Risk Management Process

 Risk
 An uncertain event that, if it occurs, has a positive
or negative effect on project objectives
 Risk Management
A proactive attempt to recognize and manage
internal events and external threats that affect the
likelihood of a project’s success
o What can go wrong (risk event)
o How to minimize the risk event’s impact (consequences)
o What can be done before an event occurs (anticipation)
o What to do when an event occurs (contingency plans)

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The Risk Event Graph

FIGURE 7.1

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 Risk Management’s Benefits
 A proactive rather than reactive approach
 Reduces surprises and negative consequences
 Prepares the project manager to take advantage of
appropriate risks
 Provides better control over the future
 Improves chances of reaching project performance
objectives within budget and on time

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 The Risk
Managemen
t Process:
a 4 Step
Program

FIGURE 7.2

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 Managing Risk
 Step 1: Risk Identification
 Generate a list of possible risks through brainstorming,
problem identification and risk profiling.
o Macro risks first, then specific events

 Step 2: Risk Assessment

 Scenario analysis
 Risk assessment matrix
 Failure Mode and Effects Analysis (FMEA)
 Probability analysis
o Decision trees, NPV, and PERT
 Semi-quantitative scenario analysis

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 Partial Risk Profile for
Product Development Project

FIGURE 7.3

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Risk Breakdown Structure

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 Risk Assessment Form:
A Typical Example

Detection Difficulty is a misnomer- better to consider it as “ability to mitigate/avoid

upon discovering the problem” before having to resort to a full blown contingency
plan
Although the text shows how to calculate “risk value” by multiplying these
numbers together, be cautious about relying on such an arbitrary measure
FIGURE 7.4

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Impact Scales- One Example

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Risk Severity Matrix- an example

FIGURE 7.5

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 Managing Risk
 Step 3: Risk Response Development
 Mitigating Risk
o Reducing the likelihood an adverse event will occur
o Reducing impact of adverse event
 Transferring Risk
o Paying a premium to pass the risk to another party
o What multibillion$ industry handles this?
 Avoiding Risk
o Changing the project plan to eliminate the risk or condition
 Sharing Risk
o Allocating risk to different parties
 Lastly….Retaining Risk
o Making a conscious decision to accept the risk

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 Contingency Planning
 Contingency Plan
 An alternative plan that will be used if a possible foreseen risk
event actually occurs
 A plan of actions that will reduce or mitigate the negative impact
(consequences) of a risk event
 Risks of Not Having a Contingency Plan
 Having no plan may slow managerial response further
 Decisions made under pressure can be potentially more
dangerous and costly
 A Contingency plan is a BACK-UP (a Plan B)- so if it is
more attractive than Plan A, why is it a contingency??

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 Sample Risk Response Matrix

Note: although unclear from this text example the Detailed Response
Strategy and Contingency Plans are not the same thing.
We might Reduce the chance of User Backlash by designing a more
user-friendly interface. But, if we fail to do that, our Contingency Plan
is to have a large support staff help frustrated users navigate
FIGURE 7.7

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 Risk and Contingency Planning
 Technical Risks
 Backup strategies if chosen technology (or tech standard) fails
 Assessing whether technical uncertainties can be resolved
 Schedule Risks
 Use of slack increases the risk of a late finish
 Imposed duration dates (absolute project finish date)
 Compression of schedules due to shortened project duration date
 Costs Risks
 Time/cost dependency links: costs increase when problems take
longer to solve than expected.
 Avoid use the schedule to solve cash flow problems.
 Price protection risks (a rise in input costs) increase if the duration
of a project is increased.
 Funding Risks
 Changes in the supply of funds for the project can affect the
likelihood of implementation or successful completion of a project.

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Contingency Funding and Time Buffers
 Contingency Funds: Funds to cover project risks—
identified and unknown
o Size of funds reflects overall risk of a project
 Budget reserves
o Are linked to the identified risks of specific work packages
 Management reserves
o Are large funds to be used to cover major unforeseen risks
(e.g., change in project scope) of the total project
 Time Buffers
o Amounts of time used to compensate for unplanned delays in
the project schedule

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Contingency Fund Estimate-Sample

Figures in 000’s $
Note: the Management Reserve is too small for my comfort

TABLE 7.1

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 Managing Risk (cont’d)
 Step 4: Risk Response Control
 Risk control
o Execution of the risk response strategy
o Monitoring of triggering events
o Initiating contingency plans
o Watching for new risks
 Establishing a Change Management System
o Monitoring, tracking, and reporting risk
o Fostering an open organization environment
o Repeating risk identification/assessment exercises
o Assigning and documenting responsibility for managing risk

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 Risk Goes
Hand in
Hand with…

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 Change Management Control
 Sources of Change
1. Project scope changes
2. Implementation of contingency plans
3. Improvement changes
“Your prototype looks
great, but can we use a Err, I guess so, but…
web interface instead?”

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 Change Management Control
 The Change Control Process
 Identify proposed changes.
 List expected effects of proposed changes on schedule and
budget.
 Review, evaluate, and approve or disapprove of changes
formally.
 Negotiate and resolve conflicts of change, condition, and cost.
 Communicate changes to ALL parties affected.
 Assign responsibility for implementing change.
 Adjust master schedule and budget.
 Track all changes that are to be implemented.

