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BA 4618 Project Management 8 –1

BA 4618

PROJECT MANAGEMENT

SESSION 8

Managing Risk




Risk Management Process

• Certainty –all information for making the right decision is available,

and the outcome is predictable with reasonable confidence.

• Uncertainty

–complete absence of information when nothing isknown about the possible outcomes.

• Risk

–an uncertain event or condition that, if it occurs, has a

positive or negative effect on the project.

– the totality of the outcomes can be described within

established confidence limits because well-defined

experiential distributions are available.




Risk Management Process

• Risk Management – A proactive attempt to recognize and manage internal

events and external threats that affect the likelihood of

a project’s success (scope, quality, time, and cost)

throughout the project cycle.

• What can go wrong (risk event)

• How to minimize the risk event’s impact (response strategy)

• What can be done before an event occurs (anticipation)

• What to do when an event occurs (contingency plans)




The Risk Event Graph




Benefits of Risk Management

• A proactive rather than reactive approach.

• Reduces surprises and negative consequences.

• Prepares the project manager to take advantage

of appropriate risks.

• Provides better control over the future.

• Improves chances of reaching project

performance objectives within budget and on

time.




Risk Management Planning

• The Project Charter –declares upper management’s support to the project

–defines the limits of the project

–introduce the project manager to the roles andresponsibilities necessary to manage the project

–specifies the organization's tolerance for risksincluding all stakeholders’ risk limitations

• The Work Breakdown Structure

–provides an overall picture of how the project fitstogether and where weaknesses may lie.


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The Risk

Management

Process




• Risk Identification –systematic identification and documentation of risks

likely to affect the project

–Generate a list of possible risks through

brainstorming, problem identification and risk profiling.• Macro risks first, then specific events

• The common mistake in Risk Identification

–focus on consequences rather than events.

Risk Identification




• Risk Breakdown Structure (RBS) – A hierarchically organized depiction of the identified project risks

arranged by risk category and subcategory that identifies the

various areas and causes of potential risks.

Risk Breakdown Structure (RBS)




Partial Risk Profile for

Product Development Project




• Qualitative Risk Analysis –assessing the impact and likelihood of identified risks

–represent both the probability and utility of an outcome

using an interval scale, where each interval includes a

range of numerical values (beyond the margin of error) and

each interval is typically represented by a non-numerical

label (such as ―High‖, ―Medium‖, ―Low‖), not the ranges of

values those labels represent.

• Quantitative Risk Analysis

–determining numerically the probability of each risk and itsimpact on project objectives.

–assign fixed numerical values (within a margin of error) to

both the probability and utility (business impact) of an

outcome.

Risk Analysis




• Qualitative –Risk Probability and Impact Assessment

–Probability and Impact Matrix

• Quantitative

–Sensitivity analysis

–Expected monetary value analysis

–Decision tree analysis

–Modeling and simulation

Risk Analysis Techniques




Impact Scales




Risk Assessment Form

Risk value = Impact x Probability x Detection




Risk Severity Matrix




• developing response strategies –Proactive

• developing contingency strategies

–Reactive

• considering risk event status (behavioral aspect)

–Risk Averse –Risk Seeking

–Risk Neutral

Risk Response Planning




• What’s the chance of winning the Lottery 6/49 (SayısalLoto)?

= 6! x (49-6)!

= 6! x 43!

= around one in 14 million

• What’s the expected monetary value of the lottery 6/49

(if the highest prize is 3 million TL)?

= (prob. of winning x highest prize) + (prob. of loosing x nothing)

= (1/14.000.000 x 3.000.000) + (13.999.999 x 0)= 3/14 + 0 = 0,2 TL

• Since one column/ticket costs 1 TL, whoever buys a lottery ticketunless the highest price is 14 million TL, is seeking for risk.

Behavioral Aspects




Risk Management

• Risk Response Planning – developing response strategies

– developing contingency strategies

• Risk Response Control and Monitoring –responding to changes in risk over the course of the

project by the risk management plan and continuous

follow-up.




Risk Responses

• Avoidance:

– Not accepting the risk

– Changing the project plan to eliminate risk or condition

• Retention:

– Making a conscious decision to accept the consequences

• Reduction:

– Mitigating the risk, through reducing the likelihood and impact of

an adverse event

• Transferring:

– Paying a premium to pass the risk to another party.

• Sharing:

– Allocating risk to different parties




Contingency Planning

• Contingency Plan – An alternative plan that will be used if a possible

foreseen risk event actually occurs.

– A plan of actions that will reduce or mitigate the

negative impact (consequences) of a risk event.

• Risks of Not Having a Contingency Plan

–Having no plan may slow managerial response.

–Decisions made under pressure can be potentially

dangerous and costly.



BA 4618 Project Management 8 –

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Risk Response Matrix

Risk Response Matrix

Risk Event

Response

*

Contingency

Plan Trigger Responsible

Delay in shipment of the

equipment Reduction

Multiple

shipments On order Logistic Team

Unable to hire proper staff

Reduction

Recruitment

intermediaries

1 month

delay in

recruitment

Project Manager

Agreement problems with

universities

Retention

-

Legal problems (permissions,

approvals etc.) Reduction

Lawyer

support

problem

occured Project Manager

Delay in installation Retention -

Agreement problems with FEBO

Reduction

Advisor

support

disagreement

occurs

CEO

Agreement problems with

suppliers Reduction

Advisor

support

disagreement

occurs Project Manager

Improper working of machines

(heating, lid mechanics etc.) Retention -

* You need to define your risk response in detail




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Types of Risk

• Technical Risks –Backup strategies if chosen technology fails

– Assessing whether technical uncertainties can be

resolved

• Schedule Risks

–Use of slack increases the risk of a late project

finish

–Imposed duration dates (absolute project finishdate)

–Compression of project schedules due to a

shortened project duration date




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Types of Risk

• Costs Risks

–Time/cost dependency links: costs increase whenproblems take longer to solve than expected.

–Deciding to use the schedule to solve cash flow

problems should be avoided. –Price protection risks (a rise in input costs)

increase if the duration of a project is increased.

• Funding Risks

–Changes in the supply of funds for the project candramatically affect the likelihood ofimplementation or successful completion of aproject.




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Funding Risks

• Contingency Funds –Funds to cover project risks—identified and unknown.

• Size of funds reflects overall risk of a project

–Budget reserves (Allowances)

• Are linked to the identified risks of specific work packages. –Management reserves

• Are large funds to be used to cover major unforeseen risks(e.g., change in project scope) of the total project.

• Time Buffers – Amounts of time used to compensate for unplanned

delays in the project schedule.




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Budget Reserve (Allowance)

• a specific provision for future situations which maybe planned for only in part (known unknowns) within the defined project scope.

• usually held at the project level, and is included in

the project's cost and schedule baselines.• use of contingency funds is within the project'sapproved scope, budget and schedule baseline.




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Management Reserve

• a separately planned quantity used to allow forfuture situations which are impossible to predict

(unknown unknowns).

• intended to reduce the risk of missing cost or

schedule objectives.• NOT to be used to fund bad cost estimates.

• held at the management level.

• requires a change to the project scope and thecost baseline.



BA 4618 Project Management 8 27

• Responding to changes in risk over the courseof the project by the risk management plan and

continuous follow-up.

• Risk control

–Execution of the risk response strategy

–Monitoring of triggering events

–Initiating contingency plans

–Watching for new risks

Risk Response Control and Monitoring

-2014-08_risk management.pptx

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