How to Manage Project
Opportunity and Risk
Why uncertainty management
can be a much better approach than risk management
Chris Chapman and Stephen Ward
Chapman and Ward HMPOR slide 1
© 2011 John Wiley & Sons Ltd.
Some introductory comments
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What do you want to take away?
Course structure
Course text
Other reading
Case studies
Participant background variations
Other issues
Questions?
Chapman and Ward HMPOR slide 2
© 2011 John Wiley & Sons Ltd.
Part one – setting the scene
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An unrestricted view of basic definitions
A broad view of projects
Two key project frameworks
Uncertainty, risk and opportunity relationships
Some key perspectives and concepts
Key motives for uncertainty management
Generic process frameworks
Chapman and Ward HMPOR slide 3
© 2011 John Wiley & Sons Ltd.
Basic definitions and their nominal/default nature
• Uncertainty – lack of certainty
• Risk – possible unfavourable outcomes
• Opportunity – possible favourable outcomes
Chapman and Ward HMPOR slide 4
© 2011 John Wiley & Sons Ltd.
Projects (programmes and portfolios)
Turner (1992) provides a useful illustrative definition of a project:
an endeavour in which human, material and financial resources
are organised in a novel way,
to undertake a unique scope of work of given specification,
within constraints of cost and time,
so as to achieve unitary, beneficial change,
through the delivery of quantified and qualitative objectives.
Chapman and Ward HMPOR slide 5
© 2011 John Wiley & Sons Ltd.
Project system examples
(a)
Chain configuration: stages in a
primary project may be managed as
a chain of component projects.
Time
primary project
component
component
component
Time
(b)
primary project
Parallel configuration: aspects of a
primary project may be managed
as a set of parallel component
projects.
component project
component project
component project
Time
primary project
(c)
Project hierarchy: the primary
project as a three-level hierarchy
of component projects.
secondary project
tertiary project
component
component
secondary project
tertiary project
tertiary project
Chapman and Ward HMPOR slide 6
© 2011 John Wiley & Sons Ltd.
component
Corporate, operations and project management
as three interlocking perspectives
Chapman and Ward HMPOR slide 7
© 2011 John Wiley & Sons Ltd.
A traditional four stage asset lifecycle example
Basic lifecycle stages
Dominant management aspect
Conceptualisation
Operations or corporate management initially,
then corporate management
Planning
Corporate management initially,
then project management
Execution and delivery
Project management
Utilisation
Operations management
Chapman and Ward HMPOR slide 8
© 2011 John Wiley & Sons Ltd.
Conceptualisation decomposed
Stage purposes
Steps
Labels
Concept,
project objectives
and business case
development in
corporate
strategy terms
Trigger event
Concept capture
Clarification of project purpose
Concept elaboration
Business case development
Concept, objectives and business case evaluation in
corporate strategy terms
Concept shaping
Governance
Consolidate plans and confirm deliverables
Concept gateway
Chapman and Ward HMPOR slide 9
© 2011 John Wiley & Sons Ltd.
Planning decomposed
Design, operations
and termination (DOT)
strategy development
from a design and
operations
management
perspective
Design and operations strategy capture from
corporate strategy
Development of lifecycle performance criteria
Integrated development of design, operations
and termination strategy
Integrated evaluation of design, operations
and termination strategy
DOT shaping
Governance
Consolidate plans and confirm deliverables
DOT gateway
Execution and delivery
(E&D) strategy
development from a
project management
perspective
Activity and related resource use capture from
corporate strategy and design strategy
Development of timing targets and milestones
Strategic plan development for execution and
delivery
Evaluation of execution and delivery strategy
E&D shaping
Governance
Consolidate plans and confirm deliverables
Strategy gateway
Detailed design
and planning
for execution,
delivery,
operation and
termination
purposes
Shifting the perspective to implementation
Development of detailed design and planning
criteria for implementation purposes
Development of detail designs and plans
Development of resource allocation and
contracting criteria
Detailed design and plan evaluation
Tactics shaping
Governance
Consolidate plans and confirm deliverables
Tactics gateways
Chapman and Ward HMPOR slide 10
© 2011 John Wiley & Sons Ltd.
Execution and delivery decomposed
Execution
Implementation of actions plans
Coordinate, control and monitor progress
Modification of all targets, commitments and resource
allocations as needed
Ongoing execution evaluation
Execution
Delivery
Undertake delivery
Deliverable modification
Manage stakeholder expectations about delivery
and operational performance
Delivery evaluation
Delivery
Chapman and Ward HMPOR slide 11
© 2011 John Wiley & Sons Ltd.
Utilisation decomposed
Operation
and
support
(O&S)
Operational utilisation of asset
Ongoing development of operations & support criteria
Ongoing development of operations & support
Ongoing operations & support evaluation
O&S
Termination
Development of detailed plans for transfer of ownership
or replacement or decommissioning
Termination execution
Termination evaluation
Termination
Chapman and Ward HMPOR slide 12
© 2011 John Wiley & Sons Ltd.
Key project definition questions – the seven Ws
1. who
who are the parties involved?
parties
2. why
what do the parties want to
achieve?
motives
3. what
what is the deliverable
product the parties are
interested in?
design
4. whichway
how will all relevant plans in
each lifecycle stage deliver
what is needed?
plans for: relationships and contracts,
business case purposes,
operations, activities
5. wherewithal
what key resources are
required to achieve execution
of these plans?
resource plans for: operations,
activities
6. when
when do all relevant events
have to take place?
integration of all
plan-based timetables
7. where
where will the project take
place? (in location and all
other context terms)
context
Chapman and Ward HMPOR slide 13
© 2011 John Wiley & Sons Ltd.
Key project definition questions – the seven Ws
who
all project parties
ultimately involved
why
project motives:
profit and
other motives
what
the design of
the product
of the project
where - the location of the
project and all the relevant
wider context issues
Chapman and Ward HMPOR slide 14
whichway
plans for
relationships
and contracts
plans for
business case
purposes
when
integration of all
plan-based
timetables
plans for
operations
resource
plans for
operations
plans for
activities
resource
plans for
activities
wherewithal
© 2011 John Wiley & Sons Ltd.
Key components of uncertainty
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Ambiguity uncertainty
Inherent variability
Event uncertainty
Systemic uncertainty
Chapman and Ward HMPOR slide 15
© 2011 John Wiley & Sons Ltd.
Most ‘sources of uncertainty’
are composites of two or more
of these basic components of
uncertainty, decomposition of
uncertainty raises key questions
about what structure is best suited
to the decomposition task in the
particular context involved, and
‘events’ or ‘conditions’ is never the
exclusive or universal answer.
Chapman and Ward HMPOR slide 16
© 2011 John Wiley & Sons Ltd.
Using the performance lens and the knowledge lens
do we want
to continue
to develop
this project?
‘the project’
performance
lens
opportunity
and
risk
uncertainty
about the
achievement
of objectives
how should we
shape our plans
to get to the
next stage?
Chapman and Ward HMPOR slide 17
how does this
project fit our
overall strategy
and operations
plans?
knowledge
lens
uncertainty
all other
views of
uncertainty
what do we
need to do
to get to the
next stage?
© 2011 John Wiley & Sons Ltd.
what else do we
need to know
to get to the
next stage?
The role of criteria-plan relationship structures
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Plans for activities
Resource plans for activities
Plans for operations
Resource plans for operations
Plans for relationships and contracts
Plans for business case purposes
Integration of all plan-based timetables
The design of the product of the process
All the motives for being involved in the project
All the parties involved with relevant plans
Chapman and Ward HMPOR slide 18
© 2011 John Wiley & Sons Ltd.
Possible criteria value outcomes:
a simple interval estimate example
Density
format
portrayal
Probability
0
0
5 6
10
14 15
Outcome value
1.0
Cumulative
probability
format
Cumulative
probability
0.5
the median
is equal to the
expected value
0
0
Chapman and Ward HMPOR slide 19
5
10
15
Outcome value
© 2011 John Wiley & Sons Ltd.
An illustration of the approximation
involved using a density portrayal
Probability
presumed reality, although multiple modes may be involved
working assumptions for the model
0
0
5 6
Chapman and Ward HMPOR slide 20
10
14 15
Outcome value
© 2011 John Wiley & Sons Ltd.
Targets, commitments and expected values
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Using P10 a default target, and alternatives
Using P90 as a default commitment, and alternatives
Expected values, and alternative ‘best estimates’
Provisions
Contingencies
Range estimates as a default, and point estimate
alternatives
• Expected values as an opportunity/risk datum, and
alternatives
• A clear opportunity/risk/uncertainty relationship
• Clarifying relationships between plans and outcomes
Chapman and Ward HMPOR slide 21
© 2011 John Wiley & Sons Ltd.
A basic probability-impact grid (PIG)
p3 = 1
high
r3
r4
r5
r2
r3
r4
r1
r2
r3
p2
Probability
medium
p1
low
p0 = 0
i0 = 0
i1
low
i2
medium
i3
high
Impact
Chapman and Ward HMPOR slide 22
© 2011 John Wiley & Sons Ltd.
