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CHAPTER SEVEN
Risk Management
Chapter Outline
PROJECT PROFILE
Haitian Earthquake Relief
INTRODUCTION
PROJECT MANAGERS IN PRACTICE
Mohammed Al-Sadiq, Saudi Aramco Oil Company
7.1 RISK MANAGEMENT: A FOUR-STAGE PROCESS
Risk Identification
Analysis of Probability and Consequences
Risk Mitigation Strategies
Use of Contingency Reserves
Other Mitigation Strategies
Control and Documentation
PROJECT PROFILE
Collapse of Shanghai Apartment Building
7.2 PROJECT RISK MANAGEMENT: AN INTEGRATED APPROACH
Summary
Key Terms
Solved Problems
Discussion Questions
07-01
Problems
Case Study 7.1 Classic Case: de Havilland’s Falling Comet
Case Study 7.2 Classic Case: Tacoma Narrows Suspension Bridge
Internet Exercises
PMP Certification Sample Questions
Integrated Project—Project Risk Assessment
Notes
07-02
TRANSPARENCIES
7.1 RISK VERSUS AMOUNT AT STAKE
07-03
7.2 TYPICAL RISK FACTORS
1. FINANCIAL RISKS
2. TECHNICAL RISKS
3. COMMERCIAL RISKS
4. EXECUTION RISKS
5. CONTRACTUAL OR LEGAL RISKS
07-04
7.3 QUALITATIVE RISK ASSESSMENT MATRIX
07-05
7.4 QUANTITATIVE RISK ASSESSMENT
CALCULATIONS
07-06
7.4 QUANTITATIVE RISK ASSESSMENT
CALCULATIONS (CON’D)
07-07
7.4 QUANTITATIVE RISK ASSESSMENT
CALCULATIONS (CON’D)
07-08
7.5 CONTINGENCY DOCUMENT FOR ADJUSTMENTS
TO PROJECT PLAN
Probable
Event ADJUSTMENT TO PLANS
Absenteesim
Resignation
Pull-aways
Unavailable
Staff/skills
Spec Change
Added work
Need more
training
Vendors late
07-09
DISCUSSION QUESTIONS
1. Do you agree with the following statement: “With proper planning it is possible to
eliminate most/all risks from a project.” Why or why not?
It is not possible to eliminate risk from a project regardless of planning. The role of risk
management is to identify and analyze potential risks associated with a project. Once
risks have been identified, preventative action or contingency plans may be established to
reduce the impact of the risk on the success of the project. While this presents a way to
help control the effects of risk, it does not eliminate risk from the project management
equation.
2. In evaluating projects across industries, it is sometimes possible to detect patterns
in terms of the more common types of risks they routinely face. Consider the
development of a new software product and compare it to coordinating an event,
such as a school dance. What likely forms of risk would your project team face in
either of these circumstances?
A new software product would include a higher amount of risk than a school dance. The
software project would be subject to risk related to market volume/price, technical risk,
financing, scheduling, resignation, organizational, and operating risk. Coordinating a
school dance would run risks associated with availability of staff and an appropriate
facility as well as adequate funding. Both projects would involve risk variables such as
cost estimate risk, integration risk, “acts of God”, inadequate skills availability, and
absenteeism.
3. Analyze Figure 7.2 (degree of risk over the project life cycle). What is the
practical significance of this model? What implications does it suggest for
managing risk?
07-10
The diagram demonstrates the relationship between level of opportunity and risk
throughout the project life cycle. This is helpful in determining points at which
uncertainty is at its highest and when the greatest amount of risk may be realized. Project
teams can focus their risk analysis in these areas or use the diagram to give weight or
perspective to potential risk variables. The diagram also depicts the risk-reward
(opportunity) tradeoff for various stages of a project. Managers can use this information
to determine if risk at a certain point is worth the potential payoffs.
4. What are the benefits and drawbacks of using the various forms of risk
identification mentioned in the chapter (e.g., brainstorming meetings, expert
opinion, etc.)?
