Integrated Risk and

Earned Value
Management
2007 NDIA Systems Engineering Conference
San Diego, CA

October 24, 2007

Paul Davis
Northrop Grumman Corporation
 Contents

ƒ Uncertainty management premises

ƒ State of industry
ƒ “As-Is” risk management
ƒ Baseline planning
ƒ Risk identification
ƒ Monitoring and control
ƒ Integration approaches
ƒ Summary

2
 Uncertainty Management Premises
ƒ A failure to meet project objectives is a failure in
uncertainty management
ƒ Uncertainty management
ƒ Risk management (RM) – minimizing
negative consequences
ƒ Opportunity management – maximizing
positive consequences
ƒ Risk management =
Uncertainty management
ƒ Uncertainty management
ƒ Affects project execution
ƒ Changes the project future by
ƒ Identifying uncertainty
ƒ Measuring uncertainty
ƒ Risk exposure (likelihood X impact)
ƒ Improving effective of uncertainty handling
ƒ Improving decision making to successfully achieve objectives
ƒ Improved decision making a key focus
3
 State of Industry
ƒ NDIA - Program Management
“Failure
“Failureto
tointegrate
integrateRM,
RM,cost-
cost-
Systems Committee Survey*
risk
riskanalysis,
analysis,and
andEVM
EVM
ƒ RM and EVM integration
contributes
contributesto tooverruns.
overruns.The
The
ƒ Oct 2003 to Jun 2004
program
programmanager
managerisisdenied
denied
ƒ 121 respondents
clear
clearvisibility
visibilityof
ofquantitative
quantitativeRM
RM
ƒ Study findings: that
thatcould
couldincrease
increasethethe
ƒ RM and EVM have separate probability
process owners 76% of the time probabilityofofmission
missionsuccess.”
success.”
Peter
PeterTeets,
Teets,former
formerUnder
Under
ƒ System engineering Secretary
Secretaryof
ofthe
theAir
AirForce
Force
ƒ Program management
ƒ Project control
ƒ Business/financial management
ƒ Risk management seldom predicts near-term issues
ƒ Majority (70%) strongly believes in the value of integrated RM and EVM
even though only 34% said they were successfully integrating them
* “Integrating Risk Management with Earned Value Management”, at
www.ndia.org/Content/ContentGroups/Divisions1/Procurement/
4
 Typical “As-Is” Risk Management
Scope
Direct & Manage Project Monitor and Control
Definition
Execution Project Work

Develop PM
Integrated Change
Plan
Control

• RM and PM operate as parallel processes

• Processes interface through planning & change control
Plan for Risk
• Minimal risk consideration in routine decision making
Management
• Risk management effectiveness not evaluated

Document Risk

Identify Analyze Handle Monitor

Risk Risk Risk Risk

5
 “As-Is” Risk Management Process
Capability – Cost Control
Descriptive
Past Performance StatisticsReferences
Contract
Variable: CPI Inverse

Anderson-Darling Normality Test Less than 25% of

A-Squared: 0.252
P-Value: 0.664 projects meet
Mean
StDev
1.10210
0.14044 budgeted costs
Variance 1.97E-02
Skewness 0.206006
Kurtosis 0.821268
N 11
0.8 0.9 1.0 1.1 1.2 1.3 1.4
Minimum 0.85000
1st Quartile 1.00000
Median 1.12000
3rd Quartile 1.18600
95% Confidence Interval for Mu Maximum 1.38000
95% Confidence Interval for Mu Xbar 1.102
1.00776 1.19645
1.1.0Ente r av e rage
1.1 , standard1.2de v iation, and spe c forlimits S 0.14
95% Confidence Interval Sigma
0.09813 0.24646
USL 1
X = ______ s = ______ USL = ______
95% Confidence LSL = _______
Interval for Median
LSL
95% Confidence Interval for Median 0.77 sigma
1.00000 1.18880

2. Labe l a Normal curv e USL

– Average LSL
– Standard deviation s
– USL (and s hade to LEFT for Area 1) S
– LSL (and s hade to LEFT for Area 2)

Average costs exceed X X+ s

0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 CPI-1
budgeted costs by 10.7%
6
 Project Baseline Planning Integrating Risk
Management
Scope Direct & Manage Project Monitor and Control
Definition Execution Project Work

Develop PM Integrated Change

Plan Control

••Plans that include risk handling with accomplishment criteria

• Risk identification that is comprehensive and decision based
• Risk handling activities/actions in project schedules and logs
Plan for Risk
• Scheduled risk management monitoring and control reviews
Management