Sensitivity diagram: Highways Agency example
base estimate value
1.0
1
2
3
Cumulative
probability
P50
0.5
P10
0
P90
100
Probability curves show the cumulative effect of:
1. base value estimating uncertainty
2. uncertainty associated with previous risk registers
3. other uncertainty sources which the HA is held accountable
for which have not been considered at a portfolio level
150
200
Cost as a % of the base estimate value
Chapman and Ward HMPOR slide 23
© 2011 John Wiley & Sons Ltd.
Extract from Sally’s BCS cost estimate and contract
Item
description
Target
minimum
Remove old floor covering and
prepare surface
Lay new flooring
Provision for cleanup and other time
Total hours
Total cost
Target
maximum
4
8
2
12
12
6
8
10
4
14
£ 420
30
£ 900
22
£ 660
Estimated value contract option basis is £ 660 + 10% = £ 726
Chapman and Ward HMPOR slide 24
Target
mid-point
© 2011 John Wiley & Sons Ltd.
Decision diagram: three approaches example
1.0
P90
Cumulative
probability
P50
0.5
A
B
C
P10
0
Cost
Chapman and Ward HMPOR slide 25
© 2011 John Wiley & Sons Ltd.
Clarity efficiency: ‘efficient frontier’ portrayal
clarity
(insight
which
can be
shared)
competent management area
non-feasible area
a
incompetent management area
b1
Key:
b2
a-c
e1
e2
e3
b3
c-d
ei
c
d
cost (of acquiring clarity)
Chapman and Ward HMPOR slide 26
© 2011 John Wiley & Sons Ltd.
efficient boundary target, with
a maximum clarity approach
c minimum clarity approach
bi intermediate approaches
inappropriate clarity levels
inefficient approaches
Sensitivity diagram: activity level example
Base plan completion date
Probability
of
achievement
by dates
indicated
1
0.9
0.8
0.7
1 2
3
4
5
0.6
6
0.5
0.4
0.3
0.2
0.1
0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
5th year
Probability curves show the cumulative effect of the following sources of uncertainty:
1. yard not available, or mobilisation delays
2. construction problems / adverse weather
3. subcontracted nodes delivery delays
4. material delivery delays
5. industrial disputes
6. delayed award of fabrication contract
Notes:
1. the curves assume a minimum fabrication period of 20 months
2. no work is transferred offsite to improve progress
3. no major fire, explosion or other damage
Chapman and Ward HMPOR slide 27
© 2011 John Wiley & Sons Ltd.
Risk efficient options: ‘efficient frontier’ portrayal
competent management area (opportunity management area)
expected
reward
(profit
or a
more
general
composite
of
positive
objectives)
non-feasible area
a
incompetent management area
e2
Key:
a-c efficient boundary target, with
a maximum reward approach
c minimum reward approach
bi intermediate reward approaches
c-d inappropriate reward levels
ei inefficient approaches
b1
b2
e1
b3
e3
c
d
risk (in terms of all relevant objectives)
Chapman and Ward HMPOR slide 28
© 2011 John Wiley & Sons Ltd.
Decision diagram: one risk efficient choice example
1.0
3.0 m barge
curve
Cumulative
probability
1.6 m barge
curve
0.5
0
expected cost
using the 3.0 m barge
Chapman and Ward HMPOR slide 29
expected cost
using the 1.6 m barge
© 2011 John Wiley & Sons Ltd.
Cost
Decision diagram: two risk efficient choices example
1.0
Cumulative
probability
0.5
1.6 m barge
curve
3.0 m barge
curve
0
expected cost
using the 1.6 m barge
Chapman and Ward HMPOR slide 30
Cost
expected cost
using the 3.0 m barge
© 2011 John Wiley & Sons Ltd.
Approximate ‘macro-phase’ alignments for three processes
Association for Project
Management (APM):
Project Risk Analysis and
Management (PRAM) Guide
(APM, 2004)
Institution of Civil Engineers (ICE)
and the
Actuarial Profession (AP):
Risk Analysis and
Management for Projects (RAMP)
(ICE and AP, 2005)
Project Management Institute
(PMI): Project Risk
Management (PRM)
(PMI, 2008),
PMI Practice Standard for PRM
(PMI, 2009)
Initiate: define the project
Initiate: focus the risk
management process
Organise and define RAMP
through the investment lifecycle
Plan and initiate risk review
Plan risk management
Identify
Identify risks
Identify risks
Assess:
structure
ownership
estimate
evaluate
Evaluate risks
Perform qualitative risk analysis
Perform quantitative risk analysis
Plan risk event responses
Plan project risk responses
Respond to risks
Assess residual risks
Plan responses to residual risks
Plan risk responses
Implement responses
Communicate strategy and plans
Implement strategy and plans
Control risks
Monitor and control risks
Chapman and Ward HMPOR slide 31
© 2011 John Wiley & Sons Ltd.
The basic PUMP process
Seven phase basic PUMP portrayal
Basic PUMP portrayal as three macro-phases
define the project
focus the process
develop the basis for analysis
identify all relevant sources, responses, conditions
structure all uncertainty
clarify ownership
execute the qualitative analysis
quantify some uncertainty
evaluate all the relevant implications
execute the quantitative analysis
Chapman and Ward HMPOR slide 32
© 2011 John Wiley & Sons Ltd.
Basic PUMP process flowchart
start
define the project
focus the process
the context
is important
in each of
the
seven
phases
identify sources, responses, conditions
structure all uncertainty
clarify ownership
quantify some uncertainty
evaluate all implications
stop
Chapman and Ward HMPOR slide 33
© 2011 John Wiley & Sons Ltd.
Example PUMP bar chart for the first pass
PUMP
phase
start of the
process
end of the first
complete cycle
define
focus
identify
structure
ownership
quantify
evaluate
Key:
intense activity
Chapman and Ward HMPOR slide 34
ongoing activity
© 2011 John Wiley & Sons Ltd.
intermittent activity
Five key shortcomings of common practice
risk management processes
1. A focus phase equivalent which is not used as a flexible basis for adjusting the
process to the context of a particular project, or used to modifying the process as
the project lifecycle progresses, beginning with concept shaping and ending with
project termination.
2. A focus phase equivalent which is unclear about the motives for the process in
relation to the various interested parties, or the links between motives for analysis of
uncertainty, opportunity and risk and the models selected.
3. A define phase equivalent which is too detailed in terms of activities, and which
fails to address all seven Ws, the project lifecycle, and linking financial cash flow
models in a balanced manner.
4. An identify phase equivalent which is limited to event based uncertainty, which
cannot cope effectively with composite uncertainties, and which fails to structure
sources of uncertainty and associated risk and responses usefully, often generating
excessively long and detailed ‘risk registers’ that address minor issues in excessive
detail.
5. Absence of a structure phase equivalent, with little evidence of robustness testing
or effective structuring decisions, including the lack of a significant search for
common or general responses and a failure to identify significant linkages and
interdependences between important sources of uncertainty.
Chapman and Ward HMPOR slide 35
© 2011 John Wiley & Sons Ltd.
Five more key shortcomings of common
practice risk management processes
1. Lack of an explicit ownership phase equivalent, with resulting inadequate
attention to the implications of contractual arrangements for motivating parties to
manage uncertainty, including inappropriate use of simple contracts.
2. A quantify phase equivalent which is costly but not cost effective, ineffectively
linked to earlier qualitative analysis, resulting in biased estimates that are usually
highly conditional on scope assumptions and other assumptions which are lost
sight of.
3. An evaluate phase equivalent which combines different sources of uncertainty
without capturing crucial dependence or without providing the insight to clarify how
revisiting earlier analysis can clarify uncertainty where appropriate, develop
effective responses where appropriate, facilitate crucial choices to achieve risk
efficiency and balance, or demonstrate the robustness of those choices when
necessary.
4. Absence of an effective iterative process structure which embeds all seven
PUMP phases and a failure to distinguish planned iterations which involve limited
costs, successive applications of an iterative process as a project lifecycle
progresses, and unplanned iterations to deal with surprises which are costly.
5. Lack of a clear and shared understanding of all relevant objectives, measurable
or not, with an orderly process for considering all relevant tradeoffs in opportunity
efficiency terms.
Chapman and Ward HMPOR slide 36
© 2011 John Wiley & Sons Ltd.
Part one review, questions and discussion
Chapman and Ward HMPOR slide 37
© 2011 John Wiley & Sons Ltd.
Part two – the basic PUMP process
• Assume the project is in the execution and delivery
strategy shaping stage most of the time
• Assume a client perspective most of the time
• Assume a high clarity approach most of the time
Chapman and Ward HMPOR slide 38
© 2011 John Wiley & Sons Ltd.
The process as a programme of projects
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Each phase is a project – use the Gantt chart
The programme is a portfolio of 7 projects
The portfolio needs holistic management
Everything we know about good project and
programme/portfolio management can be brought to
bear on managing the process
• This includes uncertainty management
• Portfolio/programme/project uncertainty management
distinctions are a question of degree for present
purpose, a process ‘driver’
Chapman and Ward HMPOR slide 39
© 2011 John Wiley & Sons Ltd.