Brainstorming, expert opinion and multiple assessment approaches share similar benefits
and drawbacks. The benefits include a variety of experience and multiple angles of
analysis due to different points of view and areas of expertise. Synergy among group
members may also create a wider range of risk identification. Although there are
shortcomings to these approaches. It may be difficult to come to an agreement or
consensus in such processes due to conflicting opinions and personal issues.
Brainstorming, expert opinion (when performed in a forum setting rather than through the
Delphi approach) and multiple assessments may also have difficulty reaching consensus
due to egos/authority issues and functional biases (when members of different
departments are present). When the Delphi technique is employed many of these issues
are resolved because members do not meet face-to-face. The process becomes
anonymous reducing interference of egos and personal problems. However, the Delphi
approach can take considerable time to complete successfully.
Past history is a unique approach to the other three. It uses historical facts to reach
conclusions, which removes many obstacles that the other techniques encounter. The
benefits of risk identification through past history is that, if past projects were well
07-11
documented, information related to similar projects can easily be found and project teams
can avoid pitfalls by learning from the mistakes of others. Unfortunately, the drawback is
that past performance does not always predict future performance. Project-specific data
(i.e. competitive environment, economy, etc.) is unaccounted for. Thus, past history may
do little to forecast present risks.
5. What are the benefits and drawbacks of using a qualitative risk assessment matrix
for classifying the various types of project risk?
Qualitative risk assessment matrix is beneficial in providing a visual depiction of
potential risk factors. The matrix enables the project team to prioritize risk based on
severity of consequences and likelihood of occurrence. For instance, those that rest in the
“high” portion of both consequences and likelihood would be top priorities during project
planning. Drawbacks of the matrix may revolve around differences in opinion as to
where risk variables should be placed on the matrix. It may also create tunnel vision
where the team fails to acknowledge the significance of tasks that fall outside of the high
priority areas.
6. What are the benefits and drawbacks of using a quantitative risk assessment tool
such as the one shown in the chapter?
One benefit of such tools is in the ability to set thresholds based on calculations of
probability and consequence. A numerical point system creates an easy way to compare
different risk variables. This point system also provides more detail than a matrix in
depicting the level of risk. Additionally, once the point system is designed it can be used
over and over to compare risk factors of future projects. Problems with these tools may
arise in disagreement over assigning points and creating thresholds. Also, the point
system is not an exact science. It relies on rules of thumb and may be subject to
interpretation.
07-12
7. Give some examples of projects using each of the risk mitigation strategies
(accept, minimize, share, or transfer). How successful were these strategies? In
hindsight, would another approach have been better?
This question requires students to do some online research, investigating projects and
analyzing them in terms of various risk mitigation approaches. One suggestion is to
assign a specific project, such as the new Airbus A-380 and have the students research it,
address relevant risks factors, and the mitigation strategies the company employed.
8. Explain the difference between managerial contingency and task contingency?
Contingency reserves are provisions set aside in case of unforeseen problems. The
primary differences between task and managerial contingency are that managerial
contingency is applied at the project level while task contingency is applied at the
individual task or work package level. Managerial contingencies are budgeting buffers
that teams can fall back on in case of natural disasters, severe divergence from original
process or technical plans or other “acts of God.” Task contingencies are established
because estimates (made during initial planning) for individual tasks may be unreliable.
Reserves for these contingencies may be adjusted as the project advances and estimates
become more accurate.
9. What are the advantages of developing and using a systematic risk management
approach, such as PRAMs methodology? Do you perceive any disadvantages
with this approach?
PRAMs and other similar systems are advantageous because they provide a detailed step-
by-step approach to risk management. This helps project teams work through each part
07-13
of risk management effectively before moving on to subsequent tasks. This way the team
does not get stalled at one stage or leave out a vital step altogether. PRAMs adds an
additional feature – the feedback loop – that acts as a built-in safeguard to overlooking
risk associated with project changes. The loop also keeps varying levels of managers and
team members up-to-date on project and risk adjustments. The disadvantage to the
PRAMs model is that it may be too involved for low-budget or otherwise small projects.
The amount of time required to learn and institute the steps may be unreasonable in a
short-term, low-budget initiative. Also, it may not be feasible for smaller companies who
do not have the resources or time to devote to such a system.
