIOD OF
I HIGHEST
S
AMOUNT AT STAKE
RISK IMPACT
K
WHAT IS RISK MANAGEMENT?

• Risk Management is a process of identifying, analysing, prioritising

and responding to risk events.

• Integration of risk managem activities ent into your other project

management functions.

• Developing responses to risk to meet

your project objectives.

• Project risk management is PROACTIVE.

INTEGRATING RISK WITH
OTHER PROJECT MANAGEMENT FUNCTIONS

PROJECT
MANAGEMENT
INTEGRATION INFORMATION /
SCOPE COMMUNICATIONS
PROJECT RISK
Expectations, Ideas, Directives, Data
Feasibility Exchange Accuracy
Life Cycle, Environment
Requirements, Variables Availability, HUMAN
QUALITY Standards Productivity RESOURCE
Time Objectives,
Constraints Services, Plant, Materials:
Cost Objectives,
Performance
Restraints
TIME
CONTRACT /
PROCUREMENT
COST
RISKS VS ISSUES

• Many projects use risk and issue logs. Sometimes the management of issues and risks can become
confusing.

• The PMBOK definition of an Issue:

• “A point or matter in question or in dispute, or a point or matter that is not settled and is under discussion
or over which there are opposing views or disagreements.”

• If you have the freedom to define these items and their logs, and the subsequent management of
risks and issues; then great. Handle risks and issues as you desire. My suggestion is to follow the
PMBOK guidelines as closely as possible .

• If you are dictated by the company, organisation or management team to handle risks and issues in
a particular manner, then follow these guidelines. Document – in your Project Management Plan,
Risk Management Plan and/or Issue Management Plan – how you will handle risks and issues.
RISK IDENTIFICATION
RISK IN CORPORATE BUSINESS

Risk in corporate business is typically divided into two basic types:

• Business Risk: chances of profit or loss associated with a business endeavour.

• Businesses employs qualified workers to increase profit and reduce chances of loss.

• Pure or Insurable Risk: divided into four categories:

• Direct Property: destruction of property by fire … etc.
• Indirect Property: extra expenses associated with rental property or loss due to a business
interruption.
• Liability: chance of a lawsuit of bodily injury, damages … etc.
• Personnel: injuries to workers (workers' compensation).
RISK IN PROJECT MANAGEMENT

• Usually not enough attention is paid to risk on projects.

• All risks are not independent, and frequently the greatest risk on a project
comes from a series of related/integrated events.

• Ultimate responsibility of risk management resides with the project

sponsor.

• As the project manager (PM) is representing the sponsor, risk management

becomes a large responsibility for PM.
TYPES OF RISK

• Technical.
• External.
• Organisational.
•▪Project
Note: Management.
these are example types of risk and this list can be
modified to meet the needs of your project.

▪ Developing a project RBS (Risk Breakdown Structure) is

an excellent tool to help identify risks.
RISK BREAKDOWN STRUCTURE (RBS)
PROJECT
RBS

PROJECT
TECHNICAL EXTERNAL ORGANIZATIONAL
MANAGEMENT

SUBCONTRACTORS PROJECT
REQUIREMENTS ESTIMATING
& SUPPLIERS DEPENDENCIES

TECHNOLOGY REGULATORY RESOURCES PLANNING

COMPLEXITY &
MARKET FUNDING CONTROLLING
INTERFACES

PERFORMANCES
& RELIABILITY CUSTOMER PRIORITIZATION COMMUNICATIONS

QUALITY WEATHER

The Risk Breakdown Structure (RBS) lists categories

and sub-categories for project risk. The actual
categories will vary across different types of projects.
IN YOUR RISK IDENTIFICATION
MEETING…
• Validate RBS with core team.

• Identify risks by source (RBS).

• Identify risks by level of uncertainty:

Known Known / Unknown Unknown / Unknown
Situation whose
Situation with no Situation with an
existence we cannot
uncertainty identifiable uncertainty
imagine
RISK QUANTIFICATION
DELPHI TECHNIQUE

• Identify your risks in a risk register or a risk log:

Identify the functional business areas
Functional Area
potentially impacted by the risk
Cost, External, Schedule, Technical,
Risk Category
Resources, Operational
Risk Description Description of the risk and the impact of it
Date Identified Date the risk was identified
Raised By Who identified the risk
KEY QUESTIONS!

• What are the right risks to manage?

• Analysing risks for probability and impact.
• Developing a risk profile for your project.
• Prioritising your risks.

• When to quantify risks?

• Whenever a new risk is created.
• An existing risk changes.
• Influential factors change.
• New information surfaces.
• A change is proposed by the sponsor.
• Market conditions change.
• Significant personnel leave the project.
QUANTITATIVE ANALYSIS VS. QUALITATIVE
ANALYSIS
• Quantitative Analysis • Qualitative Analysis
• Relies on a numeric value. • Uses subjective values:
• Uses objective data. Green, Amber, Red.
• Requires understanding of probability • Requires common understanding of
theory. ordinal ranking system.
• Removes some uncertainty. • May be less precise than quantitative
analysis.
• Should be based on historical data.
• Should be defined in terms of the
• Some examples are: sensitivity parameters of the project.
analysis, expected monetary analysis,
and modeling and simulation.
EXAMPLE OF RISK QUANTIFICATION
(SOFTWARE)
LIKELIHOOD VS. IMPACT MATRIX
EXERCISE 2: INDIVIDUAL

• Assess the probability and impact of the five risks identified in exercise 1.

• Briefly describe each risk, and then rate each one as high, medium or low in
terms of probability and impact.

• Plot the results on a probability/impact matrix.

Duration: 10 minutes + 5 minutes for feedback.

