Chapter 11:

Project Risk Management

Learning Objectives
Understand what risk is and the importance of good
project risk management
Discuss the elements involved in risk management
planning
List common sources of risks on information
technology projects
Describe the risk identification process and tools and
techniques to help identify project risks
Discuss the qualitative risk analysis process and
explain how to calculate risk factors, use
probability/impact matrixes, the Top Ten Risk Item
Tracking technique, and expert judgment to rank risks
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Learning Objectives
Explain the quantify risk analysis process and how to
use decision trees and simulation to quantitative risks
Provide examples of using different risk response
planning strategies such as risk avoidance, acceptance,
transference, and mitigation
Discuss what is involved in risk monitoring and control
Describe how software can assist in project risk
management
Explain the results of good project risk management

The Importance of Project Risk

Management
Project risk management is the art and science of
identifying, assigning, and responding to risk
throughout the life of a project and in the best interests
of meeting project objectives
Risk management is often overlooked on projects, but
it can help improve project success by helping select
good projects, determining project scope, and
developing realistic estimates
A study by Ibbs and Kwak show how risk management
is neglected, especially on IT projects
KPMG study found that 55 percent of runaway projects
did no risk management at all
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Table 11-1. Project Management Maturity by

Industry Group and Knowledge Area

What is Risk?
A dictionary definition of risk is the
possibility of loss or injury
Project risk involves understanding
potential problems that might occur on the
project and how they might impede project
success
Risk management is like a form of
insurance; it is an investment
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Risk Utility
Risk utility or risk tolerance is the amount of
satisfaction or pleasure received from a
potential payoff
Utility rises at a decreasing rate for a person who
is risk-averse
Those who are risk-seeking have a higher
tolerance for risk and their satisfaction increases
when more payoff is at stake
The risk-neutral approach achieves a balance
between risk and payoff

Figure 11-1. Risk Utility Function

and Risk Preference

What is Project Risk Management?

The goal of project risk management is to minimize potential risks
while maximizing potential opportunities. Major processes include
Risk management planning: deciding how to approach and plan
the risk management activities for the project
Risk identification: determining which risks are likely to affect a
project and documenting their characteristics
Qualitative risk analysis: characterizing and analyzing risks and
prioritizing their effects on project objectives
Quantitative risk analysis: measuring the probability and
consequences of risks
Risk response planning: taking steps to enhance opportunities
and reduce threats to meeting project objectives
Risk monitoring and control: monitoring known risks,
identifying new risks, reducing risks, and evaluating the
effectiveness of risk reduction
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Risk Management Planning

The main output of risk management planning is
a risk management plan
The project team should review project
documents and understand the organizations
and the sponsors approach to risk
The level of detail will vary with the needs of
the project

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Table 11-2. Questions Addressed in a

Risk Management Plan

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Contingency and Fallback Plans,

Contingency Reserves
Contingency plans are predefined actions that
the project team will take if an identified risk
event occurs
Fallback plans are developed for risks that have
a high impact on meeting project objectives
Contingency reserves or allowances are
provisions held by the project sponsor that can
be used to mitigate cost or schedule risk if
changes in scope or quality occur
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Common Sources of Risk on

Information Technology Projects
Several studies show that IT projects share some
common sources of risk
The Standish Group developed an IT success
potential scoring sheet based on potential risks
McFarlan developed a risk questionnaire to help
assess risk
Other broad categories of risk help identify
potential risks
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Table 11-3. Information Technology

Success Potential Scoring Sheet
Success Criterion

Points

User Involvement

19

Executive Management support

16

Clear Statement of Requirements

15

Proper Planning

11

Realistic Expectations

10

Smaller Project Milestones

Competent Staff

Ownership

Clear Visions and Objectives

Hard-Working, Focused Staff

Total

100
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Table 11-4. McFarlans Risk Questionnaire

1.

2.

3.

What is the project estimate in calendar (elapsed) time?

( ) 12 months or less

Low = 1 point

( ) 13 months to 24 months

Medium = 2 points

( ) Over 24 months

High = 3 points

What is the estimated number of person days for the system?

