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Risk Management for Projects 1 Project Risk Management Session Agenda 2 Review risk concepts – Risk Management Overview and the Risk Management Plan – Risk Identification – Risk Quantification – Risk Response – Risk Control Team exercise Team exercise readout Closing items Project Risk Management Risk Management Overview and the Risk Management Plan 3 Project Risk Management Risk Management Overview What is risk? Risk: An uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives VENTURE OUTCOME (Project) (Products) FAVORABLE UNKNOWNS (Opportunity) (Uncertainty) UNFAVORABLE (Risks) 4 Project Risk Management Risk Management Overview Project Lifecycle Risk vs. Amount at Stake I N C R CONCEPT DEVELOPMENT IMPLEMENT CLOSE PHASE PHASE PHASE PHASE $ OPPORTUNITY AND RISK E V A S A PERIOD WHEN I HIGHEST RISKS L N ARE INCURRED U E G PERIOD OF R HIGHEST I S 5 K RISK IMPACT AMOUNT AT STAKE Project Risk Management Risk Management Overview 6 What is risk management? – Identifying, analyzing, prioritizing, and responding to risk events – Integration of risk management activities into your other project management functions – Developing responses to risk to meet your project objectives – Project risk management is PROACTIVE Project Risk Management Risk Management Overview INTEGRATING RISK WITH OTHER PROJECT MANAGEMENT FUNCTIONS PROJECT MANAGEMENT INTEGRATION INFORMATION / SCOPE COMMUNICATIONS Expectations Feasibility QUALITY Requirements Standards Time Objectives, Constraints Life Cycle and Environment Variables PROJECT RISK Cost Objectives, Restraints Ideas, Directives, Data Exchange Accuracy Availability Productivity HUMAN RESOURCE Services, Plant, Materials: Performance CONTRACT / TIME COST 7 PROCUREMENT Project Risk Management Risk Management Overview Components of the Risk Management Plan – – – – – – – – – – 8 Methodology Roles and responsibilities Budgeting Timing Risk categories Definitions of risk probability and impact Probability and impact matrix Stakeholder’s tolerances Reports Tracking Project Risk Management Risk Management Overview Results from developing the Risk Management Plan – You have a written plan – You know what actions you have to do – You know who is responsible for what – You can track your work – You can learn from your risk activities and help others with their risk 9 Project Risk Management Risk Management Overview 10 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 as closely as possible the PMBOK guidelines. – If you are dictated by the company, organization, 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. Project Risk Management Risk Identification 11 Project Risk Management Risk Identification Risk in corporate business is typically divided into 2 basic types Business Risk: Chances of profit or loss associated with a business endeavor 12 Business employs a staff of qualified workers to increase profit and reduce chances of loss Pure or Insurable Risk: Divided into 4 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 (Worker’s Comp) Project Risk Management Risk Identification 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 representing the sponsor, risk management becomes a large responsibility for you 13 Project Risk Management Risk Identification Risk identification is never done Risk identification is performed throughout the life of the project 14 The process for identifying risk – Understand the project – Identify the risk event – Document the results and take appropriate actions Project Risk Management Risk Identification Types of risk – Technical – External – Organizational – Project Management Note: 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 15 Project Risk Management Risk Identification PROJECT RBS TECHNICAL 16 EXTERNAL PROJECT MANAGEMENT ORGANIZATIONAL REQUIREMENTS SUBCONTRACTORS & SUPPLIERS PROJECT DEPENDENCIES ESTIMATING TECHNOLOGY REGULATORY RESOURCES PLANNING COMPLEXITY & INTERFACES MARKET FUNDING CONTROLLING 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. Project Risk Management Risk Identification What you need to identify risk – – Product description Planning documents – Historical Information 17 Project scope statement Cost mgt plan Schedule mgt plan Communications mgt plan Enterprise environmental factors Stakeholder register Quality mgt plan Organizational process assets Previous project data Expert knowledge Project Risk Management Risk Identification In your risk identification meeting – Validate RBS with core team – Identify risks by source (RBS) – Identify risks by level of uncertainty: Known Known / Unknown Situation with no Situation with an uncertainty identifiable uncertainty 18 Unknown / Unknown Situation whose existence we cannot imagine Project Risk Management Risk Identification Conduct a risk identification meeting – Gather all relevant data – Schedule a risk management meeting with your core team members – Use a structured approach: Brainstorming, Nominal Group Technique, Delphi Technique, Mind Mapping, Project Lessons Learned – Schedule risk identification meetings in your project plan – After certain milestones: Requirements complete, design complete, etc. Event driven – 19 Focus on identifying risk only A risk event happens and becomes part of the risk register Project Risk Management Risk Identification 20 Brainstorming – Chose a facilitator (best if other than the project manager) – Chose a scribe to capture the risks – Use a category or categories to start the creativity flowing – Do not judge or analyze during this effort – Focus on getting the universe of risks for your project Project Risk Management Risk Identification Nominal Group – Gather the core team for a risk workshop – Use flip charts or a whiteboard to collect info – Begin by having each person identify potential areas of risk – Then within