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 organization’s
and the sponsor’s 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
9
Competent Staff
8
Ownership
6
Clear Visions and Objectives
3
Hard-Working, Focused Staff
3
Total
100
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Table 11-4. McFarlan’s Risk Questionnaire
1.
2.
3.
4.
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
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 company’s 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 Don’t 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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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
This
Last
Month
Month
Number
Risk Resolution
of Months Progress
Inadequate
planning
1
2
4
Working on revising the
entire project plan
Poor definition
of scope
2
3
3
Holding meetings with
project customer and
sponsor to clarify scope
Absence of
leadership
3
1
2
Just assigned a new
project manager to lead
the project after old one
quit
Poor cost
estimates
4
4
3
Revising cost estimates
Poor time
estimates
5
5
3
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
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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 model’s
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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