Process ‘drivers’ and linked assumptions
When looking at each phase in detail, what is
involved is a function of process ‘drivers’, so
we have to make assumptions for discussion
purposes. Some key process drivers (and
the related assumptions) are:
- strategy / tactical level of the project (strategic)
- perspective and motives (client wanting insight)
- learning curve position (low down)
- decisions of interest (shaping strategic plans for
execution and delivery as per the assumed stage)
Chapman and Ward HMPOR slide 40
© 2011 John Wiley & Sons Ltd.
The ‘qualitative analysis’
part of the process in
detail, considering it
phase by phase, starting
with the ‘basis of analysis’
part of the process
Chapman and Ward HMPOR slide 41
© 2011 John Wiley & Sons Ltd.
Define the project
• This phase involves problem structuring ‘craft skills’, a key
aspect of the modelling skills required by the person in
charge of leading and shaping the process, the ‘process
manager’
• All ‘process staff’ require interpersonal skills
• The importance of using a simple strategic level activity
(task) structure aligned with the nature of the risks involved
• The need to move from a task orientation to an objectives
orientation
• The role of the 12 stage nominal project lifecycle
• The role of the 7 Ws framework and the plan-criteria
relationship structure
Chapman and Ward HMPOR slide 42
© 2011 John Wiley & Sons Ltd.
Key project definition questions – the seven Ws
who
all project parties
ultimately involved
why
project motives:
profit and
other motives
what
the design of
the product
of the project
where - the location of the
project and all the relevant
wider context issues
Chapman and Ward HMPOR slide 43
whichway
plans for
relationships
and contracts
plans for
business case
purposes
when
integration of all
plan-based
timetables
plans for
operations
resource
plans for
operations
plans for
activities
resource
plans for
activities
wherewithal
© 2011 John Wiley & Sons Ltd.
Define phase specific tasks
start
the
process
consolidate
the project lifecycle
the project context
the project parties
the project objectives
the project design
the whichway plans
the wherewithal plans
the project timing
elaborate
and resolve
no
deliverables fit
for purpose?
yes
complete
the focus
phase
Chapman and Ward HMPOR slide 44
© 2011 John Wiley & Sons Ltd.
Four common tasks for all phases
• document – record in text, tables and
diagrams, with a view to ease of
understanding for all parties involved
• verify – ensure all providers of information
agree as far as possible, and important
differences of opinion are highlighted
• assess – evaluate the analysis to date in
context to ensure it is ‘fit for purpose’
• report – release verified documents and
present findings as appropriate
Chapman and Ward HMPOR slide 45
© 2011 John Wiley & Sons Ltd.
A simple BCS example to
compare with the offshore
North Sea examples used to
illustrate the define phase
earlier
Chapman and Ward HMPOR slide 46
© 2011 John Wiley & Sons Ltd.
Focus the process
• This phase involves ‘process design’ craft skills, a
crucial aspect of modelling skills needed by the
‘process manager’
• Understanding what these ‘process design’ craft skills
involve is a core requirement for those aspiring to
manage the process
• It is also crucial for decision takers – who have to trust
their judgement when selecting advisors – to ensure
that they have a clear idea what they are looking for in
terms of ‘process design’ skills
• A useful place to start to understand what is involved
is an overview of the task structure for this phase
Chapman and Ward HMPOR slide 47
© 2011 John Wiley & Sons Ltd.
Focus phase specific tasks
start the
process
scope the process
plan the process
clarify the process lifecycle
clarify the process context
select a process approach
clarify the process parties
determine resources required
clarify the process objectives
determine timing
top-down uncertainty appreciation
consolidate the process strategy
needs
development
assess
the process
scope
satisfactory
needs
development
assess
the process
plan
unacceptable
unacceptable
Chapman and Ward HMPOR slide 48
stop the
project
© 2011 John Wiley & Sons Ltd.
satisfactory
to the
Identify
phase
Some of the objectives which may be relevant
•
•
•
•
•
•
•
Risk efficiency
Clarity efficiency
Opportunity efficiency
Opportunity management as the dominant goal
Culture change
Targets, expectations and commitments distinguished
Contingencies and provisions clarified and given clear
owners
• Bottom up communication encouraged, with a shared
‘big picture’ perspective
• Creativity and satisfaction (fun) used as effective
objectives
Chapman and Ward HMPOR slide 49
© 2011 John Wiley & Sons Ltd.
Key concerns which are often not addressed
• What subset of these objectives is appropriate for this
particular application of the generic process
• How should the process be shaped to this subset of
appropriate objectives
• What are the other important drivers, like value at risk,
project novelty, project complexity, time and resources
available, learning curve position, lifecycle position,
decisions of interest, and strategy/task level focus
• Which of the 7 Ws is the focus, and how do the
objectives of immediate interest relate to the plans
which are most relevant
• What are the most important questions which need
addressing first
Chapman and Ward HMPOR slide 50
© 2011 John Wiley & Sons Ltd.
Simple predesigned processes
like the BCS example,
evolving complex processes like the BP
offshore North Sea examples,
and the implications for a range of
intermediate contexts, with examples like
the Highways Agency and National Power
Chapman and Ward HMPOR slide 51
© 2011 John Wiley & Sons Ltd.
Identify all relevant sources, responses & conditions
• This phase is relatively straightforward if it is not
confused with common practice event uncertainty
identification processes
• A basic understanding of modelling issues is needed
(the minimum - maximum clarity spectrum needs to be
understood, for example) and a clear understanding of
clarity efficient uncertainty decomposition is crucial
• A basic concern is the level of detail required and the
way the depth of decomposition required needs to be
developed on successive passes
• A useful place to start to understand what is involved is
an overview of the task structure for this phase
Chapman and Ward HMPOR slide 52
© 2011 John Wiley & Sons Ltd.
Identify phase specific tasks
from
earlier
phases
search and classify
clarify the immediate priorities
decompose the next priority
source if this is appropriate
clarify the relevant
primary responses
clarify the relevant secondary
sources and responses
clarify the relevant
conditions
clarify the immediate need
for more breadth or depth
no
deliverables
fit for purpose?
yes
to the
structure
phase
Chapman and Ward HMPOR slide 53
© 2011 John Wiley & Sons Ltd.
Offshore project examples
of immediate priorities,
the composite nature of relevant
sources of uncertainty,
secondary sources of uncertainty,
and sources best treated as conditions
Chapman and Ward HMPOR slide 54
© 2011 John Wiley & Sons Ltd.
A table of generic response types
Type of response
Method of handling uncertainty
Modify objectives
Reduce or raise performance targets expressed as constraints,
changing tradeoffs between multiple objectives
Avoid
Plan to avoid specified sources of uncertainty
Influence probability
Change the probability of potential variations
Modify consequences
Modify the possible consequences of variations
Transfer consequences
Transfer consequences to another party via
contract provisions or insurance
Develop contingency plans
Set aside resources or make other plans to provide a
reactive ability to cope
Keep options open
Delay choices and commitments, choosing versatile options
Monitor
Collect and update data about all sources of uncertainty
Accept
Acknowledge and accept uncertainty, doing nothing about it
Remain unaware
Ignore uncertainty, taking no action to identify or manage it
Optimise all the above
Explicitly recognise the value of selecting an optimal combination
Chapman and Ward HMPOR slide 55
© 2011 John Wiley & Sons Ltd.
Some illustrations of process variants
in the identify phase, building on earlier
offshore project examples, including
common shortcomings and simple contexts
when minimum decomposition
of all relevant uncertainty is the key,
as in the Highways Agency example
Chapman and Ward HMPOR slide 56
© 2011 John Wiley & Sons Ltd.
The checklist approach – source reinterpretation
Source of uncertainty
Impact
Likelihood
Definition of project
Concept and design
Financing
arrangements
Logistics
Local conditions
Resource estimates
Industrial relations
Communications
Project organization
Chapman and Ward HMPOR slide 57
© 2011 John Wiley & Sons Ltd.
Exposure
Typical uncertainty management issues in the
lifecycle stages of immediate interest, and
other prompt lists for sources of uncertainty
Execution and
delivery (E&D)
strategy shaping stage
Identifying and allowing for regulatory constraints
Concurrency of activities required
Capturing dependency relationships
Errors and omissions
Tactics shaping stage
Adequate accuracy of resource estimates
Estimating resources required
Defining responsibilities (number and scope of contracts)
Defining contractual terms and conditions
Selecting capable participants (tendering procedures and bid selection)
Execution stage
Exercising adequate coordination and control
Determining the level and scope of control systems
Ensuring effective communication between participants
Provision of appropriate organizational arrangements
Ensuring effective leadership
Ensuring continuity in personnel and responsibilities
Responding effectively to sources which are realized
Delivery stage
Adequate testing
Adequate training
Managing stakeholder expectations
Obtaining licences to operate
Chapman and Ward HMPOR slide 58
© 2011 John Wiley & Sons Ltd.
Structure all uncertainty
The need to test the robustness of working
assumptions in the search for clarity efficiency is
central to this phase, requiring basic modelling skills
and a clear understanding of the range of possible
approaches available
It is also coupled to concerns like:
- we need to order sources of uncertainty
- we need to order responses
- we need to identify general responses
- we need to understand dependencies
Chapman and Ward HMPOR slide 59
© 2011 John Wiley & Sons Ltd.
