Appendix

Managing Risk

Introduction

Risk management: The act or pratice of dealing with risk

Risk management focuses on:

Known unknowns

Proactive management

The alternative to proactive management is reactive management, also called crisis management. This requires significantly more resources and takes longer for problems to surface.

Risk management focuses on the future

Risk and information are inversely related

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Introduction

Historically, we focused our attentions on schedule and cost risk management.

Today, our primary emphasis is on technological risk management:

Can we design it and build it?

What is the risk of obsolescence?

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Definition Of Risk

Risk = f(Likelihood, Impact)

Likelihood is the probability of occurrence

Impact is the amount at stake

event

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Tolerance For Risk

Risk avoider

Risk neutral

Risk lover

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Decision-Making Categories

Complete uncertainty

Relative uncertainty (partial information)

Complete certainty

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Maximin ApproachMaximax ApproachMinimax regret ApproachInsufficient Reason Approach

Developing and Using Payoff Tables

Establishing the procedure to follow

Construct thePayoff table

Decision-makingunder certainty

Decision-making under completeuncertainty

Decision-makingunder risk

Expected Monetary Value (EMV) ApproachExpected Opportunity Loss (EOL) ApproachExpected Value of Perfect Information (EVPI) Approach

Five steps to develop payoff table

1. List all the alternatives.

2. List the future consequences of each alternative.

3. Identify the payoffs associated with each combination.

4. Assess the degree of certainty that these combinations will materialize

5. Decide on a decision criterion.

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Risk Management Process

Risk planning

Risk assessment

Risk identification

Risk analysis/quantification

Risk handling

Risk monitoring

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Risk Planning

Risk planning: Process of developing and documenting interactive strategy and methods for identifying risk issues, developiing risk handling plan and monitoring how riskd have changed

Is a program of action:

Develop and document an organized, comprehensive and ininteractive risk management strategy

Determine the methods to be used to execute the risk management strategy

Plan for adequate resources

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Risk Assessment

Risk assessment: Process of identifying and anlyzing program areas and critical process risks to increase the likelihood of meeting cost, performance and schedule objectives.

Risk assessment components Risk identification: Process of Identifying all

potential risks: cost, funding, schedule, contract relationships, technical and political risks

Risk anlysis: Process of examine each identified risk issue to estimate the likelihood and predict the impact on the project (Cost-Schedule-Technical Evaluation)

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Risk Handling

Risk handling: includes specific methods and techniques to deal with known risks, identifies who is responsible for the risk issues, and provides an estimate of the cost and schedule with reducing the risk

Options for handling risk: Risk assumption/retention

Risk avoidance Mitigating

Risk control/prevention

Risk transfer

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Pro

ject

Pro

ced

ura

lD

ocu

men

tati

on

Pro

ject

Pro

ced

ura

lD

ocu

men

tati

on

GuidelinesGuidelinesHighHigh LowLow

Tolerance for RiskTolerance for Risk

RigidPolicies/

RigidPolicies/

ProceduresProcedures

AssumptionAssumption

ReductionReduction

TransferTransfer

AvoidanceAvoidance

Which Method to Use?

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Risk Monitoring

Risk monitoring: process of systematically tracking and evaluating the performance of risk handling actions and providing inputs to updating risk handling strategies

Some techniques suitable for risk monitoring:

Earned Value (EV)

Program metrics

Schedule performance monitoring

Technical performance measurement (TPM)

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Prioritization of Risks

ScheduleSchedule CostCostTechnical

Performanceor Quality

TechnicalPerformance

or Quality

First (Highest)Priority

First (Highest)Priority

Second PrioritySecond Priority

ThirdPriorityThirdPriority

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Classroom Activity 12a

Evaluate your organisations ability to manage risk.

What can you do to improve the way you manage the risk of projects.

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Questions?