BUSM1276 Lecture 1.Ppt

7/27/2019 BUSM1276 Lecture 1.Ppt

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BUSM1276 Evaluating and

Managing Project Risk

SESSION 1: Introduction,

definitions, etc.


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Course Aims and Objectives:

To understand the concepts of risk in a projectcontext.To explore the principles and processes ofsystematic project risk management.To apply these principles and processes in asimulated project environment (RMSAssignment).

To develop a Risk Oriented Thinking


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Course topics:

Risk.Threat & Opportunity.Risk and quality.Risk and uncertainty.Risk contexts:

Project and project stakeholder organisational structures.Project decision-making.

Systematic risk management.Risk identification.Risk analysis.Risk response.Risk monitoring and control.

Recording and evaluating risk outcomes.Building a risk management systemDisaster Recovery and Emergency ManagementQuantitative Risk Management.


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Suggested reading...

HB 436: 2004. Risk Management Guidelines Companion to AS/NZS 4360. Standards

Australia. NSW.AS/NZS 4360 (2004) Risk management. Standards Australia. NSW. ISBN 0-7337-0147-7.

AS/NZS 3931 (1998) Risk analysis of technological systems-application guide. StandardsAustralia. NSW. ISBN 0-7337-1711-X.

Raftery, J. (1994) Risk analysis in project management. E & F N Spon Ltd. (an imprint ofChapman-Hall). London. ISBN 0-419-18420-1.

Flanagan, R & Norman, G. (1993) Risk management and construction. Blackwell Science

Publications. London. ISBN 0-632-02816-5.Chicken, J. (1994) Managing risks and decisions in major projects. Chapman and Hall, UK.

Chapman, C.B. and Ward, S.C. (1997) Project risk management: processes, techniques andinsights. John Wiley and Sons. UK.

Parkin, J. (1996) Management decisions for engineers. Thomas Telford. London.

Smith, N.J. (1999) Managing risk in construction projects. Blackwell Science Ltd. Oxford.

Edwards, P.J. & Bowen, P.A. (2005) Risk Management in Project Organisations. UNSWPress/Elsevier Science International.


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Why has Risk Management Become So

Important?Always importantPost September 11Crisis in world insurance marketsCorporate Collapses

EnronWorldcomHIHOnetel

Old Insurance model may no longer be validEmergence of Corporate Governancehttp://en.wikipedia.org/wiki/Corporate_governance

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way acorporation is directed, administered or controlled. Key elements of good corporate governance principles

include honesty, trust and integrity, openness, performance orientation, responsibility and accountability,mutual respect, and commitment to the organization
http://en.wikipedia.org/wiki/Corporate_governance


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When it goes wrongEsso/Longford

2 dead, class-action, criminal prosecution

http://en.wikipedia.org/wiki/1998_Esso_Longford_gas_explosion

Collins Class Submarines

2.5 years behind schedule, budget blow-out, specifications not methttp://en.wikipedia.org/wiki/Collins_class_submarine

HIH

http://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htm

Southern Cross Station Redevelopment

Claim for losses on project - contractor unable to meet deadlines in contract due to conflict with rail operator. VicGov forced to pay $32.25m for contract variations.

Pan Pharmaceutical

http://www.tga.gov.au/recalls/pan.htm

Dell Laptop batteries Recall https://www.dellbatteryprogram.com/

New Holden Commodore safety buckle Recall http://carsguide.news.com.au/story/0,20384,20734114-21822,00.html

Myki $500million project already ?? months latehttp://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2

Connext new trains braking system problem

Poor risk management 'costing billions

http://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-risk

New Terminal At Heathrow, Credit Crunch, Bail out Packages, Where the hell are you (Campaign), iphone roll out in Oz,
http://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-riskhttp://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-riskhttp://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2https://www.dellbatteryprogram.com/http://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htmhttp://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-riskhttp://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2http://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2http://carsguide.news.com.au/story/0,20384,20734114-21822,00.htmlhttp://carsguide.news.com.au/story/0,20384,20734114-21822,00.htmlhttps://www.dellbatteryprogram.com/https://www.dellbatteryprogram.com/http://www.tga.gov.au/recalls/pan.htmhttp://www.tga.gov.au/recalls/pan.htmhttp://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htmhttp://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htmhttp://en.wikipedia.org/wiki/Collins_class_submarinehttp://en.wikipedia.org/wiki/1998_Esso_Longford_gas_explosion


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Approximately 20% of risk is insurable. The

remaining 80% must be managed effectively.