Structure phase specific tasks
from the
identify
phase
develop
orderings
explore
interactions
refine
classifications
review key plan components
and associated sources
review other plans and Ws
and associated sources
identify general responses
and order responses
examine links between
sources and responses
develop diagrams and
review associated models
no
deliverables
fit for purpose?
yes
to the
ownership
phase
Chapman and Ward HMPOR slide 60
© 2011 John Wiley & Sons Ltd.
other selective
restructuring
Portion of a source-response diagram for an
offshore project platform fabrication activity
start-up
problems
yard not
available
long
delay
none
available
productivity
variations
mobilize and accept
a short delay
find an
alternative yard
accept a
long delay
Chapman and Ward HMPOR slide 61
© 2011 John Wiley & Sons Ltd.
industrial
disputes
Linking this portrayal to some alternatives
• The three ‘yard not available’ scenarios and a
traditional probability-impact grid (PIG) equivalent
• A traditional decision tree equivalent
• A traditional fault tree or event tree equivalent
• Systems dynamics, inference diagrams and other
feedback loop portrayals
Chapman and Ward HMPOR slide 62
© 2011 John Wiley & Sons Ltd.
Cognitive mapping portrayal of feedback loops
Enforced work on
unfrozen items
Increased rework
Approved delays
Lack of system freeze
Tight time scale
More parallel activities
Increased delay
Increased cross-relation
between parallel activities
Increase in
activity durations
More limited
resources
More work to do
Design changes
Reproduced by permission of the Operational Research Society
Chapman and Ward HMPOR slide 63
© 2011 John Wiley & Sons Ltd.
The valuable role of diagrams when
source-response structures are complex,
other complex structure tools and models,
and simple structures when this is clarity
efficient
Chapman and Ward HMPOR slide 64
© 2011 John Wiley & Sons Ltd.
Clarify ownership
• the nature of this phase is highly dependant
upon the position in terms of iterative cycles
• three examples to illustrate the range:
- corporate contracting stance early on
- work packaging at a mid point
- named parties towards the end
Chapman and Ward HMPOR slide 65
© 2011 John Wiley & Sons Ltd.
Ownership phase specific tasks
from the
structure
phase
scope the
contracting strategy
clarify the objectives of
the contracting strategy
identify owners for the sources
of uncertainty and responses
uncertainty appreciation
and contract design
plan/re-plan
the contracts
select a contract approach
select contract terms
contract timing
no
stop the
project
no
Chapman and Ward HMPOR slide 66
strategy fit
no
for purpose?
yes
plans fit
for purpose?
yes
overall fit
maybe
for purpose?
yes
to the
quantify
phase
© 2011 John Wiley & Sons Ltd.
The ‘quantitative’ part of the process
Chapman and Ward HMPOR slide 67
© 2011 John Wiley & Sons Ltd.
Estimating probabilities group exercise
Assume everyone in the room puts their date of birth
on a piece of paper, all the pieces of paper are put into
a hat, and one piece of paper is selected at random.
Assume no communication is allowed, and everyone
agrees to tell the truth. What is the probability the
paper selected indicates a birth date in June?
Several exercises will be involved. Make brief notes for
each.
Chapman and Ward HMPOR slide 68
© 2011 John Wiley & Sons Ltd.
Some key estimate phase issues
• The estimate phase and the evaluate phase are very
closely coupled, in the sense that the approach to one
tends to assume an approach to the other, and in
terms of the iterative looping structure
• A wide variety of different approaches are advocated
• Understanding the rational of the alternatives is
important, as is understanding what the alternatives
deliver (or not)
Chapman and Ward HMPOR slide 69
© 2011 John Wiley & Sons Ltd.
Some further important estimate phase issues
• Sizing identified sources of uncertainty is the starting point
• Later refinement may be about decomposing the structure
of the uncertainty to resolve ambiguity, and searching for
appropriate data
• Still later the defence of key decisions may become the
issue
• Data may be available, but usually it is not, and ‘there is
no such thing as a directly relevant objective estimate’
• Getting comfortable with subjectivity and coping with no
data is important
Chapman and Ward HMPOR slide 70
© 2011 John Wiley & Sons Ltd.
Alternative approaches to estimating
• ‘Traditional quantitative approaches’ as used by many
leading edge organisations for many decades, based
on specific distribution shapes most of the time, but
based on rectangular histograms some of the time,
and probability (decision) trees some of the time
• The discrete or continuous variable divide
• The use of ‘qualitative’ probability-impact grids (PIGs)
with a range of alternative labels, sometimes as a ‘first
pass’, as used by those organisations adopting
‘common practice’, still promoted by many
professional bodies
• The ‘simple scenario’ response
• The ‘minimalist’ response
• The integration of these approaches
Chapman and Ward HMPOR slide 71
© 2011 John Wiley & Sons Ltd.
The triangular distribution
Probability
L
lower
bound
M
most likely
value
Expected value = (L + M + U) / 3
Chapman and Ward HMPOR slide 72
© 2011 John Wiley & Sons Ltd.
U
upper
bound
Cost
Common probability distribution alternatives
•
•
•
•
•
•
Beta distributions as adopted for PERT
Normal
Log Normal
Exponential
Poisson
Uniform
Chapman and Ward HMPOR slide 73
© 2011 John Wiley & Sons Ltd.
Tabular format for a common interval approach
_________________________________________
Value
Probability
Product
_____________________________________________
5
0.15
0.75
6
0.35
2.10
7
0.25
1.75
8
0.15
1.20
9
0.10
0.90
Expected value (mean)
6.70
____________________________________________
Chapman and Ward HMPOR slide 74
© 2011 John Wiley & Sons Ltd.
Probability tree interpretation of this example
5
0.15
6
0.35
0.25
7
0.15
0.10
8
9
Chapman and Ward HMPOR slide 75
© 2011 John Wiley & Sons Ltd.
Rectangular histogram density format interpretation
Probability
most likely value
(most probable
class mark)
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0
3
4
5
6
7
8
expected value (point of balance)
Chapman and Ward HMPOR slide 76
© 2011 John Wiley & Sons Ltd.
9
10
Outcome value
Cumulative probability format (piecewise linear)
Cumulative
probability
1.0
0.8
median (50%) value
0.6
0.4
0.2
0
3
4
5
6
7
8
9
10
Outcome value
Chapman and Ward HMPOR slide 77
© 2011 John Wiley & Sons Ltd.
Tabular format for a three interval estimate
__________________________________________
Value
Probability
Product
_____________________________________________
10
0.3
3.0
15
0.5
7.5
20
0.2
4.0
_____________________________________________
Expected value (mean)
14.5
___________________________
Chapman and Ward HMPOR slide 78
© 2011 John Wiley & Sons Ltd.
Continuous variable portrayal with three intervals
Rectangular
density format
Probability
0.1
area=0.5
area=0.3
0
Cumulative
probability
5
7.5
10
area=0.2
12.5
15 17.5
20 22.5
Lay days per month in April
1.0
Piece-wise linear
cumulative format
0.8
0.3
0
5
7.5
10
12.5
15
17.5
20
22.5
Lay days per month in April
Chapman and Ward HMPOR slide 79
© 2011 John Wiley & Sons Ltd.
The effect of adding more classes
Days
First-cut using
three classes
Second-cut using
five classes
5
0.10
10
0.3
0.20
15
0.5
0.50
20
0.2
0.15
25
Expected value
Chapman and Ward HMPOR slide 80
0.05
14.5
© 2011 John Wiley & Sons Ltd.
14.25
Quantify phase specific tasks
from the
ownership
phase
start ordering
the sources
clarify associated
conditions
assess
the next priority
source
size this source
refine and restructure
this source
at least one more source
extend the ordering
of the sources
no more sources
deliverables
fit for purpose?
no
selective refining
and restructuring of
sources
yes
to the
evaluate
phase
Chapman and Ward HMPOR slide 81
© 2011 John Wiley & Sons Ltd.
Simple estimate portrayal
for design change approval
Probability
presumed reality, although multiple modes may be involved
working assumptions for the model
0
0
3
9
Chapman and Ward HMPOR slide 82
15
Outcome value
© 2011 John Wiley & Sons Ltd.
Two scenario portrayal
for design change approval
Probability
presumed reality, although multiple modes may be involved
working assumptions for the model
0
0
5
10
15
20
25
Outcome value
Chapman and Ward HMPOR slide 83
© 2011 John Wiley & Sons Ltd.
The rationale for a multiple scenario approach
• A simple form of uncertainty decomposition, refining
the structure used to understand uncertainty, quite
different to refining an estimate of uncertainty within a
given structure
• Can be extended to three or more scenarios
- normal variability
- abnormal outcomes (10 year return period)
- extreme outcomes (100 year return period)
- very extreme, etc
Chapman and Ward HMPOR slide 84
© 2011 John Wiley & Sons Ltd.
The rationale for a common interval approach
• Simple
• Clear and transparent approximation
• The degree of approximation to any assumed
distribution shape can be adjusted by adding more
intervals
• No distribution function assumptions are required, but
any plausible distribution function and its assumptions
can be used as a starting point
• Complex shapes with no appropriate function can be
accommodated
• Multiple scenarios, decision trees and conditional
probabilities are easily accommodated
Chapman and Ward HMPOR slide 85
© 2011 John Wiley & Sons Ltd.