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The Change
Control
Process

FIGURE 7.8

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Benefits of a Change Control System
1. Inconsequential changes are discouraged by the formal
process.
1. Side benefit- record for future who makes a lot of change requests
2. Costs of changes are maintained in a log.
3. Integrity of the WBS and performance measures is maintained.
4. Allocation and use of budget and management reserve funds
are tracked.
5. Responsibility for implementation is clarified.
6. Effect of changes is visible to all parties involved.
7. Implementation of change is monitored.
8. Scope changes will be quickly reflected in baseline and
performance measures.

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Change
Request
Form:
Sample

FIGURE 7.9

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 Change
Request
Log:
Sample

FIGURE 7.10

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 One way of incorporating Risk Planning:
PERT—Program Evaluation Review Technique
 Assumes each activity duration has a range that
statistically follows a beta distribution.
 PERT incorporates three time estimates for each
activity: an optimistic time ,a pessimistic time, and a
most likely time to represent activity durations.
1. These estimates usually gathered from polling individuals or
from looking at history for similar tasks
2. A weighted average and variance for each activity is computed
3. Knowing the weighted average and variances for each activity
allows the project planner to compute the probability of meeting
different project durations.

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 Activity and Project Frequency
Distributions

Why might activity distributions look so skewed?

Even with such skewed activity distributions, why is the overall
Project distribution symmetric?
FIGURE A7.1

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 Activity Time Calculations
The weighted average activity time is computed by
the following formula:

(7.1)

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Activity Time Calculations (cont’d)
The variability in the activity time estimates is
approximated by the following equations:
The standard deviation for the activity:

(7.2)

The standard deviation for the project:

t
(7.3)

Note the standard deviation of the activity is squared in this equation; this
is also called variance. This sum includes only activities on the critical
path(s) or path being reviewed.

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 Example
 Given the following activities, expected durations and
predecessor information, construct the AoN project
network and use the CPM.
Activity duration predecessors
a1 30 ---
a2 13 a1
a3 20 a1
a4 16 a2
a5 6 a3
a6 5 a5,a4

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Activity Times and Variances

TABLE A7.1

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Probability of Completing the Project
The equation below is used to compute the “Z” value
found in statistical tables (Z = number of standard
deviations from the mean), which, in turn, tells the
probability of completing the project in the time specified.

(7.4)

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 Text Example
 Consider the following 6-activity project
 Draw the AoN and use the CPM to compute the CP, slack
 Use PERT to analyze the chance the delays on CP activities
does not push the project duration beyond 67 days.
 Anything else we should consider?

Activity a m b te=(a+b+4m)/6 var=((b-a)/6)^2

a1 17 29 47 30 25
a2 6 12 24 13 9
a3 16 19 28 20 4
a4 13 16 19 16 1
a5 2 5 14 6 4
a6 2 5 8 5 1

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Example: Network, CP, Slack

a2 a4

a1 a6

a3 a5

FIGURE A7.2 (cont’d)

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 PERT, Considering the CP
Activity a m b te=(a+b+4m)/6 var=((b-a)/6)^2
a1 17 29 47 30 25
a2 6 12 24 13 9
a3 16 19 28 20 4
a4 13 16 19 16 1
a5 2 5 14 6 4
a6 2 5 8 5 1
nice they div ide by 6! ev en nicer the sqrts are integer!
CPM
paths a1->a2->a4->a6 64 thus this is the critical path
a1->a3->a5->a6 61 total slack = 3

Giv en a scheduled time: Ts 67

Chance project (considering CP) is less:

stdev(path) =sqrt( sum var(path) 6.00 still integer-w heee!

z = (Ts-Te)/stdev(Cpath) 0.5
so prob = 69% is the chance w e are not later than the scheduled time, considering the CP.

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Example: Possible Project Duration

FIGURE A7.3

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 Some Sample Z Values

A z-table listing such values will be provided to you on exams

TABLE A7.3

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 What Might We Have Forgotten?
 In the CPM, it is clear what the critical path is!
 With PERT we can now consider network sensitivity in
more detail.
 Extension of the textbook example- what additional analysis
would you do?

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 PERT: Caveats Abound
 For checking project duration considering multiple paths,
it’s not as simple as adding up the probabilities.
 Different paths usually have some activities in common.
 Once again, the whole assumption of independence of activity
durations must be considered.
 For complex or high-value projects, Monte Carlo
simulation is often a more appropriate approach.
 Beyond scope of this class, take DS851 or DS852 for more!

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 Group Exercise
 Sample question from a DS856 final exam: Use
the following table and a desired completion of 60 days
Activity predecessor a m b
A none 8 10 12
B A 5 7 9
C B 10 15 20
D A 10 15 50
E A 18 18 18
F C,E,D 20 22 42

 What is the likelihood that the CP exceeds 60 days?, How do PERT

calculations differ from that of CPM, using the “most likely” time?
 What should the PM worry about tracking besides CP activities?
 What doesn’t the PM need to worry about?

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