Project Management

BSB20315-7

Lecture 10
Risk and Opportunities
Management
 Learning Outcomes

• The nature of risk and risk management

• Qualitative and quantitative approaches
• Opportunities management

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 Risk and Opportunities
Management - An Introduction
• Uncertainty distinguishes projects from repetitive operations,
key
• Risk is complex in nature and it may (or may not) be
manageable
– Elements of management may be beyond the single project
• These often reflect political, social and other organisational issues
– Evaluation of risk is important, it indicates whether a project is viable
– There are well-developed procedures for managing risks
• Management of the process and outcomes
• Identifying eventualities in advance allows PM to choose actions
• Opportunity also a part of uncertainty, consider at
– Project level: new capabilities or unexpected uses of outcome
– Task level: an early finish allows next project to start early or
development of a better method
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 The nature of risk and risk
management

• Definitions of risk:
– The possibility of suffering harm or loss
[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
[BS 6097 (2000) Part 3: Guide to the Management of
Business Related Project Risk]

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 The nature of risk and risk
management (Continued)
• Risk management incorporates a process for
– Identifying potential risks
– Analysing them
– Managing the significant ones
• Project planning looks into the future; there is always
uncertainty
– Objective is not necessarily to eliminate all uncertainty
– Risk is proportional to return, view as trade-off
– Saving money on one activity may mean an increase in risks
• Individuals have different perspectives on risk
– Individuals are prepared to accept different cost/benefit levels
– Individuals will choose different levels of risk
– Treatment of risk is based on partial knowledge and instinct
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 Framework for risk management
(The nature of risk and risk management)(Continued)

Figure 10.1 Risk management schema

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 The nature of risk and risk
management (Continued)
• Risk Identification
– The process of prediction of the key risk outcomes
– Indicators that something is going/may go wrong
in a project
• How to identify risks
– By brainstorming
– By consultation activities
• Seek the wider stakeholder views
• Seek the view of experts
– Refer to the WBS
– Look to time, cost and quality plans
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 The nature of risk and risk
management (Continued)
• Categories of risk identification
– Consider what might happen
• The possibility of missing key objectives
• Unexpected changes demanded by stakeholders
• Technological problems
• Staffing changes
• Behaviour that would conspire to cause failure
– Particular aspects
• Time: critical path, critical chain
• Cost: how good are the estimates?

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 The nature of risk and risk
management (Continued)
Categories of risk identification (Continued)

• Quality: assurance for all processes or are some out

of the projects control?
• Health and safety
• Legal or financial standing of the organisation
– Check key assumptions
• Will changes made to save money increase costs
elsewhere?
• Will changes produce further risks?
• Have the risks become ‘normal’?
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 The nature of risk and risk
management (Continued)
Response control or mitigation (1)
• Procedures are required to ensure
– Either the likelihood of the event occurring is reduced
– Or effects can be managed or mitigated
• Consider
– Corrective action
– Contingencies and reserves
– Outsourcing the risk to contractors, experts or insurance
– Conducting limited trials (fundamental to agile/extreme
approaches)
• The top 20 percent of risks are likely to cause 80
percent of delays or over-runs
– For these significant risks make contingency plans
– Put contingency plans into the project proposal
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 The nature of risk and risk
management (Continued)
Response control or mitigation (2)
• Formal techniques may be required by
– Organisation policy
– Client demand
• Benefits
– Improvements to plans, better reflecting reality
– Highlighting areas that need attention and
contingency planning
– Harnessing the ‘gut-feel’/intuition element
– Allowing factors/events to be traced historically
– Building up experience in a structured way

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 The nature of risk and risk
management (Continued)
Response control or mitigation (3)
• Benefits from ongoing process through the project
– Support documentation
• the risk register or the risk log
• Risk register/risk log:
– List identified risks
– Their occurrence
– Actions taken to mitigate them
– Results of the actions taken
– Add new risks as they become apparent
– Remove expired risks
– Beneficial as highlights ongoing process
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 Qualitative and quantitative
approaches

• How risky is an event or activity?