( ) 12 to 375

Low = 1 point

( ) 375 to 1875

Medium = 2 points

( ) 1875 to 3750

Medium = 3 points

( ) Over 3750

High = 4 points

Number of departments involved (excluding IT)

( ) One

4.

Low = 1 point

( ) Two

Medium = 2 points

( ) Three or more

High = 3 points

Is additional hardware required for the project?

( ) None

Low = 0 points

( ) Central processor type change

Low = 1 point

( ) Peripheral/storage device changes Low = 1

( ) Terminals

Med = 2

( ) Change of platform, for example High = 3

PCs replacing mainframes

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Other Categories of Risk

Market risk: Will the new product be useful to
the organization or marketable to others? Will
users accept and use the product or service?
Financial risk: Can the organization afford to
undertake the project? Is this project the best
way to use the companys financial resources?
Technology risk: Is the project technically
feasible? Could the technology be obsolete
before a useful product can be produced?
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What Went Wrong?

Many information technology projects fail because of technology risk. One
project manager learned an important lesson on a large IT project: focus on
business needs first, not technology. David Anderson, a project manager for
Kaman Sciences Corp., shared his experience from a project failure in an article
for CIO Enterprise Magazine. After spending two years and several hundred
thousand dollars on a project to provide new client/server-based financial and
human resources information systems for their company, Anderson and his
team finally admitted they had a failure on their hands. Anderson revealed that
he had been too enamored of the use of cutting-edge technology and had taken
a high-risk approach on the project. He "ramrodded through" what the project
team was going to do and then admitted that he was wrong. The company
finally decided to switch to a more stable technology to meet the business needs
of the company.

Hildebrand, Carol. If At First You Dont Succeed, CIO Enterprise Magazine, April 15, 1998
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Risk Identification
Risk identification is the process of
understanding what potential unsatisfactory
outcomes are associated with a particular project
Several risk identification tools and techniques
include

Brainstorming
The Delphi technique
Interviewing
SWOT analysis

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Table 11-5. Potential Risk Conditions

Associated with Each Knowledge Area
Knowledge Area

Risk Conditions

Integration

Inadequate planning; poor resource allocation; poor integration

management; lack of post-project review

Scope

Poor definition of scope or work packages; incomplete definition

of quality requirements; inadequate scope control

Time

Errors in estimating time or resource availability; poor allocation

and management of float; early release of competitive products

Cost

Estimating errors; inadequate productivity, cost, change, or

contingency control; poor maintenance, security, purchasing, etc.

Quality

Poor attitude toward quality; substandard

design/materials/workmanship; inadequate quality assurance
program

Human Resources

Poor conflict management; poor project organization and

definition of responsibilities; absence of leadership

Communications

Carelessness in planning or communicating; lack of consultation

with key stakeholders

Risk

Ignoring risk; unclear assignment of risk; poor insurance

management

Procurement

Unenforceable conditions or contract clauses; adversarial relations

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Quantitative Risk Analysis

Assess the likelihood and impact of
identified risks to determine their magnitude
and priority
Risk quantification tools and techniques
include
Probability/Impact matrixes
The Top 10 Risk Item Tracking technique
Expert judgment

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10

Sample Probability/Impact Matrix

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Table 11-6. Sample Probability/Impact Matrix for Qualitative Risk Assessment

22

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Figure 11-3. Chart Showing High-, Medium-,

and Low-Risk Technologies

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Top 10 Risk Item Tracking

Top 10 Risk Item Tracking is a tool for
maintaining an awareness of risk throughout
the life of a project
Establish a periodic review of the top 10
project risk items
List the current ranking, previous ranking,
number of times the risk appears on the list
over a period of time, and a summary of
progress made in resolving the risk item
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Table 11-7. Example of Top 10 Risk

