Five risk management rules for the project manager

1 Copyright 2011 Square Peg Consultiing, All Rights Reserved

Five rules for risk management A presentation

Produced by Square Peg Consulting, LLC

Orlando, Florida www.sqpegconsulting.com

What does PMBOK say about risk management?

• Risk: Events or conditions with uncertain potential to impact project objectives

• Risk management: Actions to minimize unfavorable impacts or maximize favorable possibilities


More than Chapter 11; More than the risk register

• I want to forecast a risk (Chapter 11)

• I want to take a risk (Decision policy and risk-adjusted

process)

• I want to be confident (Risk adjusted estimating paradigms)

• I want to test my hypothesis (Risk adjusted reasoning

paradigms)


Where’s the risk?

• In the baseline: work estimates, project architecture, product architecture

• Off the baseline: risk register possibilities

• In the ether: stakeholders, regulators, users, customers

• Friends and neighbors: portfolio and program dependencies

• Among opportunities: Do this, or perhaps that ….

• After it’s over: post-project adoption & support


5 Rules: Begin with the end in mind

1. There are no facts about the future: Facts are in the past;

estimates, biases, and perception are the future

2. Requirements (and tests) are never complete: No one can

imagine everything

3. Central tendency rules the metrics: Optimism and

pessimism find a balance

4. Merge bias dominates schedule risk: Confidence takes a hit

when paths, work streams, or projects join

5. If it’s mission critical, it often takes a model: PRA isn’t for

everything


(Rule 1) There’s no objective estimate

• Adjustment and Anchor bias: – Initial value sets anchor (Boss to Dilbert: I think it oughta cost …. )

– Anchor limits adjustment

• Representative bias: – A is part of B, B caused by A, A will cause B

– Because there’s progress now, there will be progress when …..

• Availability: – Imaginable, retrievable comparisons, easily recalled

– This is just like ……


Amos Tversky and Daniel Kahneman: “Judgments under Uncertainty”

(Rule 1) Utility maps perceived reality

• Utility maps reality to perception

• Hubris inflates estimated advantage and mitigating effects

• Dread inflates expected impacts


Hubris: This

solves

everything!

Dread: This is going to kill us!

Utility value

Objective

value

“Against the Gods” by Peter Bernstein

(Rule 1) Facts v. Future—Project balance sheet

• Sponsors are more optimistic (under estimate resources)

• Project managers are more pessimistic (over estimate risks)


Value

Proposition

for the

Project

Management’s investment

Scope

Time

Resources

Quality

Project’s use of

investment

Risk gap

(Rule 2) Requirements are never complete

• Sampling errors in the V model


Requirements

Specification (Backlog)

Vision

Strategy → goals

Validate

design/development

Verify deliverables

Correct

(refactor) errors

Sampled elicitation,

and elaboration

Iterate

(Rule 3) Central tendency is smoothing

• Asymmetrical extremes wash out • Pessimism and optimism balance

10 Copyright 2011 Square Peg Consultiing, All Rights Reserved Image: http://herdingcats.typepad.com/my_weblog/2011/05/deterministic-versus-probabilistic.html

Project

manager

Work package

manager

(Rule 3) Antithesis to Central Tendency

• Black swan: made famous by Nassim Taleb


(Rule 3) Extreme impact events

• 3 rules of Black swans 1. An outlier, beyond realm of reasonable expectation, with

nothing in the past to convincingly point to its possibility 2. Carries an extreme impact 3. After the fact, it’s “explainable” and “predictable”

• 1% doctrine* – If the impact is extreme, no matter it’s probability, consider

the event a certainty


* Ron Suskind: “The One Percent Doctrine”

(Rule 4) Merge bias dominates schedule risk

• Confidence degrades exponentially (geometrically) at joining paths


Confidence: 64% ≤ 4

Confidence: 80% ≤ 4 Before merge

After merge

(Rule 4) Buffer to mitigate merge bias

• Akin to Critical Chain method *


Plan slack (buffer) in one path

Eliyahu Goldratt: “Critical Chain”

Rule 5: It often takes a model

• Probabilistic risk analysis (PRA) of large number of conjunctive constituents may be meaningless (everything has to work = success)

• Model behavior, failures, and safety – Confirming (prediction & control)* – Exploratory (insight & understanding)*


*Steve Phelan, The Interaction of complexity and management

Rule 5: Three common models

1. FMEA: Failure Mode and Effects Analysis** – MilStd 1629, NASA, Others

2. FTA: Fault tree analysis – Bell Telephone, Boeing, others

3. Event trees; Event Logic Diagrams


** Also: FMECA, Failure Mode Effects and Criticality Analysis

Rule 5: FMEA is inductive


Inductive: Observations Cause

Rule 5: FMEA Example

• How would you control the loss of a nail ?



The author of this seminar

John C Goodpasture, PMP

Program manager, author, coach,

and instructor • PMI eSeminarsWorldsm instructor for

Advanced Risk Management, and Agile

Project Management

• Project coach in Europe, Asia, and the

United States

Portfolio manager and business unit

leader • Operations and IT professional

• System engineer in the Department of

Defense and the aerospace industry

[email protected]

johngoodpasture.com

Read more …..

• “PMBOK Risk Management Practice Standard”

• “Black Swan” by Nassim Taleb

• “Against the Gods” by Peter Bernstein

• “Judgments under Uncertainty” by Amos Tversky and Daniel Kahneman

• Probability and statistics online: Khan Academy videos (khanacademy.org)

• Schedule risk analysis by David Hulett (projectrisk.com)

• FMEA NASA Practice Standard, DoD MilStd 1629

• Project balance sheet (http://www.slideshare.net/jgoodpas/the-project-balance-sheet)

• “The Flaw of Averages” by Sam Savage



All done and ready for questions!

Five risk management rules for the project manager

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