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9. Managing project risk Project risk management is the art and

science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives

Risk management is often overlooked, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates

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9. What is risk? A dictionary definition of risk is “the possibility

of loss or injury” Project risk involves understanding potential

problems that might occur on the project and how they might impede project success

Risk management is like a form of insurance; it is an investment.

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9. Why take risks?

OpportunitiesRisks

Try to balance risks and opportunities

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9. Risk utility Risk utility or risk tolerance is the amount of

satisfaction or pleasure received from a potential payoff Utility rises at a decreasing rate for a person

who is risk-averse Those who are risk-seeking have a higher

tolerance for risk and their satisfaction increases when more payoff is at stake

The risk neutral approach achieves a balance between risk and payoff

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9. Risk utility function

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9. Common source of risks for IT projects

Several studies show that IT projects share some common sources of risk

The Standish Group developed an IT success potential scoring sheet based on potential risks

McFarlan developed a risk questionnaire to help assess risk

Other broad categories of risk help identify potential risks

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9. McFarlan’s risk questionnaire1. What is the project estimate in calendar (elapsed) time?

( ) 12 months or less Low = 1 point

( ) 13 months to 24 months Medium = 2 points

( ) Over 24 months High = 3 points

2. What is the estimated number of person days for the system?

( ) 12 to 375 Low = 1 point

( ) 375 to 1875 Medium = 2 points

( ) 1875 to 3750 Medium = 3 points

( ) Over 3750 High = 4 points

3. Number of departments involved (excluding IT)

( ) One Low = 1 point

( ) Two Medium = 2 points

( ) Three or more High = 3 points

4. Is additional hardware required for the project?

( ) None Low = 0 points

( ) Central processor type change Low = 1 point

( ) Peripheral/storage device changes Low = 1

( ) Terminals Med = 2

( ) Change of platform, for example High = 3

PCs replacing mainframes

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9. Risk types Market risk: Will the new product be useful to the

organization or marketable to others? Will users accept and use the product or service?

Financial risk: Can the organization afford to undertake the project? Is this project the best way to use the company’s financial resources?

Technology risk: Is the project technically feasible? Could the technology be obsolete before a useful product can be produced?

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9. Technology riskDavid Anderson, a project manager for Kaman Sciences Corp., shared his lessons learned from a project failure in an article for CIO Enterprise Magazine. After spending two years and several hundred thousand dollars on a project to provide new client-server based financial and human resources information systems for their company, Anderson and his team finally admitted they had a failure on their hands. Anderson admitted that he was too enamored by using cutting edge technology and took a high-risk approach on the project. He "ramrodded through" what the project team was going to do, and he admitted that he was wrong. The company finally decided to switch to a more stable technology to meet the business needs of the company.

Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, 1998

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9. What is project risk? The goal of project risk management is to minimize

potential risks while maximizing potential opportunities. Major processes include Risk identification: determining which risks are likely

to affect a project Risk quantification: evaluating risks to assess the

range of possible project outcomes Risk response development: taking steps to

enhance opportunities and developing responses to threats

Risk response control: responding to risks over the course of the project

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9. Identifying risk Risk identification is the process of

understanding what potential unsatisfactory outcomes are associated with a particular project

Several risk identification tools include checklists, flowcharts, and interviews

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9. Potential risk areasKnowledge Area Risk Conditions

Integration Inadequate planning; poor resource allocation; poor integrationmanagement; lack of post-project review

Scope Poor definition of scope or work packages; incomplete definitionof quality requirements; inadequate scope control

Time Errors in estimating time or resource availability; poor allocationand management of float; early release of competitive products

Cost Estimating errors; inadequate productivity, cost, change, orcontingency control; poor maintenance, security, purchasing, etc.

Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assuranceprogram

Human Resources Poor conflict management; poor project organization anddefinition of responsibilities; absence of leadership

Communications Carelessness in planning or communicating; lack of consultationwith key stakeholders

Risk Ignoring risk; unclear assignment of risk; poor insurancemanagement

Procurement Unenforceable conditions or contract clauses; adversarial relations

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9. Quantifying risk Risk quantification or risk analysis is the

process of evaluating risks to assess the range of possible project outcomes

Determine the risk’s probability of occurrence and its impact to the project if the risk does occur

Risk quantification techniques include expected monetary value analysis, calculation of risk factors, PERT estimations, simulations, and expert judgment

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9. Expected Monetary Value

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Bid the Best Project by utilizing EMV and your personal risk tolerance