Item Tracking
Monthly Ranking
Risk Item

This

Last

Month

Month

Number
Risk Resolution
of Months Progress

Inadequate
planning

Working on revising the

entire project plan

Poor definition
of scope

Holding meetings with

project customer and
sponsor to clarify scope

Absence of
leadership

Just assigned a new

project manager to lead
the project after old one
quit

Poor cost
estimates

Revising cost estimates

Poor time
estimates

Revising schedule
estimates
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Expert Judgment
Many organizations rely on the intuitive feelings
and past experience of experts to help identify
potential project risks
Experts can categorize risks as high, medium, or
low with or without more sophisticated
techniques

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Quantitative Risk Analysis

Often follows qualitative risk analysis, but both
can be done together or separately
Large, complex projects involving leading edge
technologies often require extensive quantitative
risk analysis
Main techniques include
decision tree analysis
simulation

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Decision Trees and Expected Monetary

Value (EMV)
A decision tree is a diagramming method used
to help you select the best course of action in
situations in which future outcomes are
uncertain
EMV is a type of decision tree where you
calculate the expected monetary value of a
decision based on its risk event probability and
monetary value

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Figure 11-4. Expected Monetary Value

(EMV) Example

29

Simulation
Simulation uses a representation or model of a
system to analyze the expected behavior or
performance of the system
Monte Carlo analysis simulates a models
outcome many times to provide a statistical
distribution of the calculated results
To use a Monte Carlo simulation, you must
have three estimates (most likely, pessimistic,
and optimistic) plus an estimate of the
likelihood of the estimate being between the
optimistic and most likely values
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15

What Went Right?

A large aerospace company used Monte Carlo simulation to help quantify
risks on several advanced-design engineering projects. The National
Aerospace Plan (NASP) project involved many risks. The purpose of this
multibillion-dollar project was to design and develop a vehicle that could
fly into space using a single-stage-to-orbit approach. A single-stage-to-orbit
approach meant the vehicle would have to achieve a speed of Mach 25 (25
times the speed of sound) without a rocket booster. A team of engineers and
business professionals worked together in the mid-1980s to develop a
software model for estimating the time and cost of developing the NASP.
This model was then linked with Monte Carlo simulation software to
determine the sources of cost and schedule risk for the project. The results
of the simulation were then used to determine how the company would
invest its internal research and development funds. Although the NASP
project was terminated, the resulting research has helped develop more
advanced materials and propulsion systems used on many modern aircraft.

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Risk Response Planning

After identifying and quantifying risks, you
must decide how to respond to them
Four main strategies:
Risk avoidance: eliminating a specific threat or risk,
usually by eliminating its causes
Risk acceptance: accepting the consequences should
a risk occur
Risk transference: shifting the consequence of a risk
and responsibility for its management to a third
party
Risk mitigation: reducing the impact of a risk event
by reducing the probability of its occurrence
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Table 11-8. General Risk Mitigation Strategies for

Technical, Cost, and Schedule Risks

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Risk Monitoring and Control

Monitoring risks involves knowing their status
Controlling risks involves carrying out the risk
management plans as risks occur
Workarounds are unplanned responses to risk
events that must be done when there are no
contingency plans
The main outputs of risk monitoring and control
are corrective action, project change requests,
and updates to other plans
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17

Risk Response Control

Risk response control involves executing the risk
management processes and the risk management
plan to respond to risk events
Risks must be monitored based on defined
milestones and decisions made regarding risks
and mitigation strategies
Sometimes workarounds or unplanned responses
to risk events are needed when there are no
contingency plans
35

Using Software to Assist in Project

Risk Management
Databases can keep track of risks. Many IT
departments have issue tracking databases
Spreadsheets can aid in tracking and quantifying
risks
More sophisticated risk management software,
such as Monte Carlo simulation tools, help in
analyzing project risks

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Figure 11-5. Sample Monte Carlo Simulation

Results for Project Schedule

37

Figure 11-6. Sample Monte Carlo Simulations

Results for Project Costs

38

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Results of Good Project Risk

Management
Unlike crisis management, good project risk
management often goes unnoticed
Well-run projects appear to be almost effortless,
but a lot of work goes into running a project
well
Project managers should strive to make their
jobs look easy to reflect the results of well-run
projects
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