each area have each person write at least 3-5 risk events – 21 Repeat until everyone has listed their risks Project Risk Management Risk Identification Delphi technique – Identify a facilitator – The facilitator then identifies qualified experts to participate – The facilitator poses questions to the experts individually – The facilitator then analyzes the results to identify common themes 22 – The results are then shared with the experts for validation – The list is then refined and again shared with the panel – The facilitator the creates a single results document Project Risk Management Risk Identification Mind mapping – Begin with a category of risk in the center represented by a circle – Major risks for that category are represented by lines connecting with the circle 23 – For each major risk identify smaller risks that are part of that risk – Do not judge or evaluate at this time – Continue until no more risks can be identified Project Risk Management Risk Quantification 24 Project Risk Management Risk Identification 25 Identify your risks in a risk register or a risk log 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 Project Risk Management Risk Quantification What are the right risks to manage – – – When to quantify risks – – – – – – – 26 Analyzing risks for probability and impact Developing a risk profile for your project Prioritizing your 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 Project Risk Management Risk Quantification Quantitative Analysis – – – – – – 27 Relies on a numeric value Uses objective data Requires understanding of probability theory Removes some uncertainty Should be based on historical data Some examples are: sensitivity analysis, expected monetary analysis, and modeling and simulation Qualitative Analysis – Uses subjective values: Green, Amber, Red – Requires common understanding of ordinal ranking system – May be less precise than quantitative analysis – Should be defined in terms of the parameters of the project Project Risk Management Risk Quantification 28 Project Risk Management Risk Quantification Probability – Can be done in a basic approach by developing a simple estimate of the probability that an event will be late in delivery – – Ed says it is 50% likely this task will be late Probability of Event 1 x Probability of Event 2 = Probability Can be done in a more complex manner by using weighted averages Joe says 35% chance of being late Mary says 40% chance of being late Ed says 50% chance of being late Joe gets twice as much credit because he knows more about the situation The probability is: ((2 x 35) + (40) + (50)) / 4 = 40% Quantifying risk probability can become quite complex, there are many resources to assist you with more detailed approaches (books, internet research, multi-day training, 29 consultants). Project Risk Management Risk Quantification Assessing Impact – Schedule Tools: – Cost tools: 30 Network analysis (relationships, durations, critical path(s), near critical paths, hard constraints) Resources (availability, competency, productivity) Estimates (accuracy, source, method) WBS Requirement definition Estimating methodologies Expected monetary value Decision trees Financial analysis Project Risk Management Risk Quantification Assessing Impact (cont.) – 31 Quality Ask yourself the question “What if the project fails to perform as expected during its operational life?” Of all the project objectives, conforming to quality objectives is the one most remembered Therefore, this is one of the most important dimensions impacting your project You can use financial analysis to identify risk for poor quality by quantifying long term activities that will impact the product lifecycle for your analysis Project Risk Management Risk Response 32 Project Risk Management Risk Response 33 Risk response is: – Defining steps for responses to opportunities and threats – Assigning responsibility – Developing responses for negative risks: Avoiding: Changing the project mgt plan to eliminate the risk. Could involve changing the objective, modifying the schedule, or reduction in scope. Mitigating: 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. Transferring: Shifting the risk to a third party for the management of the risk. Does not eliminate the risk, could involve insurance, warranties, bonds. Insurance: Purchase insurance to reduce/eliminate risk – an athlete may purchase insurance against injury to guarantee their income. Project Risk Management Risk Response 34 Risk response is: – Developing responses for negative risks(cont.): Accepting: 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. – Developing responses for positives risks or opportunities The strategies for managing positive risks are: – 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. Project Risk Management Risk Response Approach response development from a project wide perspective Consider related risks Stay within your project scope on your responses Consider the following for contingency planning: – – – – 35 The management of a contingency budget The development of schedule alternatives and work-arounds Complete emergency responses to deal with major areas of risk An assessment of project shut-down liabilities Project Risk Management Risk Control 36 Project Risk Management Risk Control 37 Actively work your risk register/log Update risks as needed (data, new resources, new/changing requirements) Review the log in status calls, set and use due dates for active contingency plans Hold assigned resources accountable for their action items Engage sponsor when invoking contingency plans to ensure they know a risk has happened and the team is actively working the response plan Project Risk Management Risk Control Example Log 38 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 Project Risk Management Small Team Exercise 39 