10. Consider the following statement: “The problem with risk analysis is that it is
possible to imagine virtually anything going wrong on a project. Where do you draw
the line; in other words, how far do you take risk analysis before it becomes
overkill?” How would you respond to this observation?
The tools in this chapter address this very problem. Looking for possible risks could be
an endless process, however, it is important (as outlined in the text) to approach risk in a
systematic way. The early stages of risk management may best answer this question.
The prioritization of risks makes the process manageable, and when done properly, will
prevent a situation of overkill. After potential risks have been identified (using a
supervised, controlled method such as brainstorming, expert opinion, etc.), managers can
use qualitative and quantitative tools to sift through scores of risks to identify what is
probable enough to worry about. Once vital risk variables have been identified, then
mitigation and contingencies can be established. This process does not ensure that all
risks will be identified or that the right contingencies will be created. All the same, the
benefits of taking part in risk management far outweigh the danger of not preparing for
potential problems.
07-14
CASE STUDIES
Case Study 7.1: de Havilland’s Falling Comet
The de Havilland story is a fascinating example of a well-respected organization that
sought to be first to market with a radical new technology and cut some important safety
corners, with disastrous results. The story highlights the problems when innovations in
design are pushed too far, too quickly. With its unique design and all the additional
features that made it radical, the Comet should have been slowly integrated into
production and use, instead of being rushed to market. De Havilland knew that Boeing
was at work on its own design, the 707, and felt the need to be first to market. In this
rush, they cut a number of safety corners with disastrous results.
Questions:
1) How could risk management have aided in the development of the Comet?
De Havilland was producing an aircraft that was so revolutionary in so many ways that
they may have become overawed by the push in technology for its own sake. Certainly,
the original Comet included several radical design elements (embedded engines in the
wing root, square windows, pressurized cabin, and so forth) that any one of them could
have been a significant advance on its own. Putting them all together into the same new
aircraft design without adequate testing was a disaster. The question of how much testing
is enough is difficult to answer but certainly, with so many innovations in one design, it is
clear that they did not engage in sufficient risk assessment and design testing.
2) Discuss the various types of risk (technical, financial, commercial, etc.) in relation
to the Comet. Develop a qualitative risk matrix for these risk factors and assess
them in terms of probability and consequences.
07-15
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  • 5. CHAPTER SEVEN Risk Management Chapter Outline PROJECT PROFILE Haitian Earthquake Relief INTRODUCTION PROJECT MANAGERS IN PRACTICE Mohammed Al-Sadiq, Saudi Aramco Oil Company 7.1 RISK MANAGEMENT: A FOUR-STAGE PROCESS Risk Identification Analysis of Probability and Consequences Risk Mitigation Strategies Use of Contingency Reserves Other Mitigation Strategies Control and Documentation PROJECT PROFILE Collapse of Shanghai Apartment Building 7.2 PROJECT RISK MANAGEMENT: AN INTEGRATED APPROACH Summary Key Terms Solved Problems Discussion Questions 07-01
  • 6. Problems Case Study 7.1 Classic Case: de Havilland’s Falling Comet Case Study 7.2 Classic Case: Tacoma Narrows Suspension Bridge Internet Exercises PMP Certification Sample Questions Integrated Project—Project Risk Assessment Notes 07-02
  • 7. TRANSPARENCIES 7.1 RISK VERSUS AMOUNT AT STAKE 07-03
  • 8. 7.2 TYPICAL RISK FACTORS 1. FINANCIAL RISKS 2. TECHNICAL RISKS 3. COMMERCIAL RISKS 4. EXECUTION RISKS 5. CONTRACTUAL OR LEGAL RISKS 07-04
  • 9. 7.3 QUALITATIVE RISK ASSESSMENT MATRIX 07-05
  • 10. 7.4 QUANTITATIVE RISK ASSESSMENT CALCULATIONS 07-06
  • 11. 7.4 QUANTITATIVE RISK ASSESSMENT CALCULATIONS (CON’D) 07-07
  • 12. 7.4 QUANTITATIVE RISK ASSESSMENT CALCULATIONS (CON’D) 07-08
  • 13. 7.5 CONTINGENCY DOCUMENT FOR ADJUSTMENTS TO PROJECT PLAN Probable Event ADJUSTMENT TO PLANS Absenteesim Resignation Pull-aways Unavailable Staff/skills Spec Change Added work Need more training Vendors late 07-09