Document Risk

Identify Analyze Handle Monitor

Risk Risk Risk Risk

Effective Risk Management Actions are Comprehensive

7
 A Structured Risk and Opportunity Identification (SROI)
Approach Is Effective in Identifying More Uncertainties
Comparison of Uniform Distribution of Risks with SRI Risks
Comparison of risk counts from uniformly distributed risks over a (5 X 5)
likelihood-by-impact linear risk space
Uniform with average
Distribution counts
SRI Risk Counts from 6 SRI pilot projects
16.00
Conclusions from analyzing risks from the six SRI pilot projects:
14.00
- Project risk identification identifies most high exposure risks (16-25)
12.00 - Low exposure risks (1- 5) remain unidentified even with SRI
10.00
Risk Count

8.00

6.00

4.00

2.00

0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Risk Exposure

Unidentified risks SRI identified risks Project-identified risks

• 50% of risks • 42% of risks • 8% of risks
• 20% of risk exposure • 55% of risk exposure • 25% of risk exposure

8
 Integrating Risk Monitoring and Control with Project
Monitoring and Control
Scope Direct & Manage Project Monitor and Control
Definition Execution Project Work

Develop PM
Integrated Change
Plan
Control

•• Quantifies cost,schedule,
Quantify cost, schedule,and
andperformance
technical risk exposure
impacts
•• Risk exposures
Include included in cost/schedule
performance-based forecasts
earned value metrics
Risk •• Estimates at complete
Include impacts (EAC) computed withforecasts
in technical/cost/schedule the
Management •addition of risk andatopportunity
Assess estimates exposures
complete probabilistically
Planning
• Risk management
considering tracked
uncertainty by EAC, CPI and SPI
distributions

Risk Qualitative & Risk Risk

Identification Quantitative Response Monitoring
Risk Analysis Planning and Control

Integrated RM & EVM assists decision making

9
 RM and EVM Integration Approaches
ƒ Barriers to risk management integration*
ƒ Contractual incentives ƒ Organizational
ƒ Technology - tools ƒ Baseline instability
ƒ RM or EVM process maturity ƒ Emotional
1.4
EAC Uncertainty
1.2
ƒ Internal/external management cultures

B u d g e t C o s t F a c to r
1 X

ƒ RM-EVM integration approaches 0.8

ƒ EAC with and without risk exposure

0.6
ƒ Residual uncertainties in forecasts
with statistical profiles and EAC ellipses 0.4

ƒ Risk handling earned value monitoring – 0.2

residual risks monitored against plans 0

ƒ Cost and schedule performance indices 0 2 4 6 8 10 12

(CPI and SPI) monitoring and control Performance Period

ƒ Focus on risk handling, not mechanics

* “Integrating Risk Management with Earned Value Management”, NDIA Study Report 2005
10
 “Earned Value” Monitoring Measures Risk Handling
Effectiveness
ƒ Monitors actual handling Planned RE Actual RE Lower Control Upper Control

performance against plans 30

25
ƒ Performance-based earned
R
value measures 20

Risk Exposure
ƒ A means to measure
uncertainty management 15

effectiveness performance
10

ƒ Measures effectiveness of
uncertainty management, 5

not just task completion

0
0 SRR
1 SDR
2 PDR
3 CDR
4 TRR
5 6

Milestone
ƒ Triggers uncertainty
management corrective actions
R
Performance-Based Earned Value is registered with the U.S. Patent and
11 Trademark Office by Paul Solomon.
 Cost/Schedule Performance Monitoring Provides
Leading Indicators for Corrective Action
Risk Management Process Effectiveness Monitoring
CPI SPI
1.12
Cost/Schedule Performance Index

Negative Trends in monthly

1.1
CPI and SPI triggers
1.08 corrective actions

1.06

1.04

1.02

0.98

0.96
9/5/2005 10/25/2005 12/14/2005 2/2/2006 3/24/2006 5/13/2006 7/2/2006

Calendar Time

12
 Summary
ƒ RM-EVM integration provides leading indicators that
increase response time and probability of success

ƒ A structured risk identification

approach increases risk
assessment comprehension

ƒ Quantified uncertainty metrics are

a basis for effective management

ƒ Alternative RM-EVM integration

approaches can be selected to meet project needs

ƒ Focus on uncertainty handling and project decision

making -- not on uncertainty computation mechanics

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