Chapter 11: Project Risk Management

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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

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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

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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

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Figure 11-1. Risk Utility Function and Risk Preference

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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 User Involvement Executive Management support Clear Statement of Requirements Proper Planning Realistic Expectations Smaller Project Milestones Competent Staff Ownership Clear Visions and Objectives Hard-Working, Focused Staff Total
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Points 19 16 15 11 10 9 8 6 3 3 100
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Table 11-4. McFarlans Risk Questionnaire

1. What is the project estimate in calendar (elapsed) time? ( ) 12 months or less ( ) 13 months to 24 months ( ) Over 24 months 2. ( ) 12 to 375 ( ) 375 to 1875 ( ) 1875 to 3750 ( ) Over 3750 3. ( ) One ( ) Two ( ) Three or more 4. ( ) None ( ) Central processor type change ( ) Terminals PCs replacing mainframes Low = 1 point Medium = 2 points High = 3 points Low = 1 point Medium = 2 points Medium = 3 points High = 4 points Low = 1 point Medium = 2 points High = 3 points Low = 0 points Low = 1 point Med = 2

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

Number of departments involved (excluding IT)

Is additional hardware required for the project?

( ) Peripheral/storage device changes Low = 1 ( ) Change of platform, for example High = 3

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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 Integration Scope Time Cost Quality Risk Conditions Inadequate planning; poor resource allocation; poor integration management; lack of post-project review Poor definition of scope or work packages; incomplete definition of quality requirements; inadequate scope control Errors in estimating time or resource availability; poor allocation and management of float; early release of competitive products Estimating errors; inadequate productivity, cost, change, or contingency control; poor maintenance, security, purchasing, etc. Poor attitude toward quality; substandard design/materials/workmanship; inadequate quality assurance program Poor conflict management; poor project organization and definition of responsibilities; absence of leadership Carelessness in planning or communicating; lack of consultation with key stakeholders Ignoring risk; unclear assignment of risk; poor insurance management Unenforceable conditions or contract clauses; adversarial relations
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Human Resources Communications Risk Procurement

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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Sample Probability/Impact Matrix

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

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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 Inadequate planning Poor definition of scope Absence of leadership This Month 1 2 Last Month 2 3 Number Risk Resolution of Months Progress 4 3 Working on revising the entire project plan Holding meetings with project customer and sponsor to clarify scope Just assigned a new project manager to lead the project after old one quit Revising cost estimates Revising schedule estimates
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Poor cost estimates Poor time estimates

4 5

4 5

3 3

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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

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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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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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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
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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

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Figure 11-6. Sample Monte Carlo Simulations Results for Project Costs

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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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