Current use of probability-impact grids (PIGs)
with numeric bounds and risk index values
p3 = 1
high
r3
r4
r5
r2
r3
r4
r1
r2
r3
p2
Probability
medium
p1
low
p0 = 0
i0 = 0
low
i1
i2
medium
i3
high
Impact
Chapman and Ward HMPOR slide 86
© 2011 John Wiley & Sons Ltd.
Reinterpretation of PIGs in more powerful terms
1.0
source number 2 – very uncertain probability, but predictable impact
source number 1 – uncertain probability and impact
Probability
source number 4 is not
shown because its
probability is 1, so it
does not lend itself to
this portrayal, and it is
omitted in conventional
risk management using
probability-impact grids
complete
scale from
0 to 1.0
source number 3 – reliable probability estimate
available, but very uncertain impact
0
0 … etc with a complete scale for outcome values
Chapman and Ward HMPOR slide 87
© 2011 John Wiley & Sons Ltd.
Impact
Estimate phase approach overall implications
• There is no satisfactory way to combine ‘qualitative
estimates’ – a ‘weak quantitative analysis’ interpretation
of PIGs is needed – and all sources need attention
• Combining first pass quantified individual sources of
uncertainty is the starting point
• Looping back after the evaluate phase, changing the
proposed project plans to make effective use of all
available insights and achieve overall corporate risk
efficiency is the end point
• In between, managing the process to achieve simplicity
efficiency at the most appropriate level of effort is the
goal, adding more estimation detail on aspect of this
• This phase and the closely coupled evaluate phase are
at the core of the iterative process
Chapman and Ward HMPOR slide 88
© 2011 John Wiley & Sons Ltd.
Evaluate phase specific tasks
from the
quantify
phase
select an appropriate
subset of sources
specify dependence
combine the
subset of sources
portray the effect
diagnose
the implications
local yes
deliverables
fit for purpose?
no – restructure
or extend
global yes
interim
or gateway
report
Chapman and Ward HMPOR slide 89
© 2011 John Wiley & Sons Ltd.
to the
define
phase
Sensitivity diagrams as a key evaluate phase tool:
activity level offshore project example used earlier
Base plan completion date
Probability
of
achievement
by dates
indicated
1
0.9
0.8
1 2
3
0.7
4
5
0.6
6
0.5
0.4
0.3
0.2
0.1
0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
5th year
Probability curves show the cumulative effect of the following sources of uncertainty:
1. yard not available, or mobilisation delays
2. construction problems / adverse weather
3. subcontracted nodes delivery delays
4. material delivery delays
5. industrial disputes
6. delayed award of fabrication contract
Notes:
1. the curves assume a minimum fabrication period of 20 months
2. no work is transferred offsite to improve progress
3. no major fire, explosion or other damage
Chapman and Ward HMPOR slide 90
© 2011 John Wiley & Sons Ltd.
Sensitivity diagrams as a key evaluate phase tool:
offshore project intermediate level output example
Award of design Award of fabrication contract (2) Steel (4) and other (5) Fabrication
complete (6)
deliveries complete
and major material orders (3)
contract (1)
1.0
Probability
0.9
of
achievement
0.8
by
dates
0.7
indicated
2
1
3
5
4
Offshore installation
complete (7)
6
7
0.6
0.5
0.4
0.3
0.2
0.1
0
2nd year
Chapman and Ward HMPOR slide 91
3rd year
4th year
© 2011 John Wiley & Sons Ltd.
5th year
Sensitivity diagrams as a key evaluate phase tool:
addition of items A, B and C as in the BCS example
Cumulative
probability
1.0
P90
0.8
0.6
A
A+B
A+B+C
0.4
0.2
P10
0
Cost
Chapman and Ward HMPOR slide 92
© 2011 John Wiley & Sons Ltd.
Using decision diagrams to evaluate risk efficient
choices: one risk efficient choice example
1.0
Cumulative
probability
3.0 m barge
curve
1.6 m barge
curve
0.5
0
expected cost
using the 3.0 m barge
Chapman and Ward HMPOR slide 93
Cost
expected cost
using the 1.6 m barge
© 2011 John Wiley & Sons Ltd.
Using decision diagrams to evaluate risk-reward
tradeoffs: two risk efficient choices example
1.0
Cumulative
probability
0.5
1.6 m barge
curve
3.0 m barge
curve
0
expected cost
using the 1.6 m barge
Chapman and Ward HMPOR slide 94
Cost
expected cost
using the 3.0 m barge
© 2011 John Wiley & Sons Ltd.
Using decision diagrams to evaluate other
criteria tradeoffs: the photocopier example
1.0
P90
Cumulative
probability
P50
0.5
A
B
C
P10
0
Cost
Chapman and Ward HMPOR slide 95
© 2011 John Wiley & Sons Ltd.
Managing opportunity efficiency as an overall objective,
with risk efficiency in relation to each objective,
plus clarity efficiency,
plus optimal tradeoffs between all objectives,
whether or not objectives are measurable.
Optimal tradeoffs between all objectives is the goal,
and it is crucial to systematically seek this goal.
Chapman and Ward HMPOR slide 96
© 2011 John Wiley & Sons Ltd.
Build comprehensively from the bottom-up,
moving the bottom down selectively,
then present selectively top-down
• Understand specific sources of uncertainty, responses and
conditions at the bottom level, moving the bottom down where
this seems worth while
• Understand the role of dependence as uncertainty accumulates
and decomposition is refined
• Understand composite uncertainty and general responses at
higher levels
• Manage the uncertainty plus any associated opportunity and risk
as the build-up evolves
• Present the ‘bottom line’ first
• Explain where it came from working top-down
• Make sure conditions and non-quantified objectives do not get
overlooked, emphasising the key ones
• Focus all presentations on what matters most
Chapman and Ward HMPOR slide 97
© 2011 John Wiley & Sons Ltd.
Approaches to combining uncertainty
• Methods based on moments (mean-variance approaches in
particular)
• Methods based on discrete probabilities (as used in decision
analysis and other probability tree models)
• Methods based on simulation (Monte Carlo simulation in
particular)
The norm is using simulation without a gradual build up of
intermediate results – no ‘sensitivity diagrams’ are the obvious
symptom – but simulation can be used for any approach to any
decomposition structure, and simulation is a reasonable default
assumption
Chapman and Ward HMPOR slide 98
© 2011 John Wiley & Sons Ltd.
Approaches to dependence to be aware of
• Assuming independence as a default position is the
norm
• Assuming perfect positive correlation as a simple form
of complete dependence as a default is the
recommended clarity efficient starting position
• Intermediate correlation and percentage dependence
provides a simple compromise
• Conditional specifications start to provide the insight
needed to understand simple and complex forms of
statistical dependence
• Causal structures provide a practical maximum insight
approach sometimes, but they may not be clarity
efficient
Chapman and Ward HMPOR slide 99
© 2011 John Wiley & Sons Ltd.
Part two review, questions and discussion
Chapman and Ward HMPOR slide 100
© 2011 John Wiley & Sons Ltd.
Part three – the generic process
in all lifecycle stages
• Start by considering roles for PUMPs in the strategy shaping
stages, and the way the 7Ws plan-criteria relationship structure
focus shifts
• Consider the strategy gateway as a performance uncertainty
management process (PUMP) which is very different to the basic
PUMP
• Then consider earlier lifecycle strategy shaping PUMPs and
associated gateway PUMPs, working back towards the concept
stage
• Follow with the later lifecycle stage PUMPs, working forward to
the termination stage
• The overall strategy gateway as a watershed
Chapman and Ward HMPOR slide 101
© 2011 John Wiley & Sons Ltd.
Roles for PUMPs in the strategy shaping stages
Lifecycle stage
Stage purposes
Roles for the associated PUMP
Concept shaping
Concept, project objectives
and business case
development in corporate
strategy terms
Confirm the initial concept from a corporate perspective
Identify stakeholders and their expectations
Identify appropriate performance objectives
Provide unbiased initial estimates of business case outcomes
Evaluate the concept and business case in corporate strategy terms
Concept gateway
Consolidation
Governance
Consolidate the base and contingency plans
Confirm expectations about the deliverables
DOT shaping
Design, operations and
termination (DOT) strategy
development from a design
and operations management
perspective
Confirm the design basis from a design and operations perspective
Develop lifecycle operations performance criteria
Assess the feasibility of the design strategy
Assess the likely costs and benefits of design changes
Evaluate the operations and termination strategy
Test the reliability of designs and their operations effectiveness
DOT gateway
Consolidation
Governance
Consolidate the base and contingency plans
Confirm expectations about the deliverables
E&D shaping
Execution and delivery (E&D)
strategy development from a
project management
perspective
Confirm the execution basis from an execution perspective
Estimate the resources required at a strategic level
Identify and allow for regulatory constraints
Assess contracting strategy at an overview level
Assess the feasibility of plans
Assess the likely duration of execution
Assess the likely cost of execution and delivery
Determine the appropriate milestones
Determine the appropriate levels of contingency funds
Assess the effect of changes to plans
Strategy gateway
Consolidation
Governance
Consolidate the base and contingency plans
Confirm expectations about the deliverables
Chapman and Ward HMPOR slide 102
© 2011 John Wiley & Sons Ltd.
