Total Project Management

2 INSE 6230
The Importance of
Project Risk Management

Project risk management is the art and science of

identifying, analyzing, and responding to risk
throghot the life of a project and in the !est interests
of meeting project o!jecti"es#

$isk management is often o"erlooked in projects, !t it

can help impro"e project sccess !y helping select
good projects, determining project scope, and
de"eloping realistic estimates#
3 INSE 6230
Negative Risk

% dictionary definition of risk is &the possi!ility

of loss or injry#'

Negati"e risk in"ol"es nderstanding potential

pro!lems that might occr in the project and
ho( they might impede project sccess#

Negati"e risk management is like a form of

insrance) it is an in"estment#
* INSE 6230
Risk Can Be Positive

Positi"e risks are risks that reslt in good things

happening) sometimes called opportnities#

% general definition of project risk is an ncertainty

that can ha"e a negati"e or positi"e effect on meeting
project o!jecti"es#

+he goal of project risk management is to minimize

potential negati"e risks (hile ma,imizing potential
positi"e risks#
- INSE 6230
Project Risk Management
Processes

Risk management planning. /eciding ho( to

approach and plan the risk management acti"ities for the
project#

Risk identification. /etermining (hich risks are likely

to affect a project and docmenting the characteristics of
each#

Qualitative risk analysis. Prioritizing risks !ased on

their pro!a!ility and impact of occrrence#
6 INSE 6230
Project Risk Management
Processes (contd)

Quantitative risk analysis. Nmerically estimating

the effects of risks on project o!jecti"es#

Risk response planning. +aking steps to enhance

opportnities and redce threats to meeting project
o!jecti"es#

Risk monitoring and control. 0onitoring identified

and residal risks, identifying ne( risks, carrying ot
risk response plans, and e"alating the effecti"eness of
risk strategies throghot the life of the project#
Internal Risks
Project managers mst identify and
prioritize risks to the project at hand that
are internal to the organization# 1hen
looking internally, risks to the project may
in"ol"e the financial sol"ency of the
company, the a!ility for the company to
ha"e re2ired e2ipment and other
resorces on hand in time to spport the
project# Personnel isses sch as the
sickness or nanticipated termination of a
key team mem!er also can !e considered as
internal risks to the project#
External Risks
E,ternal risks are otside the control of the project
team and its host organization# 3ecase of this,
e,ternal risks are generally more difficlt to predict
and control# 4actors sch as a key "endor going
!ankrpt, economic phea"al, (ars, crime, and
other e"ents may directly impact the project5s
effecti"eness# Some risk may !e difficlt to foresee
sch as a mine in a foreign contry pro"iding
essential elements for the project !eing taken o"er
!y a re"oltionary go"ernment# +his kind of e"ent
directly threatens the project, !t often takes project
managers !y srprise !ecase of a deficient analysis
of e,ternal threats#
6 INSE 6230
Broad Categories of Risk

0arket risk

4inancial risk

+echnology risk

People risk

Strctre7process risk
80 INSE 6230
Sim!ation

Simlation ses a representation or model of a system

to analyze the e,pected !eha"ior or performance of the
system#

Monte Carlo analysis simlates a model9s otcome

many times to pro"ide a statistical distri!tion of the
calclated reslts#

+o se a 0onte :arlo simlation, yo mst ha"e three

estimates ;most likely, pessimistic, and optimistic< pls
an estimate of the likelihood of the estimate !eing
!et(een the most likely and optimistic "ales#
88 INSE 6230
Steps of a Monte Car!o
"na!#sis
8# %ssess the range for the "aria!les !eing considered#
2# /etermine the pro!a!ility distri!tion of each
"aria!le#
3# 4or each "aria!le, select a random "ale !ased on the
pro!a!ility distri!tion#
*# $n a deterministic analysis or one pass throgh the
model#
-# $epeat steps 3 and * many times to o!tain the
pro!a!ility distri!tion of the model9s reslts#
82 INSE 6230
Samp!e Monte Car!o
Sim!ation Res!ts for Project
Sched!e
83 INSE 6230
Sensitivit# "na!#sis