RISK RESPONSE
 INTRODUCTION

• The primary goal of the 'Plan' step is to prepare specific management responses to the
threats and opportunities identified; ideally to remove/reduce the threats and to maximise
the opportunities.
RISK RESPONSE CONSISTS OF…

• Defining steps for responses to opportunities and threats.

• Assigning responsibility.
• Developing responses for negative risks or Threats:
• Avoid: changing the project management plan to eliminate the risk. Could involve changing the objective,
modifying the schedule or reduction in scope.
• Mitigate: a reduction in the probability or impact to the project. Taking early action to reduce the probability,
adopting less complex processes or conducting more tests.
• Transfer: shifting the risk to a third party for the management of the risk. Does not eliminate the risk; could
involve insurance, warranties, bonds … etc.
• Insurance: purchase insurance to reduce/eliminate risk – an athlete may purchase insurance against injury to
guarantee their income.
• Accept: it is possible that the risk cannot be eliminated or managed. Can be active or passive in approach – a
contingency reserve in time, money or resources.
RISK RESPONSE CONSISTS OF… (CONT.)

• Developing responses for positive risks or opportunities

• Exploit the situation. We will do whatever we can to make sure the event does
happen, so we can enjoy the rewards of the event.

• Enhance the probability and positive impacts of the event.

• Share the ownership with a third party who can better enhance the situation.

• Accept the opportunity; take the advantages provided by the event, but do not
actively pursue the event.
RISK BUDGET

• Sum of money set aside.

• Contained within project budget.
• Funds specific responses to threats/opportunities.
• Financial approach required e.g. expected monetary value.
• Controlled (as defined in Risk Management Strategy).
• Provision for known/unknown risks?
RISK ANALYSIS AND RESPONSES

• Which risks to act on/avoid?

“High” impact AND “High” probability.

• Which risks to monitor closely/mitigate or reduce?

“High” impact OR “High” probability.

• Which risks to review/accept?

“Medium” impact AND/OR “Medium” probability.

• Which risks to ignore/accept?

“Low” impact AND “Low” probability.
RISK ANALYSIS AND RESPONSES (CONT.)
COMMUNICATE

• Communication is a step that is carried out continually

• The ‘communicate' step should ensure that information related to the threats and opportunities faced by
the project is communicated both within the project and externally to stakeholders.
• Risks are communicated as part of the following management products:
• Checkpoint reports, bulletins, notice boards, dashboards, briefings … etc.
• Highlight reports.
• End stage reports.
• End project reports.
• Lessons reports.
• Communication aspects:
• Identification of risks.
• Risk can change status.
GROUP EXERCISE

• Work with your probability impact matrix developed in exercise

2.

• Discuss one possible response to each one of the risks

identified.

• Also, prepare an entry for one of the risks for the Risk Log.

Duration: 15 minutes + 5 minutes for feedback.

RISK CONTROL
IMPLEMENT/CONTROL

• The primary goal of the ‘implement' step is to ensure that the

planned risk responses are actioned, their effectiveness is monitored,
and corrective action is taken where responses do not match expectations.

• Important roles in this respect are:

• Risk Owner: a named individual who is responsible for the management, monitoring and
control of all aspects of a particular risk assigned to them; including the implementation
of the selected responses to address the threats or to maximise the opportunities
• Risk Actionee: an individual assigned to carry out a risk response action or actions to
respond to a particular risk or set of risks. They support and take direction from the risk
owner.
RISK REGISTER/LOG

• The purpose of the Risk Log is to capture and maintain information

on all of the identified threats and opportunities relating to the project.

• Each risk on the Risk Log is allocated a unique identifier as well as details such as:

o Who raised the risk. o Proximity.

o When it was raised. o Risk response category.
o The category of risk. o Risk response actions.
o The description of the risk o Risk status.
(cause, risk event, effect). o Risk owner.
RISK LOG EXAMPLE
Risk ID Sequential number assigned
Functional Area Identify the functional business areas potentially impacted by the risk
Risk Category Cost; External; Schedule; Technical; Resources; Operational
Risk Description Description of the risk and the impact of it
Date Identified Date the risk was identified
Raised By Who identified the risk
Date Assigned Date the risk was assigned
Assigned To Who the risk was assigned to
Probability 1, 2, 3, 4
Potential Impact 1, 2, 3, 4
Risk Factor (P*I) Probability * Impact
Positive or Negative Impact Will the potential impact of the risk have a Positive, Negative, Both or Unknown impact if realized?
Response Category Acceptance; Mitigation; Transfer; Avoidance
Status/Comments Status of risk and update/comments about it
Trigger Preliminary event that will indicate the risk is about to take place
Proposed/Actual Resolution Risk Response plan
Contingency Plan Alternate Plan if Risk Response fails
CONCLUSION

• Risk Management requires:

• Planning.
• Structure.
• Analysis.
• Creativity.
• Constant attention.
• Flexibility.
• Communications, communications, communications!!!
CONCLUSION (CONT.)

• The PMBOK has a lot of great reference materials to assist you with your Risk
Management planning activities.
• Whatever you do, just do SOMETHING to address risk on your projects – and
do it in a structured manner.
• If your company/organisation does not have templates or a process in place,
develop your own tools.
• Use the PMBOK for ideas on the approach and build a risk register in Excel.
• A tab in Excel identifying your “plan” and another tab with the Risk
Register will work much better than nothing.
CONCLUSION (CONT.)

• Program Risk Management

• Project risk management principles can be applied to programs.
• Use of an RBS will be helpful for programs.
• Project risks will roll up to the program.
• Program risks will take on a more global nature in addition to the project
risks within the program.
• External events, company profits, legal/compliance issues, political issues, company strategies …
etc.
• Communication with your sponsors is even more critical on programs than
on projects.
THANK YOU