Overall strategy gateway specific tasks
from the
evaluate
phase
consolidate and
explain the strategy
PUMP report
base plans
contingency plans
commitment plans
support and convince
to the
define
phase
maybe
deliverables
fit for
purpose?
no
stop
the
project
gateway yes
to the
next lifecycle
stage
Chapman and Ward HMPOR slide 103
© 2011 John Wiley & Sons Ltd.
Gateway processes viewed from an
uncertainty management perspective
and the governance issues which
need to be addressed
Chapman and Ward HMPOR slide 104
© 2011 John Wiley & Sons Ltd.
Adapting the basic PUMP to the
design, operations and termination (DOT)
shaping stage
• The PetroCanada liquefied natural gas storage example
and the Yukon River pipeline crossing example
• Terminology changes
• Modelling concerns which stay the same
• Interaction with different people with different
perspectives and agendas
• Safety as a special case, and the questions raised by
tradeoffs between fatalities and cost
• Integration with the formation and shaping of operations
strategy
Chapman and Ward HMPOR slide 105
© 2011 John Wiley & Sons Ltd.
Adapting the basic PUMP to the concept stage
• UK Nirex example (nuclear waste disposal), and simpler
examples
• Terminology changes
• Modelling concerns which stay the same
• Interaction with different people with different
perspectives and agendas
• Integration with the formation and shaping of corporate
strategy
• The relationship between constraints imposed by broader
strategic goals and multiple criteria tradeoffs
• Whole lifecycle issues
Chapman and Ward HMPOR slide 106
© 2011 John Wiley & Sons Ltd.
Overall project evaluation involves
the whole project lifecycle and the use of
decision frameworks based on NPV
(Net Present Value) or closely related
variants like IRR (Internal Rate of Return)
Chapman and Ward HMPOR slide 107
© 2011 John Wiley & Sons Ltd.
A very simple initial example
Based on a paper published to illustrate a parametric
approach to discounting (Chapman and Cooper,1983)
The basic example context: insulating the walls of a
house in the UK in the early 1980s
The more complex underlying example context: the
State of Alaska considering a major hydro-electric
facility development or the incremental development
of coal-fired electric power
Chapman and Ward HMPOR slide 108
© 2011 John Wiley & Sons Ltd.
The perceived differential cash flow
X0 X1 X2 … Xt … Xn
-C F F
F
F+S
where money of the day (eg 1981£) is used for
C the capital cost
F the fuel cost saving per annum
S the scrap value at the planning horizon
n the number of years in the planning horizon
Chapman and Ward HMPOR slide 109
© 2011 John Wiley & Sons Ltd.
The need to inflate, escalate and discount
It
a general inflation factor for period t
Et
an escalation factor for F
At
an appreciation factor for S
Dt
a real discount factor
Chapman and Ward HMPOR slide 110
© 2011 John Wiley & Sons Ltd.
Net Present Value (NPV = V) basic definition
V = -C
+ the sum over t = 1…n of the F It Et / It Dt
+ S In An / In Dn
General inflation cancels out, so we can work in
‘real terms’ with respect to ‘economic desirability’
‘Financial feasibility’ requires attention to general
inflation patterns
Chapman and Ward HMPOR slide 111
© 2011 John Wiley & Sons Ltd.
Composition of parameters
R = the sum over t = 1…n of the Et / Dt
T = S An / Dn
N=C–T
V=FR–N
The purpose of composition
Chapman and Ward HMPOR slide 112
© 2011 John Wiley & Sons Ltd.
NPV based tests
‘V greater than zero?’ is the basic test
If V is set equal to 0, equivalent tests include:
D greater than ‘correct D’?
n greater than the expected planning horizon?
N greater than F R ?
F less than N / R ?
The purpose of alternative frameworks
Chapman and Ward HMPOR slide 113
© 2011 John Wiley & Sons Ltd.
Embedding this model in a simple process
step 1
2
estimate n
R
3
N
5 years
E / D = 1.1
R = 6.72
C = £400
S = £250
A = 1.025
T = £283
N = £117
Alternative insulation types as an example
component decision embedded in step 3
Chapman and Ward HMPOR slide 114
© 2011 John Wiley & Sons Ltd.
The simple process continued, steps 4 and 5
step 4
estimate F = £40
then
V = FR–N
= 40 x 6.72 – 117
= 152
step 5
tabulate V as n varies over a
plausible range, and determine
the value of n which flips the
decision given the expected
value of all other parameters
Chapman and Ward HMPOR slide 115
© 2011 John Wiley & Sons Ltd.
Key composite parameters as a function of n
n
1
2
3
4
5
6
7
8
9
10
T
256
263
269
276
283
290
297
305
312
320
N
144
137
131
124
117
110
103
95
88
80
Chapman and Ward HMPOR slide 116
R
1.10
2.31
3.64
5.11
6.72
8.49
10.44
12.58
14.94
17.53
N/R
130.9
49.3
36.0
24.3
17.4
13.0
9.9
7.6
5.9
4.6
© 2011 John Wiley & Sons Ltd.
V
-100
-45
15 *
80
152
230
315
408
510
621
The simple process continued, steps 6 - 9
step 6
generalise step 5 to determine the flip
point values of all other parameters
eg n = 2.8 (via diagram, often useful)
T = £131
F = £17.5
step 7
step 8
step 9
identify key parameters
choose a suitable framework
illustrate with scenarios
Chapman and Ward HMPOR slide 117
© 2011 John Wiley & Sons Ltd.
The more complex underlying example
State of Alaska decision - hydro verses coal
The perceived differential cash flow involves
the same notation symbols but:
C is the capital cost of hydro less coal
F is the fuel and other operating costs saving
S is the ‘scrap’ value after 40 years of the
hydro facility assuming zero for the coal
facility
Scrap value focus for evaluation (NTV)
Chapman and Ward HMPOR slide 118
© 2011 John Wiley & Sons Ltd.
Disposal of nuclear waste example
UK Nirex context
C0 = £2500 million
Cn = £5000 million
S = £135 million
r = 1 / (1 + D/100)
D = 6%
n = 50 years
The changes in notation (r/D and S in particular)
Chapman and Ward HMPOR slide 119
© 2011 John Wiley & Sons Ltd.
The perceived differential cash flow
X0
X1
X2
C0 -S
-S
…
Xt
-S
…
Xn
-S-Cn
V = £100 million (advantage for deferral)
V=N–SR
N = C0 – T
T = Cn r
R = the sum over t = 1…n of the rt
Chapman and Ward HMPOR slide 120
© 2011 John Wiley & Sons Ltd.
Key composite parameters as a function of D
D
0
2
4
6
8
T
N
R
N/R
5000 -2500 50.00 -50
1860
640 31.42 20
710 1790 21.48 83
270 2230 15.76 141
110 2390 12.23 195
Chapman and Ward HMPOR slide 121
N/R-S
V
-185 -9250
-115 -3600
-52 -1100
6
100 *
40
740
© 2011 John Wiley & Sons Ltd.
Flip values and swings for key parameters
Parameter
D
S
C0
Cn
Expected value
6
135
2500
5000
Chapman and Ward HMPOR slide 122
Flip value
5.7
141
2397
6907
© 2011 John Wiley & Sons Ltd.
Swing %
-5
+4.4
-4.1
+38
Integrating probabilistic analysis
• a minimum clarity approach for the first pass
• further uncertainty clarification for various reasons
eg Cn
C0 and C0 / Cn relationship
S
D
Chapman and Ward HMPOR slide 123
© 2011 John Wiley & Sons Ltd.
Responding to the ‘real options’ critique
•
•
•
•
•
The value (cost or benefit) of delay
The value of information
The value of responding to threats and opportunities
The value of flexibility (general responses)
The need to address all ‘real options’ critiques of NPV
as ‘actual options’ via decision analysis in an
uncertainty management framework using a creative
approach to option generation
Chapman and Ward HMPOR slide 124
© 2011 John Wiley & Sons Ltd.
Responding to ‘Green Book’ discussions
• HM Treasury advice on the ‘correct’ discount rate:
10%, 6%, 3.5% declining in stages to 1% by year 300
• Conflicting theoretical basis for these rates
• Discount hurdle rate decision rule or a decision
process
• Proposed resolution for the public sector
• Anticipated implications for PFI (PPP)
• Anticipated implications for the private sector (plc and
other structures)
Chapman and Ward HMPOR slide 125
© 2011 John Wiley & Sons Ltd.
Traffic light view of the proposed process
review
reviewfort =t =1…n
1, 2, …
review
reviewfort t==00
submitproject
project
submit
red
bond tests
amber
red
return tests
amber
red
legacy tests
amber
red
risk tests
amber
red
option tests
amber
red
further tests
amber
reject project
Chapman and Ward HMPOR slide 126
implement project
© 2011 John Wiley & Sons Ltd.
implement portfolio
Corporate strategy formation issues
• There are lots of different perspectives for ‘strategic
management’
• The concern here is understanding ‘bottom-up’ and
‘top-down’ approaches to strategy formation and
shaping, their integration, and the way they relate to
operations strategy and programme/portfolio strategy,
building on earlier aspects of our discussions
Chapman and Ward HMPOR slide 127
© 2011 John Wiley & Sons Ltd.