Project Chance of Outcome Estimated Profits

Project 150%50%

$120,000-$50,000

Project 2

30%40%30%

$100,000$50,000-$60,000

Project 370%30%

$20,000-$5,000

Project 4

30%30%20%20%

$40,000$30,000$20,000-$50,000

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9. Simulation for quantifying riskMcDonnell Aircraft Company used Monte Carlo simulation to help quantify risks on several advanced-design engineering projects. The National Aerospace Plan (NASP) project involved many risks. The purpose of this multi-billion dollar project was to design and develop a vehicle that could fly into space using a single-stage-to-orbit approach. A single-stage-to-orbit approach meant the vehicle would have to achieve a speed of Mach 25 (25 times the speed of sound) without a rocket booster. A team of engineers and business professionals worked together in the mid-1980s to develop a software model for estimating the time and cost of developing the NASP. This model was then linked with Monte Carlo simulation software to determine the sources of cost and schedule risk for the project. The results of the simulation were then used to determine how the company would invest its internal research and development funds. Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft.

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9. Expert judgment Many organizations rely on the intuitive

feelings and past experience of experts to help identify potential project risks

The Delphi method is a technique for deriving a consensus among a panel of experts to make predictions about future developments

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9. Response to risk Risk avoidance: eliminating a specific threat

or risk, usually by eliminating its causes Risk acceptance: accepting the

consequences should a risk occur Risk mitigation: reducing the impact of a risk

event by reducing the probability of its occurrence

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9. Risk Mitigation Strategies

Technical Risks Cost Risks Schedule Risks

Emphasize team supportand avoid stand aloneproject structure

Increase the frequency ofproject monitoring

Increase the frequency ofproject monitoring

Increase project managerauthority

Use WBS and PERT/CPM Use WBS and PERT/CPM

Improve problem handlingand communication

Improve communication,project goals understandingand team support

Select the most experiencedproject manager

Increase the frequency ofproject monitoring

Increase project managerauthority

Use WBS and PERT/CPM

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9. Risk planning A risk management plan documents the

procedures for managing risk throughout the project

Contingency plans are predefined actions that the project team will take if an identified risk event occurs

Contingency reserves are provisions held by the project sponsor for possible changes in project scope or quality that can be used to mitigate cost and/or schedule risk

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9. Risk management questions Why is it important to take/not take this risk in

relation to the project objectives? What specifically is the risk and what are the risk

mitigation deliverables? How is the risk going to be mitigated? (What risk

mitigation approach is to be used?) Who are the individuals responsible for implementing

the risk management plan? When will the milestones associated with the

mitigation approach occur? How much is required in terms of resources to

mitigate risk?

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9. Response to risks Risk response control involves executing the

risk management processes and the risk management plan to respond to risk events

Risks must be monitored based on defined milestones and decisions made regarding risks and mitigation strategies

Sometimes workarounds or unplanned responses to risk events are needed when there are no contingency plans

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9. Tracking risks Top 10 risk item tracking is a tool for

maintaining an awareness of risk throughout the life of a project

Establish a periodic review of the top 10 project risk items

List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item

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9. Example for risk tracking Monthly Ranking

Risk Item This

Month

Last

Month

Number of Months

Risk Resolution Progress

Inadequate planning

1 2 4 Working on revising the entire project plan

Poor definition of scope

2 3 3 Holding meetings with project customer and sponsor to clarify scope

Absence of leadership

3 1 2 Just assigned a new project manager to lead the project after old one quit

Poor cost estimates

4 4 3 Revising cost estimates

Poor time estimates

5 5 3 Revising schedule estimates

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9. Tools for tracking risks Databases can keep track of risks Spreadsheets can aid in tracking and

quantifying risks More sophisticated risk management

software helps develop models and uses simulation to analyze and respond to various project risks

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9. Good project risk management Unlike crisis management, good project risk

management often goes unnoticed Well-run projects appear to be almost

effortless, but a lot of work goes into running a project well

Project managers should strive to make their jobs look easy to reflect the results of well-run projects

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9. Discussion questions Can you avoid risks? What are common sources of risk for IT

projects? How does spreadsheet help to quantify risk? How does simulation help to quantify risk? What is the best way to plan for risks? What is the difference between contingency

plan and contingency reserve?

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9. Discussion questions Read and comment on interview questions

and answers at the end of this chapter. What question or which response do you find interesting and why?

Which group of risks (internal, external) described in this chapter is more critical to an information system project? Why? What is the most critical risk for any information system project?

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9. Discussion questions Is user involvement important to risk

management? Why? Comment on sources of risk:

continued management support top management style alignment with organizational needs user acceptance shifting goals and objectives

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9. Discussion questions Comment on sources of risk:

vendors consultants contract employees market and change fluctuation government regulation

What are effective ways of avoiding the risk of losing internal talents to external providers?