Why Risk is Important
When a project is originally sold or contracted many decisions, agreements, and contracts are set. Yet at the beginning uncertainty is highest and overall project risk is actually the greatest. That does not mean the project should not go forward. At the beginning, the typical risks often include unclear objectives and requirements, unavailable subject matter experts and other resources, and hasty planning. There are appropriate responses to these identifiable risks as well as ways of dealing with unidentified risks.
Risk management provides the basis upon which to identify risks, estimate the amount of cost and schedule contingency reserves are needed to cover risk response actions to provide a level of confidence for meeting project objectives and to manage the risks as well as possible. As the implementation planning goes into detailed planning, the risk management is likely to focus more on areas surrounded with getting started with the teams work and the urgency of risk surrounding inexperienced team members, resource availability, poor role definition, unclear statements of work, compliance, and technology risks often take center stage.
Towards the implementation closure, it is common for risks such as poor quality, areas of disagreement with the customer, changes, and hitting budgets tend to become the focus. At this point, it feels like there is a lot of time, cost, and energy at stake and if you are dealing with risk that could hurt the client relationship, there may be a desire to throw anything and everything at the final phase risk solutions to make any negative customer impression go away.
As the organization shares their project risk experiences these tendencies can be anticipated and better managed. It is helpful for the organization to consider what PMI calls “The 6 Critical Success Factors for Project Risk Management” in the Practice Standard for Project Risk Management. An adapted version of them is listed here:
1. Indoctrinate project managers in risk management
2. Emphasize that risk management is everybody’s responsibility
3. Create an environment allowing for honest communication about uncertainty
4. Have high-level management support of risk management activities
5. Scale the risk effort appropriately for the project
6. Integrate risk management with overall good project management processes
The above list forms the basis for good negative risk management. However, the flip side of that is possibly even more important as positive risk (opportunity) management is where tremendous project management value is realized by the organization. We like to call that “Thinking Positive About Risk”.
It is through the opportunity identification and appropriate response development through innovation, creativity, and advanced problem solving, that the benefits of good project and people management are the most powerful. It is imperative that we protect our project from negative risk; but in order to achieve our full project, organizational, and team potential we need to strive to think positive about risk.
The first run of a simulation model can often yield results that are surprising to the modelers or to management — especially when there are several different sources of uncertainty that interact to produce an outcome. Even before an in-depth analysis of the results, simply seeing the range of outcomes — for example, how low and how high Net Profit can be, given our model and sources of uncertainty — can encourage a re-thinking of the risks we face, and the actions we can take.
Because a simulation yields many possible values for the outcomes we care about — from Net Profit to environmental impact — some work is needed to analyze the results. It is very useful to create charts to help us visualize the results — such as charts and cumulative frequency charts. We can summarize the range of outcomes using various kinds of statistics, such as the mean or median, the standard deviation, and variance, or the 5th and 95th percentile or Value at Risk.
Another tool for assessing model results is sensitivity analysis, which can help us identify the uncertain inputs with the biggest impact on our key outcomes. For example, a tornado chart can give us a visual summary of uncertainties with the greatest positive and negative impact on net profit.
Dealing with Critical Incidents in Project Management
What should a project manager do when things seriously fall apart? (Read now.)
Best Practices: It is recommended that this contingency is shown in the WBS and schedule. The project manager should take the lead in planning and controlling this – and treat it as a team contingency pool as opposed to creating a buffer for each and every activity or deliverable.
Minimax vs. Maximax
|Risk avoider||Risk seeker|
|Mostly concerned with control of loss||Mostly concerned with taking opportunities|
|Associated with Wald||Associated with Herzwald|
Issues vs. Risks
What is the difference between a risk and an issue? Probability. An issue is a manifested risk. It is happening. Whereas a risk has uncertainty. Issues are active problems. So issues and risks are closely related but there is an important differentiation.
(The answer is determined by this equation: 0.3 x 0.4 = 0.12.)
The answer is 12%.
Project Risk Management
“A little risk management saves a lot of fan cleaning.” – Anonymous