Taking a contractor’s perspective
•
•
•
•
•
•
Bidding for work as a context
The Transcon case as an example
Background to the development of this case
The case information
The way the case is usually addressed
The basis for some key ideas to take away
Chapman and Ward HMPOR slide 128
© 2011 John Wiley & Sons Ltd.
The ‘watershed’ aspect of the strategy gateway
• The argument for understanding execution and
delivery strategy shaping and its gateway first
• The argument for implementing PUMPs from the
outset of the concept stage
• The integration implications
• The implications of a failure to integrate
• Moving on to the rest of the lifecycle assuming
integration – strategy implementation
• Escalating expenditure issues and contractual
implications
• Using PUMPs now dependent on earlier PUMPs
Chapman and Ward HMPOR slide 129
© 2011 John Wiley & Sons Ltd.
Roles for PUMPs
in the tactics shaping and gateway stages
Lifecycle stage
Stage purposes
Roles for the associated PUMP
Tactics shaping
Detailed design
and planning
for execution,
delivery,
operation and
termination
purposes
Help to shift the perspective to implementation
Consolidate the strategic plans for implementation purposes
Develop detailed designs and plans
Develop resource allocation and contracting criteria
Estimate the resources required at a more detailed level
Assess the contracting strategy at a more detailed level
Evaluate alternative procurement strategies
Define contractual terms and conditions
Determine appropriate risk sharing arrangements
Assess the implications of contract conditions
Assess and compare competitive tenders
Determine the appropriate target costs and bid prices for contracts
Evaluate detailed designs and plans
Tactics gateways
Consolidation
Governance
Consolidate the base and contingency plans
Confirm the deliverables
Chapman and Ward HMPOR slide 130
© 2011 John Wiley & Sons Ltd.
An overview of tactics shaping and gateways
overall
strategy
approved
formulate the tactics
tactics shaping PUMPs
base and contingency plans
commitment plans
action plans
no
deliverables
fit for
purpose?
tactics planning team yes
support and convince
to an
appropriate maybe
define
phase
deliverables
no
stop the
fit for
project
purpose?
tactics gateway yes
to the
next lifecycle
stage
Chapman and Ward HMPOR slide 131
© 2011 John Wiley & Sons Ltd.
Tactics shaping
and the tactical/strategic plans relationship
• We have been concerned with shaping the strategy of the project
earlier, and now want to implement it
• Strategy implementation requires detailed plans, and developing
detailed plans involves another lifecycle stage
• Detailed plans are a waste of effort until an appropriate strategy
has been developed
• Detailed plans beyond a limited time horizon are a waste of effort
• The tactics shaping stage is about appropriate detailed planning,
to prepare for strategy implementation, after gaining approval for
the strategy
• Multiple gateways may be involved
• Prior testing for ‘the devil in the detail’
Chapman and Ward HMPOR slide 132
© 2011 John Wiley & Sons Ltd.
Roles for PUMPs in the execution and later stages
Execution
Execution
Support the execution of the plans
Coordinate, control and monitor progress
Modify all targets, commitments and resource allocations as needed
Revise estimates of cost on completion or completion time
Provide ongoing execution evaluation
Assess the implications of changes to designs or plans
Support responding to crises and disasters
Delivery
Delivery
Support the delivery of the asset created by the project
Identify issues impacting delivery
Assess the feasibility of delivery schedules
Assess the feasibility of meeting performance criteria
Assess the availability of commissioning facilities
Assess the reliability of testing equipment
Assess the resources needed to modify the delivered asset
O&S
Operation
and
support
(O&S)
Support the operation of the asset created by the project
Assess the effectiveness of uncertainty management strategies
Provide ongoing uncertainty management of all relevant concerns
Update assessments of asset performance
Support the design and planning of maintenance
Assess appropriate levels of resources required
Support responding to crises and disasters
Termination
Termination
Assess options for replacement, decommissioning, or transfer
Identify the extent of future liabilities
Support the termination of the asset
Chapman and Ward HMPOR slide 133
© 2011 John Wiley & Sons Ltd.
An overview of the execution and delivery stages
from
the tactics
gateways
manage planned
execution and delivery
actions
roll execution and
delivery action plans
forward
monitor
and control
enlightened
governance
until these stages
are complete
to the
next lifecycle
stage
Chapman and Ward HMPOR slide 134
© 2011 John Wiley & Sons Ltd.
manage crises and
be prepared to respond
to disasters
Execution and delivery stages
• Earlier stages obtained approval for strategic plans,
developed appropriately detailed action plans, and
obtained approval for these action plans
• The project can now be executed, which requires
ongoing management in ‘cutting metal’ or ‘writing
code’ terms
• ‘The talking ends, the action begins’ in terms of
emphasis, although a lot of ongoing planning with
related communication issues remains essential
• The ‘enlightened governance’ requirement, and
selective re-planning as required
Chapman and Ward HMPOR slide 135
© 2011 John Wiley & Sons Ltd.
Operations and support and prior tactics shaping
from the
strategy
approval
gateway
tactics shaping
for operations and
support
manage
planned actions
roll action
plans forward
monitor
and control
enlightened
governance
until this stage
is complete
to the
next lifecycle
stage
Chapman and Ward HMPOR slide 136
© 2011 John Wiley & Sons Ltd.
manage crises and
be prepared to respond
to disasters
The termination stage and prior tactics shaping
from the
strategy
approval
gateway
tactics shaping
for termination
manage
planned actions
monitor
and control
roll action
plans forward
enlightened
governance
until this stage
is complete
end of
the
project
Chapman and Ward HMPOR slide 137
© 2011 John Wiley & Sons Ltd.
manage crises and
be prepared to respond
to disasters
Some alternative generic process descriptions
• PRAM 2004 (APM) and forthcoming
• RAMP 2005 (ICE AND IoA) and forthcoming
• PMBOK chapter 11 2008 (PMI) and forthcoming
Chapman and Ward HMPOR slide 138
© 2011 John Wiley & Sons Ltd.
The role of generic processes in
the development of processes for
particular organizations and
particular contexts
Chapman and Ward HMPOR slide 139
© 2011 John Wiley & Sons Ltd.
Part three summary, questions and discussion
Chapman and Ward HMPOR slide 140
© 2011 John Wiley & Sons Ltd.
Part four – key corporate implications
• Start by considering developing corporate capability as
a project in the ‘programme’ sense
• Then look at contracts and governance as frameworks
for enlightened relationship management
• Conclude with a corporate capability perspective
Chapman and Ward HMPOR slide 141
© 2011 John Wiley & Sons Ltd.
Some key implementation issues to get started
•
•
•
•
•
Selling the idea to all concerned
Choosing a demonstration project
Context as a process design issue
Planning the introduction as a project/programme
Starting by being clear about initial and long term
objectives, and the evolution planned
• Integrating risk and opportunity management across
the organization
• Being clear about the skills needed, skills and
knowledge development, and role of consultants
• Governance
Chapman and Ward HMPOR slide 142
© 2011 John Wiley & Sons Ltd.
Selling a ‘best practice’ perspective
•
•
•
•
choosing the best ‘brand’ label
benefits as objectives
a clear understanding of the possibilities
processes tailored to deliver what is required
Chapman and Ward HMPOR slide 143
© 2011 John Wiley & Sons Ltd.
Objectives which may be relevant
•
•
•
•
•
Opportunity management
Clarity, risk and opportunity efficiency
Culture change
Targets, expectations and commitments distinguished
Bottom up communication encouraged, with a shared
‘big picture’ perspective
• Creativity and satisfaction (fun) used as effective
objectives
• Corporate learning and knowledge management
• Linking projects, strategy and operations
Chapman and Ward HMPOR slide 144
© 2011 John Wiley & Sons Ltd.
Expected, commitment and target values,
and associated provision and contingency
a density portrayal is convenient
for understanding what is involved
Probability
stretch target value
trigger target value
commitment value
Duration, cost, …
expected
value
provision
Chapman and Ward HMPOR slide 145
contingency
© 2011 John Wiley & Sons Ltd.
Stretch targets as goals are crucial
• targets should stretch people
• targets may have little chance of achievement,
but targets must be plausible
Chapman and Ward HMPOR slide 146
© 2011 John Wiley & Sons Ltd.
Properly defined commitments and
trigger target values are crucial
•
•
•
•
•
separating contingencies and provisions
understanding asymmetric penalties
being clear about the ownership of risk
the need for contractual flexibility and trust
the need for Balanced Incentive And Risk Sharing
(BIARS) contracts
Chapman and Ward HMPOR slide 147
© 2011 John Wiley & Sons Ltd.
Using the concept of risk efficiency is crucial
• Risk efficiency involves a maximum level of expected
performance for an appropriate level of downside risk
• Ensuring choices are risk efficient can be seen as one
of the core purpose of risk management
• Along with clarity efficiency it provides a foundation for
opportunity efficiency
• Decision diagrams are a key tool when uncertainty
about key measurable objectives is important
Chapman and Ward HMPOR slide 148
© 2011 John Wiley & Sons Ltd.