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UNIVERSALITY OF RISK

We are all exposed to risk during our lives.We all have to deal with risk.For good risk management, the differences

arise in how we perceive those risks, andhow we respond to them.

We cannot avoid risk completely. Retreat from the world does not work! A recluse living

in a cave still faces risks every day


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RISK

There is a 60% chance of rain showers

occurring over the area during the next

24 hours.The flight might be delayed.

Which of these is a risk?


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DEFINITION OF RISK

Risk is:

The chance that an adverse event willoccur during a stated period of time.


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DEFINITION OF RISK

This definition implies:

That probability (chance) is associated withthe of occurrence of an event.That the event has a measurable adverse(unfavourable) outcome (impact,consequence).That the risk event and its consequences are

each constrained to a period of time.

Weather forecast example: There is a 75% chance of heavy showers occurring over the next

5 days. (RM: beware putting washing out to dry; take an umbrella to work; and cancel

Wednesdays golf date.)


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ELEMENTS OF RISK

EVENT

Consequence / Impact



ProbabilityOf Occurrence

Duration of exposure to event (Time)Duration of exposure to consequences (Time)

latent defect phenomenon in most construction projects; or the medical negligence

issue


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DEFINITION OF RISK(AS/NZS 4360: 2004)

Risk is:

The chance of something happening thatwill have an impact on objectives.


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RE-DEFINITION OF RISK

Risk is:

The chance of something happening during a

stated period of time that will have an impact on

objectives.


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Threat:There is a chance P that event E will occur during theT period, leading to X adverse consequences.

Opportunity:There is a chance P that, if opportunity C is exploitedduring the T period, benefit B be will be obtained

THREAT & OPPORTUNITY RISK STATEMENTS


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RISK AS A SOCIAL CONSTRUCT

Risk is a social construct:

It arises out of (human) societys world views and

perceptions of events and their impacts.

Different people will have different views aboutwhat constitutes risk; the source of risk events;

and their treatment.

A persons attitude towards risk is not necessarily

consistent over all risks, nor even for specific risksover time.


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EXAM

PLES

A society which knows nothing about surgery or disease

may have no concept of health risks.

Some insurance companies have removed the term acts

of God from their policy contracts, as this has no meaningfor some people.

A heart surgeon might be: highly risk averse at the operating table;

off-hand about putting a plaster on the cut she got from a thorn on

a rose bush in the garden;and very anxious to place a $10,000 bet on a particular horse in a

well-known race!


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RISK CONTEXTS

One persons (organisations) risk threat may

be anothers risk opportunity.

Example:The takeover company from the earlier example is presented with anew investment opportunity.


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RISK CONTEXTS

The context is the key to

identifying risks.


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RISK CHARACTERISTIC

Risk is usually dynamic:

For a risk event, the probability andimpact elements of risk may changeover the time element.


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EXAMP

LES

The technical risk of accident caused by falling from height may be

constant (in terms of probability and impact) for the full period of a

pipeline project.

The probability of the same risk might start as low, then increase

sharply, and finally decline again as a multi-storey building project

emerges from the ground, structural floors are added, and the external

scaffold is eventually removed from the completed faade. The impact

is likely to remain the same throughout the period.

For a software development project, the probability of the risk of

losing key data occurring may be constant throughout, but the impact is

likely to increase over time.For an open-air entertainment event, the probability of weather risk

will change over time (seasons), as also will the type of impact (winter

storms and summer heat).


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RISK AND QUALITY

On the other hand, achieving high quality outcomes

may involve taking more risks.

The difference between risk and quality

management lies in their overall objectives.Quality management is more about aiming to get

things right.

Risk management is concerned with dealing with

the possibility that something will go wrong.These could be seen as points on the same

continuum...