Sensitivity analysis is a techni2e sed to sho( the

effects of changing one or more "aria!les on an
otcome#

4or e,ample, many people se it to determine (hat the

monthly payments for a loan (ill !e gi"en different
interest rates or periods of the loan, or for determining
!reak=e"en points !ased on different assmptions#

Spreadsheet soft(are, sch as E,cel, is a common tool

for performing sensiti"ity analysis#
8* INSE 6230
Samp!e Sensitivit# "na!#sis for
$etermining Break%&ven Point
Semih
>ildirim
%/0S
3-30
6=8-
Some '(hat If) *estions

Sensiti"ity %nalysis

% sensiti"ity analysis calclates the conse2ences of

incorrectly estimating a "aria!le in yor NP? analysis#

If forces yo.

+o identify the "aria!les nderlying yor analysis#

+o focs on ho( changes to these "aria!les cold impact

the e,pected NP?#

+o consider (hat additional information shold !e

collected to resol"e ncertainties a!ot the "aria!les#
Semih
>ildirim
%/0S
3-30
6=86
Some '(hat If) *estions
Semih
>ildirim
%/0S
3-30
6=8@
Some '(hat If) *estions
Semih
>ildirim
%/0S
3-30
6=8A
Some '(hat If) *estions

Sensiti"ity %nalysis

4or e,ample, if the initial in"estment in the

project (ere B6#2 million, instead of B-#* m,
yo (old recalclate NP? as.
NP? C P? of :ash 4lo(s = In"estment ;:
0
<
C DBA06,66@ , 82 year annity factorE = 6#2 m
C DBA06,66@ , @#-36E F 6#2 m
C =$12!"#$ %
G /on9t forget to change the depreciation for the projectH
Semih
>ildirim
%/0S
3-30
6=86
Some '(hat If)
*estions

Sensiti"ity %nalysis

>o no( kno( ho( !adly the project cold !e thro(n off
corse !y changes in certain "aria!les#

Iooking at the pre"ios ta!le, can yo ans(er follo(ing

2estions.

1hat is the least critical "aria!le to the sccess of the projectJ

1hat are t(o most critical "aria!les to the sccess of the projectJ

>o can see that the principal ncertainties come from sales and
"aria!le costs, nder pessimistic assmptions, NP? cold !e
significantly negati"e

If yor sales are B8* mil# instead of B86 mil# the NP? is =B8#2 mil#

If yor "aria!le costs are set at A3K if sales, NP? is =B0#A mil#

4i,ed costs is the least critical "aria!le, e"en the pessimistic

assmption (old lead to a positi"e NP?
Semih
>ildirim
%/0S
3-30
6=20
Some '(hat If) *estions

Sensiti"ity %nalysis

No( that yo ha"e identified the critical sccess7failre factors, yo may

(ish to focs yor attention on them.

>o might collect additional data on sales and costs so as to resol"e some of the
ncertainty concerning these "aria!les

Sensiti"ity analysis is not a &cre=all'#

It does ha"e its dra(!acks.

+he reslts are am!igos since the terms &optimistic' and &pessimistic' are
completely s!jecti"e#

?aria!les are often related and it may !e difficlt to identify all of the
conse2ences associated (ith a change in one of them#

1hen "aria!les are interrelated, it may !e helpfl to look at ho( the project
(old fare nder different scenarios#

Scenario analysis allo(s s to look at different !t consistent com!inations of

"aria!les
Semih >ildirim %/0S 3-30
6=28
Some '(hat If)
*estions
Modi+ed Interna! Rate
,f Retrn % MIRR
1hile the internal rate of retrn ;I$$< assmes the cash
flo(s from a project are rein"ested at the I$$, the
modified I$$ assmes that positi"e cash flo(s are
rein"ested at the firm5s cost of capital, and the initial
otlays are financed at the firm5s financing cost#
+herefore, 0I$$ more accrately reflects the cost and
profita!ility of a project#
+he formla for 0I$$ is.