Decision diagrams: the one risk efficient choice example
showing how complex choice comparisons can become
reasonably straightforward illustrates an important idea
1.0
3.0 m barge
curve
Cumulative
probability
1.6 m barge
curve
0.5
the 3.0m barge involves
a lower expected cost and
less risk – which makes it
a risk efficient choice
0
expected cost
using the 3.0 m barge
Chapman and Ward HMPOR slide 149
Cost
expected cost
using the 1.6 m barge
© 2011 John Wiley & Sons Ltd.
Using decision diagrams to evaluate risk-reward tradeoffs:
the example involving two risk efficient choices used earlier
illustrates taking more risk may be worth while sometimes
1.0
Cumulative
probability
0.5
1.6 m barge
curve
3.0 m barge
curve
0
expected cost
using the 1.6 m barge
Chapman and Ward HMPOR slide 150
Cost
expected cost
using the 3.0 m barge
© 2011 John Wiley & Sons Ltd.
there is a trade-off
between expected
cost and risk - the
3.0 m barge involves
less risk but more
expected cost
Using decision diagrams in very simple forms can
be useful: the photocopier example illustrates this
in terms of contract cost risk, and this example
also illustrates how to consider secondary criteria
which may not be quantifiable directly
1.0
P90
Probability
P50
0.5
A
B
C
P10
0
Cost
Chapman and Ward HMPOR slide 151
© 2011 John Wiley & Sons Ltd.
Understanding risk efficiency at a corporate
level as well as at a project level is crucial
• Understanding the basic implications
• Using it to make decisions simpler
• Using it as a engine of culture change to replace
a ‘blame culture’ with an ‘opportunity culture’
Chapman and Ward HMPOR slide 152
© 2011 John Wiley & Sons Ltd.
Returning to our list of implementation issues
•
•
•
•
Choosing a demonstration project
Context as a process design issue
Planning the introduction as a project/programme
Starting by being clear about initial and long term
objectives, and the evolution planned
• Integrating risk and opportunity management across
the organization
• Being clear about the skills needed, skills and
knowledge development, and role of consultants
• Governance
Chapman and Ward HMPOR slide 153
© 2011 John Wiley & Sons Ltd.
Contracts and governance
as frameworks for
enlightened relationship management
Chapman and Ward HMPOR slide 154
© 2011 John Wiley & Sons Ltd.
Some pathways for
uncertainty management development
• Current uncertainty management activity may not be
evenly developed
• Some possible development options:
- focus on building uncertainty management into
one unit or process
- launch a company-wide initiative
- concentrate on a wider use of a limited process
- target quick or large wins
Chapman and Ward HMPOR slide 155
© 2011 John Wiley & Sons Ltd.
Risk management maturity models:
Deloach (2000) example
Description
Maturity Level
1 Initial
Capability
(Ad hoc/chaotic)
No
institutionalised
processes
Reliance on the
competence of
individuals
2 Repeatable
(Intuitive)
Processes
established
and repeating
Reliance on
individuals
reduced
3 Defined
(Qualitative/
quantitative)
Policies,
processes and
standards
defined and
uniformly
applied across
the
organization
4 Managed
(Quantitative)
Risks measured
and managed
quantitatively,
and
aggregated
enterprise
wide
Risk/reward
tradeoffs
considered
Hillson (1997) and Hopkinson (2011) are example alternatives
Chapman and Ward HMPOR slide 156
© 2011 John Wiley & Sons Ltd.
5 Optimising
(Continuous
feedback)
Emphasis on
taking and
exploiting risk
Knowledge
accumulated
and shared
Some common issues
• Limited definitions of levels of maturity
• Benchmarking of existing practice against maturity
levels
• Identification of weakest links to focus development
efforts
• How to move from one level to the next
Chapman and Ward HMPOR slide 157
© 2011 John Wiley & Sons Ltd.
Aspects of uncertainty management capability:
descriptors
1. The focus of attention
Threats, opportunities and threats, or uncertainty.
2. Application contexts
UM applied to operations, projects, programmes, or
strategies.
3. The nature and quality of processes employed
The degree of formality, level of documentation, the
scope of processes, the nature of steps involved, the
tools and techniques employed, the extent and quality
of quantification.
Chapman and Ward HMPOR slide 158
© 2011 John Wiley & Sons Ltd.
Aspects of uncertainty management capability:
facilitators
1. Supporting uncertainty management infrastructure
Guiding principles, objectives and scope of UM, policies (operating
rules), allocation of responsibilities for UM, formal processes for
administration of UM applications, information systems, resources
applied to UM.
2. Supporting organisational capabilities
Administrative structures, communication, information systems,
knowledge management, organisation learning.
3. Organisation culture
Attitude to risk and uncertainty, tolerance of mistakes, level of trust,
openness, etc.
4. Human resource capability for risk management
Knowledge and experience of UM methodology and techniques,
perceived roles and responsibilities, motivation to undertake UM,
motivation to develop UM expertise
Chapman and Ward HMPOR slide 159
© 2011 John Wiley & Sons Ltd.
Facilitating infrastructure
•
•
•
•
•
Guiding principles
Objectives and scope for uncertainty management
The strategy for use and development
Assignment of formal roles
Policies and guidelines for uncertainty management
application
• Nature of decision support and information systems
Chapman and Ward HMPOR slide 160
© 2011 John Wiley & Sons Ltd.
Some guiding principles
The strategic perspective
• Which business areas to operate in
• What risks are central/inherent to this business
• Shareholder expectations about corporate risk taking
Risk tolerance
• How much is the firm willing to lose?
• What resources are available to support potential
losses?
• Is the firm getting sufficient return for the risks being
taken?
Chapman and Ward HMPOR slide 161
© 2011 John Wiley & Sons Ltd.
The organisation’s risk ‘philosophy’ ?
• Exposure to risk is necessary for success
• Risk is uncertainty about performance: it includes
‘upside’ as well as ’downside’ variability
• ‘A stitch in time saves nine’
• Risk is not something to be avoided, but represents
the source of opportunities
• Uncertainty needs to be understood so that
opportunities can be seized effectively
• Everyone retains some responsibility for managing risk
• Risk management is an opportunity for creative
thinking and having fun
Chapman and Ward HMPOR slide 162
© 2011 John Wiley & Sons Ltd.
Policies and guidelines for a best practice
approach to uncertainty management application
•
•
•
•
The purpose of uncertainty management
What form uncertainty management should take
Who should do it
How uncertainty management should be carried out,
supported, and monitored
• When uncertainty management should be undertaken
• What resources should be applied
Chapman and Ward HMPOR slide 163
© 2011 John Wiley & Sons Ltd.
Example uncertainty management policy statement issues
 The level and nature of risk which is acceptable for particular business activities or programmes
with context conditions and a risk-reward tradeoffs basis
 Responsibilities for the management of particular sources of uncertainty and associated
financing arrangements
 Roles and responsibilities for carrying out various uncertainty management activities
 Mechanisms for monitoring and reviewing uncertainty management activities
 Mechanisms for monitoring and reviewing uncertainty management principles, policies, and
guidelines
 Rules for reporting significant uncertainty, opportunity and risk higher up the hierarchy
 The nature of PUMPs and other uncertainty management processes in various contexts
 Use of standard documentation for analysis and reporting
 Use of particular sensitivity analysis tools and techniques for ranking and evaluating sources of
uncertainty
 Use of particular tools for making decisions between available option choices
 Treatment of interdependencies between sources of uncertainty in a range of ways for different
levels of clarity
 Guidance on achieving clarity efficiency and overall opportunity efficiency
Chapman and Ward HMPOR slide 164
© 2011 John Wiley & Sons Ltd.
Corporate benefits of a best practice
uncertainty management approach
more profit
win more
contracts
competitive
advantage
keener pricing
lower costs
reduce cost
of tendering
avoid
‘disaster’
contracts
improved design
of projects
better quality opportunity
and risk management
ability to
manage issues
more realistic
quantification
appreciation
of uncertainty
of uncertainty
corporate knowledge base
documentation of
sources and responses
Chapman and Ward HMPOR slide 165
© 2011 John Wiley & Sons Ltd.
Corporate benefits of a best practice
uncertainty management culture
higher quality staff
more profit
more smiles
fewer ‘disasters’
more opportunities
less wasted effort
enlightened
caution
uncertainty as
opportunities
enlightened
gambles
effective
planning
horizons
enlightened
controls
more smiles
=
more ‘pleasure’
more trust
more openness
better communication
more congruent objectives
more lateral thinking
more creativity
more constructive insubordination
better ‘bonding’
better teamwork and partnering
more ‘empowerment’
more training, less directing
better ‘management of expectations’
better use of diverse experiences
good management recognised
Chapman and Ward HMPOR slide 166
+
less ‘pain’
less wasted effort
less frustration
fewer crises
less confrontation
fewer witch-hunts
bad luck recognised
© 2011 John Wiley & Sons Ltd.
The way forward
• Enormous potential for improving organisational
performance? Current risk management activity is
limited.
• Start by recognising dimensions for development.
• Consider the full range of objectives, and linkage
management.
• Major obstacles to development?
• Need for a strategy to develop uncertainty
management capability.
Chapman and Ward HMPOR slide 167
© 2011 John Wiley & Sons Ltd.
Part four summary, questions and discussion
Chapman and Ward HMPOR slide 168
© 2011 John Wiley & Sons Ltd.