  • 14. DISCUSSION QUESTIONS 1. Do you agree with the following statement: “With proper planning it is possible to eliminate most/all risks from a project.” Why or why not? It is not possible to eliminate risk from a project regardless of planning. The role of risk management is to identify and analyze potential risks associated with a project. Once risks have been identified, preventative action or contingency plans may be established to reduce the impact of the risk on the success of the project. While this presents a way to help control the effects of risk, it does not eliminate risk from the project management equation. 2. In evaluating projects across industries, it is sometimes possible to detect patterns in terms of the more common types of risks they routinely face. Consider the development of a new software product and compare it to coordinating an event, such as a school dance. What likely forms of risk would your project team face in either of these circumstances? A new software product would include a higher amount of risk than a school dance. The software project would be subject to risk related to market volume/price, technical risk, financing, scheduling, resignation, organizational, and operating risk. Coordinating a school dance would run risks associated with availability of staff and an appropriate facility as well as adequate funding. Both projects would involve risk variables such as cost estimate risk, integration risk, “acts of God”, inadequate skills availability, and absenteeism. 3. Analyze Figure 7.2 (degree of risk over the project life cycle). What is the practical significance of this model? What implications does it suggest for managing risk? 07-10
  • 15. The diagram demonstrates the relationship between level of opportunity and risk throughout the project life cycle. This is helpful in determining points at which uncertainty is at its highest and when the greatest amount of risk may be realized. Project teams can focus their risk analysis in these areas or use the diagram to give weight or perspective to potential risk variables. The diagram also depicts the risk-reward (opportunity) tradeoff for various stages of a project. Managers can use this information to determine if risk at a certain point is worth the potential payoffs. 4. What are the benefits and drawbacks of using the various forms of risk identification mentioned in the chapter (e.g., brainstorming meetings, expert opinion, etc.)? Brainstorming, expert opinion and multiple assessment approaches share similar benefits and drawbacks. The benefits include a variety of experience and multiple angles of analysis due to different points of view and areas of expertise. Synergy among group members may also create a wider range of risk identification. Although there are shortcomings to these approaches. It may be difficult to come to an agreement or consensus in such processes due to conflicting opinions and personal issues. Brainstorming, expert opinion (when performed in a forum setting rather than through the Delphi approach) and multiple assessments may also have difficulty reaching consensus due to egos/authority issues and functional biases (when members of different departments are present). When the Delphi technique is employed many of these issues are resolved because members do not meet face-to-face. The process becomes anonymous reducing interference of egos and personal problems. However, the Delphi approach can take considerable time to complete successfully. Past history is a unique approach to the other three. It uses historical facts to reach conclusions, which removes many obstacles that the other techniques encounter. The benefits of risk identification through past history is that, if past projects were well 07-11
  • 16. documented, information related to similar projects can easily be found and project teams can avoid pitfalls by learning from the mistakes of others. Unfortunately, the drawback is that past performance does not always predict future performance. Project-specific data (i.e. competitive environment, economy, etc.) is unaccounted for. Thus, past history may do little to forecast present risks. 5. What are the benefits and drawbacks of using a qualitative risk assessment matrix for classifying the various types of project risk? Qualitative risk assessment matrix is beneficial in providing a visual depiction of potential risk factors. The matrix enables the project team to prioritize risk based on severity of consequences and likelihood of occurrence. For instance, those that rest in the “high” portion of both consequences and likelihood would be top priorities during project planning. Drawbacks of the matrix may revolve around differences in opinion as to where risk variables should be placed on the matrix. It may also create tunnel vision where the team fails to acknowledge the significance of tasks that fall outside of the high priority areas. 6. What are the benefits and drawbacks of using a quantitative risk assessment tool such as the one shown in the chapter? One benefit of such tools is in the ability to set thresholds based on calculations of probability and consequence. A numerical point system creates an easy way to compare different risk variables. This point system also provides more detail than a matrix in depicting the level of risk. Additionally, once the point system is designed it can be used over and over to compare risk factors of future projects. Problems with these tools may arise in disagreement over assigning points and creating thresholds. Also, the point system is not an exact science. It relies on rules of thumb and may be subject to interpretation. 07-12