– How likely is it to occur, what is the probability?
• Improbable to highly likely
– What might be the effect (impact/severity) of the
event?
• Critical – will cause total failure
• Major – will hold up or increase costs in one or
more areas
• Minor – will only cause inconvenience

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 Qualitative approaches
(Qualitative and quantitative approaches)(Continued)

• Gather peoples’ perceptions as to probability and

impact
• Use scales
– Low–medium–high; 1 to 3; 1 to 5 (APM); 1 to 10
(PMI)
– Ratings based on opinion or perception
• Chart on matrix
– Visual identity of high risks needing attention

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 Qualitative approaches
(Qualitative and quantitative approaches)(Continued)

• Risks in the purple boxes need to be actioned

Figure 10.2 Probability impact chart

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 Qualitative approaches
(Qualitative and quantitative approaches)(Continued)

Failure mode effect analysis (FMEA)

• Consider three elements of each activity or path
through the activities:
– Likelihood, severity and hideability
– Estimate each on a scale of 1–10
– Total risk is product of all three: likelihood ×
severity × hideability

Table 10.1 FMEA analysis

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

• Mathematical models of the scenario

• Enables a large number of variables to be considered
• Useful guides for decision making
• Four models shown: Project Possible Probability Expected
outcome of Value
occurrence
1 £200 mill 50% £100 mill

1. Expected Value 2 £150 mill 70% £105 mill

– The expected value of the event

• is the possible outcome multiplied by
• the probability of its occurrence
– Useful for comparing several projects or alternatives
– Percent chance (probability) can be estimated or
calculated using Monte Carlo analysis.
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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

2. Sensitivity analysis
• Use expected, optimistic and pessimistic value of inputs
(e.g. costs)
– Shows effect on the outcome of a change in the variable
– Shows where management attention and control is needed
• Example
– Prices on materials and labour likely to fluctuate
– Contract price is fixed in advance
– Need to see effect of fluctuations on profit
– Costs of materials say £0.6m
– Costs of direct labour say £0.2m
– Contribution to say 175 percent of direct labour
– Revenues: fixed at £1.2m
– Profit = revenue – material costs – (labour + overheads)
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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Table 10.2 Sensitivity analysis

• This shows when the project will make a profit or a loss
• Should materials increase by 10 percent, unless there is a drop
in labour costs, the project will make a loss
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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

3. Monte Carlo simulation

– Practicable if use computer (extension to popular
spread sheets)
– Use range of values of distribution apply to time,
cost and other estimates
– Shows effect on finances or other critical factors

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

• Example
– Revenue stream to be generated: in the range of
£.75m to £1.15m
• Equally likely to be any value
– Materials costs: £.25m most likely
• could be considerably more, unlikely to be less
– Labour costs: £.55m
• Could be more, could be less
– Profit
• Normally = revenue–materials–labour = £.15
• Uncertainties suggest otherwise
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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Figure 10.3 Examples of the use of Monte Carlo analysis

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

4. PERT: Programme evaluation and review technique

• Likely a single value for ‘time for completion’ will have an error
• Three estimates for each activity are required
– Optimistic (o) – if conditions are ideal
– Most probable (m) – if conditions are ‘normal’
– Pessimistic (p) – if things go wrong
• Expected time is (o + 4m + p)/6
• Use expected time in critical path analysis
– May effect the duration, may change the critical path
• The downside
– Shows outcome (partial picture) but does not indicate probability
– Additional complexity may not be justified by a return in
accuracy of the plans
– Relies on people being accurate in their forecasting
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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Figure 10.4 Network showing optimistic, most probable and pessimistic times

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Figure 10.5 Distribution of estimated times for an activity

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Table 10.3 Three-point estimates for tasks

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Table 10.4 Three-point estimates and variances for tasks

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 Quantitative approaches
(Qualitative and quantitative approaches)(Continued)

Table 10.5 Probabilities of completing tasks

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 Opportunities management
‘On a recent project, my team spent two days trying to reduce
a £50 000 risk. I would much rather they spent that time looking to see
how the project could yield an extra £50 000 of business benefit’
[Project Director, Rolls-Royce]
• Many ideas are lost because there is no route to exploit them
• Rare that great innovative products are the result of a
development process that started out with that objective in mind
• A route to exploit opportunities is essential
• One framework:
– Negative to positive: a risk that doesn’t materialise is a benefit
– Opportunities of response: a high risk that is mitigated presents an
opportunity
– Random good fortune: opportunities presented by a breakthrough
• Qualitative process for managing opportunities similar to that of
managing risks
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 Summary
• The issue of risk is central to projects
– How risk is managed will impact on project success
– A basic process provides a structure
• Identification, quantification and mitigation
– Use ‘enterprise risk management’ to establish a ‘risk portfolio’
• Inclusion of high and low risk projects
• Using a risk management framework is strongly recommended
– Practice and reflection is essential
• Do risk processes work?
– Recent research suggests that success is limited
– Risk an opportunity management only part of the process
– Important how organisations respond
– Consideration of process necessary
– As is attention to behaviour
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