Project Risk Management

The Importance of Project Risk

Management
• Project risk management is the art and science of
identifying, assigning, and responding to risk
throughout the life of a project and in the best interests
of meeting project objectives
• Risk management is often overlooked on projects, but
it can help improve project success by helping select
good projects, determining project scope, and
developing realistic estimates
• Study by Ibbs and Kwak show how risk management is
neglected, especially on IT projects
• KPMG study found that 55 percent of runaway projects
did no risk management at all

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Table: Project Management Maturity by
Industry Group and Knowledge Area
 What is Risk?

• A dictionary definition of risk is “the possibility

of loss or injury”
• Project risk involves understanding potential
problems that might occur on the project and
how they might impede project success
• Risk management is like a form of insurance; it
is an investment

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 Risk Utility
• Risk utility or risk tolerance is the amount of
satisfaction or pleasure received from a
potential payoff
– Utility rises at a decreasing rate for a person who
is risk-averse
– Those who are risk-seeking have a higher
tolerance for risk and their satisfaction increases
when more payoff is at stake
– The risk neutral approach achieves a balance
between risk and payoff

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 Figure 10-1. Risk Utility
Function and Risk Preference

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 What is Project Risk Management?
The goal of project risk management is to minimize potential risks
while maximizing potential opportunities. Major processes include
– Risk management planning: deciding how to approach and plan
the risk management activities for the project
– Risk identification: determining which risks are likely to affect a
project and documenting their characteristics
– Qualitative risk analysis: characterizing and analyzing risks and
prioritizing their effects on project objectives
– Quantitative risk analysis: measuring the probability and
consequences of risks
– Risk response planning: taking steps to enhance opportunities
and reduce threats to meeting project objectives
– Risk monitoring and control: monitoring known risks,
identifying new risks, reducing risks, and evaluating the
effectiveness of risk reduction
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 Risk Management Planning

• The main output of risk management planning is

a risk management plan
• The project team should review project
documents and understand the organization’s
and the sponsor’s approach to risk
• The level of detail will vary with the needs of
the project

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Questions Addressed in a Risk
Management Plan

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 Contingency and Fallback Plans,
Contingency Reserves
• Contingency plans are predefined actions that
the project team will take if an identified risk
event occurs
• Fallback plans are developed for risks that have
a high impact on meeting project objectives
• Contingency reserve or allowances are
provisions held by the project sponsor that can
be used to mitigate cost or schedule risk if
changes in scope or quality occur

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 Other Categories of Risk
• Market risk: Will the new product be useful to
the organization or marketable to others? Will
users accept and use the product or service?
• Financial risk: Can the organization afford to
undertake the project? Is this project the best
way to use the company’s financial resources?
• Technology risk: Is the project technically
feasible? Could the technology be obsolete
before a useful product can be produced?

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 Risk Identification

• Risk identification is the process of

understanding what potential unsatisfactory
outcomes are associated with a particular project
• Several risk identification tools and techniques
include
– Brainstorming
– The Delphi technique
– Interviewing
– SWOT analysis

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

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 Quantitative Risk Analysis
• Assess the likelihood and impact of
identified risks to determine their magnitude
and priority
• Risk quantification tools and techniques
include
– Probability/Impact matrixes
– The Top 10 Risk Item Tracking technique
– Expert judgment

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Table: Sample Probability/Impact Matrix
for Qualitative Risk Assessment

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Figure: Chart Showing High-, Medium-,
and Low-Risk Technologies

Copyright Course Technology 2001 16

 Top 10 Risk Item Tracking
• Top 10 Risk Item Tracking is a tool for
maintaining an awareness of risk throughout
the life of a project
• Establish a periodic review of the top 10
project risk items
• List the current ranking, previous ranking,
number of times the risk appears on the list
over a period of time, and a summary of
progress made in resolving the risk item

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 Example of Top 10 Risk Item Tracking
Monthly Ranking
Risk Item This Last Number Risk Resolution
of Months Progress
Month Month
Inadequate 1 2 4 Working on revising the
planning entire project plan
Poor definition 2 3 3 Holding meetings with
of scope project customer and
sponsor to clarify scope
Absence of 3 1 2 Just assigned a new
leadership project manager to lead
the project after old one
quit
Poor cost 4 4 3 Revising cost estimates
estimates
Poor time 5 5 3 Revising schedule
estimates estimates

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 Expert Judgment

• Many organizations rely on the intuitive feelings

and past experience of experts to help identify
potential project risks
• Experts can categorize risks as high, medium, or
low with or without more sophisticated
techniques

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 Quantitative Risk Analysis

• Often follows qualitative risk analysis, but both

can be done together or separately
• Large, complex project involving leading edge
technologies often require extensive quantitative
risk analysis
• Main techniques include
– Decision tree analysis
– simulation

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 What Went Right?
McDonnell Aircraft Company used Monte Carlo simulation to help
quantify risks on several advanced-design engineering projects. The
National Aerospace Plan (NASP) project involved many risks. The
purpose of this multi-billion dollar project was to design and develop
a vehicle that could fly into space using a single-stage-to-orbit
approach. A single-stage-to-orbit approach meant the vehicle would
have to achieve a speed of Mach 25 (25 times the speed of sound)
without a rocket booster. A team of engineers and business
professionals worked together in the mid-1980s to develop a
software model for estimating the time and cost of developing the
NASP. This model was then linked with Monte Carlo simulation
software to determine the sources of cost and schedule risk for the
project. The results of the simulation were then used to determine
how the company would invest its internal research and
development funds. Although the NASP project was terminated, the
resulting research has helped develop more advanced materials and
propulsion systems used on many modern aircraft.

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 Risk Response Planning
• After identifying and quantifying risk, you must decide
how to respond to them
• Four main strategies:
– Risk avoidance: eliminating a specific threat or risk, usually
by eliminating its causes
– Risk acceptance: accepting the consequences should a risk
occur
– Risk transference: shifting the consequence of a risk and
responsibility for its management to a third party
– Risk mitigation: reducing the impact of a risk event by
reducing the probability of its occurrence

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Table 10-8. General Risk Mitigation Strategies for
Technical, Cost, and Schedule Risks

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 Risk Monitoring and Control

• Monitoring risks involves knowing their status

• Controlling risks involves carrying out the risk
management plans as risks occur
• Workarounds are unplanned responses to risk
events that must be done when there are no
contingency plans
• The main outputs of risk monitoring and control
are corrective action, project change requests,
and updates to other plans

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 Risk Response Control
• Risk response control involves executing the
risk management processes and the risk
management plan to respond to risk events
• Risks must be monitored based on defined
milestones and decisions made regarding risks
and mitigation strategies
• Sometimes workarounds or unplanned
responses to risk events are needed when there
are no contingency plans

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 Using Software to Assist in
Project Risk Management
• Databases can keep track of risks. Many IT
departments have issue tracking databases
• Spreadsheets can aid in tracking and quantifying
risks
• More sophisticated risk management software,
such as Monte Carlo simulation tools, help in
analyzing project risks

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 Results of Good Project Risk
Management
• Unlike crisis management, good project risk
management often goes unnoticed
• Well-run projects appear to be almost effortless,
but a lot of work goes into running a project
well
• Project managers should strive to make their
jobs look easy to reflect the results of well-run
projects

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