  • 17. 7. Give some examples of projects using each of the risk mitigation strategies (accept, minimize, share, or transfer). How successful were these strategies? In hindsight, would another approach have been better? This question requires students to do some online research, investigating projects and analyzing them in terms of various risk mitigation approaches. One suggestion is to assign a specific project, such as the new Airbus A-380 and have the students research it, address relevant risks factors, and the mitigation strategies the company employed. 8. Explain the difference between managerial contingency and task contingency? Contingency reserves are provisions set aside in case of unforeseen problems. The primary differences between task and managerial contingency are that managerial contingency is applied at the project level while task contingency is applied at the individual task or work package level. Managerial contingencies are budgeting buffers that teams can fall back on in case of natural disasters, severe divergence from original process or technical plans or other “acts of God.” Task contingencies are established because estimates (made during initial planning) for individual tasks may be unreliable. Reserves for these contingencies may be adjusted as the project advances and estimates become more accurate. 9. What are the advantages of developing and using a systematic risk management approach, such as PRAMs methodology? Do you perceive any disadvantages with this approach? PRAMs and other similar systems are advantageous because they provide a detailed step- by-step approach to risk management. This helps project teams work through each part 07-13
  • 18. of risk management effectively before moving on to subsequent tasks. This way the team does not get stalled at one stage or leave out a vital step altogether. PRAMs adds an additional feature – the feedback loop – that acts as a built-in safeguard to overlooking risk associated with project changes. The loop also keeps varying levels of managers and team members up-to-date on project and risk adjustments. The disadvantage to the PRAMs model is that it may be too involved for low-budget or otherwise small projects. The amount of time required to learn and institute the steps may be unreasonable in a short-term, low-budget initiative. Also, it may not be feasible for smaller companies who do not have the resources or time to devote to such a system. 10. Consider the following statement: “The problem with risk analysis is that it is possible to imagine virtually anything going wrong on a project. Where do you draw the line; in other words, how far do you take risk analysis before it becomes overkill?” How would you respond to this observation? The tools in this chapter address this very problem. Looking for possible risks could be an endless process, however, it is important (as outlined in the text) to approach risk in a systematic way. The early stages of risk management may best answer this question. The prioritization of risks makes the process manageable, and when done properly, will prevent a situation of overkill. After potential risks have been identified (using a supervised, controlled method such as brainstorming, expert opinion, etc.), managers can use qualitative and quantitative tools to sift through scores of risks to identify what is probable enough to worry about. Once vital risk variables have been identified, then mitigation and contingencies can be established. This process does not ensure that all risks will be identified or that the right contingencies will be created. All the same, the benefits of taking part in risk management far outweigh the danger of not preparing for potential problems. 07-14
  • 19. CASE STUDIES Case Study 7.1: de Havilland’s Falling Comet The de Havilland story is a fascinating example of a well-respected organization that sought to be first to market with a radical new technology and cut some important safety corners, with disastrous results. The story highlights the problems when innovations in design are pushed too far, too quickly. With its unique design and all the additional features that made it radical, the Comet should have been slowly integrated into production and use, instead of being rushed to market. De Havilland knew that Boeing was at work on its own design, the 707, and felt the need to be first to market. In this rush, they cut a number of safety corners with disastrous results. Questions: 1) How could risk management have aided in the development of the Comet? De Havilland was producing an aircraft that was so revolutionary in so many ways that they may have become overawed by the push in technology for its own sake. Certainly, the original Comet included several radical design elements (embedded engines in the wing root, square windows, pressurized cabin, and so forth) that any one of them could have been a significant advance on its own. Putting them all together into the same new aircraft design without adequate testing was a disaster. The question of how much testing is enough is difficult to answer but certainly, with so many innovations in one design, it is clear that they did not engage in sufficient risk assessment and design testing. 2) Discuss the various types of risk (technical, financial, commercial, etc.) in relation to the Comet. Develop a qualitative risk matrix for these risk factors and assess them in terms of probability and consequences. 07-15
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