© risk decisions, 2009 getting a return on investment from risk management val jonas ceo, risk...

© Risk Decisions, 2009

Getting a Return On Investment from

Risk Management

Val Jonas

CEO, Risk Decisions Group

© Risk Decisions, 2009

Agenda

· Understanding uncertainty and risk

· Impact on ROI

· A recent example & conclusion

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Part 1

Understanding uncertainty and risk

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Uncertainty & Risk

• Risk analysis & Tornado results

{ • 3 point estimates (Max, Min, Most likely)

• Identified risks(probability & Impact)

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Budget Uncertainty Analysis

Cost (£k)

Like

lihoo

d

0

20%

49%

60%

80%

100%

£4

5,0

00

£5

0,0

00

£5

5,0

00

£6

0,0

00

£6

5,0

00

£7

0,0

00

£7

5,0

00

£8

0,0

00

£8

5,0

00

£9

0,0

00

50% confidence

(Excluding Risk Events)

© Risk Decisions, 2009

Cost (£k)

£45,0

00

£50,0

00

£55,0

00

£60,0

00

£65,0

00

£70,0

00

£75,0

00

£80,0

00

£85,0

00

£90,0

00

Baseline (incl. Estimating Error) Exposure

Budget Uncertainty Analysis

RiskAppetite

(Excluding Risk Events)

‘Long’ right hand tail may indicate risk events (which should be

managed in risk register)

Ta

rget

Max

imu

m

Aggressivetarget

Non-Aggressivetarget

Min

imu

m

Lik

ely

© Risk Decisions, 2009

0

2,0

00

4,0

00

6,0

00

8,0

00

10,0

00

12,0

00

14,0

00

16,0

00

18,0

00

20,0

00

22,0

00

24,0

00

26,0

00

28,0

00

30,0

00

32,0

00

34,0

00

36,0

00

Provision for known risks

Provision for Known Risks

Exposure

Bu

dg

et

RiskAppetite

Max

imu

m

Min

imu

mPay attention to ‘Long’ right hand tail (must identify mitigation

actions)

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Managing uncertainty and risk

¾ Manage cost and schedule over-runs• Estimating accuracy• Resource management• Project & change control

¾ Manage known threats• Proactive risk mitigation actions• Treat, transfer, tolerate, terminate• Budget and authority in place

¾ Exploit opportunities

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Focus on ‘Left Shift’

Baseline

Targ

et

Reserve

Co

ntr

act

ed

Exposure

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How to convince senior management?

¾ Limited ability to interpret risk analysis results¾ Confusion over meaning of Risk Appetite¾ Consider risk budget spent as ‘wasted’¾ Focussed on business objectives

(and the bottom line)

… We need to find new ways of getting information across to managers

© Risk Decisions, 2009

Part 2

Impact on Return on Investment

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Achieving return

· Contracting routes¾ Fixed price (vs. cost plus)¾ Fixed base + performance payments¾ Bonuses & penalties for on-time or late delivery¾ Pain / gain-share

· Business case¾ Need to understand sensitivity to uncertainty and risk

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Modelling performance

Outcomes

Inputs

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What-if scenarios on schedule

· Analyse the schedule

· Impacts of schedule uncertainty on:¾ 1a. Performance payments¾ 1b. Penalty and bonus payments¾ 1c. Costs of the ‘Marching Army’

· Contain the impact of schedule slippage

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19 O

ct 2008

8 N

ov 2

008

28 N

ov 2

008

18 D

ec 2

008

7 J

an 2

009

27 J

an 2

009

16 F

eb 2

009

8 M

ar

2009

28 M

ar

2009

17 A

pr

2009

7 M

ay 2

009

27 M

ay 2

009

16 J

un 2

009

6 J

ul 2009

26 J

ul 2009

15 A

ug 2

009

4 S

ep 2

009

24 S

ep 2

009

Analysing the schedule

Baseline Schedule Reserve Exposure

Max

imu

m

Min

imu

m

Targ

et

RiskAppetite

Co

ntr

acte

dAggressive

targetNon-Aggressive

target

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1a. Impact on performance payments

Expected Reduction of 15% ROI

Zeroperformancepaymentfor latemilestones

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1b. Added impact of penalties/bonuses

NegativeexpectedROI(down 21%)

Dailypenalties/ bonusesfor late / earlydelivery

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1c. Added impact of the ‘marching army’

No chanceof positiveROI(down 23%)

Assumes noopportunityfor savings iffinished early

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Focus on ‘Left Shift’

Contain schedule slip

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Managing the uncertainty

What-if’s based on containing the schedule slip:

(Do we really want this contract?)

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What-if scenarios on risk

· 2a. The cost of risks materialising

· 2b. The post mitigation position

· 2b. Pain/Gain-share contracting

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Back to base case model

Outcomes

Inputs

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2a. Impact of risks materialising

Risks impact(down 12%)

Assumesno risk mitigation

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Focus on ‘Left Shift’

Manage the risks

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2b. Impact of risks (post mitigation)

Mitigatonsaves2% ROI

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Risk sharing scenario15%

confidence65%

confidence

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2c. Pain/Gainshare contracting

Back to15% ROI

Customershareof the risk payment

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More what-ifs …

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Part 3

Conclusion

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but… …can we afford not to manage risk?

Not so much a question of… what is the value of risk management?

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‘Getting a Return on Investment from Risk Management’

White paper:www.riskdecisions.com

Val Jonas, CEO Risk Decisions Group