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Gettingthings right

Avoidingthings going

wrong

RISKMANAGEMENT

QUALITYMANAGEMENT

Value?


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RISK AND UNCERTAINTY

Uncertainty is associated with risk because of

the inherent variability of one or more of the

three risk elements (probability, impact and

time).


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EXAMPLEO

FUNCERTA

INTY

Assume that the financial performance of three alternativeprojects (A, B, C) has been modelled financially, using MonteCarlo simulation, each with 360 iterations. The IRR outcomesfor each project are tabled below:


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EXAMPLEO

FUNCERTA

INTY


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EXAMPL

EOFUNC

ERTAINTY


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EXAMPLEO

FUNCE

RTAINT

Y

Project B has the greatest range of IRR values encountered(6.0% to 8.5%) and is therefore associated with the greatestIRR uncertainty.Project A has the smallest range of IRR values encountered(6.5% to 8.0%) and is therefore associated with the least

IRR uncertainty.Project C is less risky than B, but more risky than A, interms of IRR outcome.


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Uncertainty is the lack of completeinformation about any or all of the

characteristics of a potential risk event:the probability of occurrence,the magnitude of impact,the period of exposure.


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Treating uncertainty may be a matter of settingboundaries on the range of values the risk analyst(decision-maker) is prepared to consider in terms

of the magnitude of impact, or the period ofexposure associated with a particular risk; or ofassigning a particular distribution to theprobability of occurrence.


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EXAM

PLE

A property consultant may consider that a rental value of

below $200, or above $275, per m2 p.a. for a particular

building would be highly unlikely to occur.

This sets the acceptable bounds of rental rate uncertainty(for that consultant assessing that property) as $200 -$275,

and the consultant would proceed to model the financial

risk of the property investment on this basis.

Theoretically, however, an actual rental value might be

found below or above the given range.


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Some economists see setting the bounds of

uncertainty in terms of the analysts capacity to

be surprisedby the outcome (Gallie, 1957).

Human judgement is therefore brought into

play, and with it the potential for human error.


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Uncertainty may also be dealt withlinguistically.

Different verbal descriptors may beassigned to the elements ofprobability, impact and time.


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Risk Likelihood Descriptors

RISK CONSEQUENCE DESCRIPTOR


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RISK CONSEQUENCE DESCRIPTOR


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RISK ASSESSMENT MATRIX


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IMPACT

DURATION

PROBABILITY OF OCCURRENCE

Rare

Unlikely

Moderate

Likely

Almost

Certain

Catastrophic

Moderate

Insignificant

3. Medium

5. Long

1. Short

Major

Minor

A three-dimensional matrixfor a linguistic concept ofrisk.

(P x I x D)

AS4360AS3931

(5 x 5 x 5)


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COMPLEXITY OF RISK

Risk is a complex concept because:

The characteristics of risk are dynamic.

The characteristics of risk decision-makers are

inconsistent.Uncertainty is often associated with one or more

of the risk elements.

HENCE THE NEED FOR GOOD RISK MANAGEMENT!


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RISK MANAGEMENT: DEFINITION

Risk management is:

A systematic approach to dealing

with risk(Edwards, 2001)


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WHY USE RISK MANAGEMENT?

Using a systematic approach to risk management encourages:

More effective decisions.Effective delivery of products and services.

Effective allocation and use of resources.

High standards of customer service.

High standards of accountability.

Creativity and innovation in management practice.Improved capacity to manage in the face of competing obligations.

Improved organisational morale.

Flexibility in meeting objectives.

Transparent decision-making.

(Knight, 1999)Are all these claims valid?


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RISK MANAGEMENT: PROCESS

Systematic risk management comprises:

Establishing the risk context.

Identifying risks.Analysing risks.

Responding to risks.

Monitoring and controlling risk decisions.

Recording and evaluating outcomes.


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Summing it up

Risk is dynamicRisk is contextualUncertainty brings the riskRisk for one may be an opportunity for the otherJust insuring against the risk is not practicing RiskManagementRisk Management is a systematic approach to identifying &managing risks


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Next session:

Contexts for project risk.Objectives.Organisational structures.Decision making

BUSM1276 Lecture 1.Ppt

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