Project Risk Management Small Team Exercise 40 Your task, should you choose to accept it, and you must, is to develop a risk plan for your project The group will break into 3-5 person teams to work on their project There are 2 projects, a construction project and a new product development effort You will develop your risk plan, then the similar project teams will get together (all the construction teams in one group and all the product development teams in another) and develop a summary of what happened, then each large project group will present to the whole class their experiences Project Risk Management Small Team Exercise Product Development Project – – – – – 41 This is a telecommunications product The team will develop and deploy a new feature to be used on your home or work phone called “Phone Buzz” There is an estimated customer base of 6M consumer users and 1M business users across the 50 states Revenue for the consumer base is estimated to be $720M per year and revenue for the business segment is estimated at $180M per year. The base telecommunications technology for the application is proven, but must be combined with a new technology that has never been utilized on the current telecommunications system architecture Project Risk Management Small Team Exercise Product Development Project (cont.) – – The VP of Marketing is planning on announcing the new product at the industry’s largest trade show in 6 months The budget for the project is currently set at: – – Initial estimates are 12 – 18 months to complete the project The project has been approved to start, and the following assets have been developed 42 $ 25M for technology $ 1M for business project costs $ 5M for marketing High level business requirements A preliminary technical feasibility assessment Secondary market research has been performed The sponsor and initial core team have been identified Project Risk Management Small Team Exercise Product Development Project (cont.) – Core team members 43 Required – Business Project Manager – Technical Project Manager – Project Sponsor Optional – Operations Manager – Training Project Manager Project Risk Management Small Team Exercise Construction Project – – This project will develop a combined residential and commercial community in southern Louisiana, the community will be called “Southern Comfort” Planned activities are: 300 Residential Condos (Targeted sales price $100K to $150K each) 100 Residential Homes (Targeted sales price $350K to $500K each) A small office complex (50,000 sq. ft.) 2 convenience stores, each with a gas station 4 recreational areas: – – – 44 2 open space areas: Also used for youth soccer and football 1 area with tennis courts and basketball courts 1 area with 6-8 baseball/softball fields Project Risk Management Small Team Exercise Construction Project (cont.) – The current project budget is $47M, targeting 3 years to complete the entire effort Unit Type Quantity Sq. Ft (tot) Cost Cost per Unit Condos 300 360,000 21,600,000 72,000 Houses 100 200,000 18,000,000 180,000 Commercial 1 50,000 6,500,000 6,500,000 Stores 2 8,000 1,040,000 520,000 Fields 4 100,000 25,000 47,240,000 45 Project Risk Management Small Team Exercise Construction Project (cont.) – So far the following has happened: The land has been purchased The property is located next to a protected wildlife area and had wonderful views and access to good shopping and restaurants 46 35 condos have been built or are in progress 10 homes have been built or are in progress The zoning for the commercial lots has not yet been completed Project Risk Management Small Team Exercise Construction Project (cont.) – Core team members 47 Required – Business Project Manager – Construction Project Manager – Project Sponsor Optional – Sales Manager – Supplier/Materials Project Manager Project Risk Management Small Team Exercise Your assignment, as the new Business Project Manager is to: – – – – – – – – Develop a Risk Management Plan Develop an RBS Conduct a Risk Identification meeting After the identification meeting is complete, quantify your risks Develop risk responses for your significant risks Prepare a summary sheet on your findings to share with the other small teams in your project type Develop a summary sheet with the similar projects to present to the entire class Notes: 48 Each small team will call for 2 reviews, one for their Risk Management Plan and one for their Risk Register once they complete their risk responses from the facilitator Updates to the project information will be provided during the exercise Project Risk Management Small Team Exercise Conclusions – – – – – – 49 What worked well? What did not work so well? What happened during the process that you found interesting? How well were you able to manage your risk? What would you do differently? Is there anything you would now do differently on your project based on this experience? Project Risk Management Conclusion Conclusion 50 Project Risk Management Conclusion 51 Risk management requires: – Planning – Structure – Analysis – Creativity – Constant attention – Flexibility – Communications, communications, communications!! Project Risk Management 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/organization does not have templates or a process in place, develop your own tools. – – 52 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. Project Risk Management 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 – 53 External events, company profits, legal/compliance issues, political issues, company strategies Communication with your sponsors is even more critical on programs than on projects Project Risk Management References 54 Project Risk Management References PMBOK Fifth Edition Book – “Project and Program Risk Management”, R. Max Wideman PMI Seminar – “Managing Risk on Projects”, Jimmie West 55