Managing Risk - Chapter 7 PDF

Because learning changes everything. ® Chapter Seven Managing Risk © 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-H...

Because learning changes everything. ® Chapter Seven Managing Risk © 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Where We Are Now © McGraw-Hill Education 2  Learning Objectives 07-01 Describe the risk management process. 07-02 Understand how to identify project risks. 07-03 Assess the significance of different project risks. 07-04 Describe the five responses to managing risks. 07-05 Understand the role contingency plans play in the risk management process. 07-06 Understand opportunity management and describe the five approaches to responding to opportunities in a project. 07-07 Understand how contingency funds and time buffers are used to manage risks on a project. 07-08 Recognize the need for risk management being an ongoing activity. 07-09 Describe the change control process. © McGraw-Hill Education 3  Chapter Outline 7.1 Risk Management Process 7.2 Step 1: Risk Identification 7.3 Step 2: Risk Assessment 7.4 Step 3: Risk Response Development 7.5 Contingency Planning 7.6 Opportunity Management 7.7 Contingency Funding and Time Buffers 7.8 Step 4: Risk Response Control 7.9 Change Control Management © McGraw-Hill Education 4  7.1 Risk Management Process You are planning to paint a house - WBS completed - Tasks scheduled - Projected costs calculated Q1: What can go wrong? © McGraw-Hill Education 5  7.1 Risk Management Process Risk Defined - An uncertain event or condition that if it occurs, has a negative effect on project objectives. - No amount of planning can overcome or control all risk. Risk Management - An attempt to recognize and manage potential trouble spots that may occur when the project is implemented. 1. Identify as many risk events as possible (what can go wrong), 2. Minimize their impact (what can be done about the event before the project begins), 3. Manage responses to events that do materialize (contingency plans), and 4. Provide contingency funds to cover risk events that materialize. © McGraw-Hill Education 6  7.1 Risk Management Process Risk Defined - An uncertain event or condition that if it occurs, has a negative effect on project objectives. - No amount of planning can overcome or control all risk. Risk Management - An attempt to recognize and manage potential trouble spots that may occur when the project is implemented. Think through what could go wrong (risk events) Develop contingency plans in case they happen, to minimize the effect © McGraw-Hill Education 7  7.1 Risk Management Process Q2: What is one risk event that could occur when studying for your advanced diploma? What is one contingency you could put in effect? © McGraw-Hill Education 8  Risk Event Graph © McGraw-Hill Education FIGURE 7.1 9  Risk Event Graph - The risks are greatest at the beginning of a project when there are more unknowns: reliability of suppliers, accuracy of estimates, etc. - Less risks as one understands the project better - Earlier risk events are discovered, the less costly to fix or mitigate © McGraw-Hill Education 10  Benefits of Risk Management - A proactive rather than reactive approach: anticipate issues and put plans in place - Reduces surprises and negative consequences - Improves chances of reaching project objectives on time, within budget, and of meeting required performance. © McGraw-Hill Education 11  7.2 Risk Management - Step 1: Risk Identification - Pull together a risk management team consisting of core team members and other relevant stakeholders - Generate a list of possible risks that could affect the project through brainstorming and other problem identifying techniques. - Use risk breakdown structure (RBS) in conjunction with work breakdown structure (WBS) to identify and analyze risks. - Identify the macro risks that affect the entire project first then specific areas can be checked. - Use risk profile (a list of questions) to alert you to possible risks © McGraw-Hill Education 12  The Risk Breakdown Structure (RBS) © McGraw-Hill Education FIGURE 7.3 13  Partial Risk Profile for a Product Development Project © McGraw-Hill Education FIGURE 7.4 14  Partial Risk Profile for Getting your Advanced Diploma Project Q3: What are questions you could ask to ensure you are considering risk factors that could affect you finishing your degree on time? © McGraw-Hill Education 15  7.3 Step 2: Risk Assessment – Calc the magnitude of the risk Scenario analysis assesses the significance of each risk event in terms of probability or likelihood and impact or consequence. Four Approaches: 1. Risk assessment form evaluates the severity (impact) , probability of risk events and its detection difficulty. 2. Failure Mode and Effects Analysis (FMEA) Risk Value = Impact x Probability x Ease of Detection 3. Risk severity matrix prioritizes which risks to address. 4. Probability analysis uses statistical techniques in assessing project risk. © McGraw-Hill Education 16  Risk Assessment Form used on an information systems project involving an operating systems (OS) upgrade. 2. Failure Mode and Effects Analysis (FMEA) Impact × Probability × Ease of Detection = Risk Value © McGraw-Hill Education FIGURE 7.6 17  3. Risk Severity Matrix 5 User Interface Backlash problems 4 Likelihood Red zone (major risk) 3 Yellow zone (moderate risk) Green zone (minor risk) System freezing 2 Hardware malfunc- tioning 1 Impact 1 2 3 4 5 © McGraw-Hill Education FIGURE 7.7 18  7.4 Step 3: Risk Response 1. Mitigating Risk 2. Avoiding Risk 3. Transferring Risk 4. Escalating Risk 5. Retaining Risk and planning in case it happens © McGraw-Hill Education 19  7.4 Step 3: Risk Response 1. Mitigating Risk a. Reducing the likelihood or chance that the event will occur by addressing what is causing the risk a. E.g., Do a market research before developing a new product b. Reducing the impact that the adverse event would have on the project by planning around it a. E.g., Have two teams work independently on two approaches to develop the same product 2. Avoiding Risk - Changing the project plan to eliminate the risk or condition. E.g., plan to conduct a ceremony indoors instead of outdoors 3. Transferring Risk - Passing risk to another party that can better manage it Examples: Fixed-price contracts, insurance, Build-Own-Operate-Transfer (BOOT) provisions The contractor will pay for any risk event that materializes; therefore, a monetary risk factor is added to the contract bid price. © McGraw-Hill Education 20  7.4 Step 3: Risk Response 4. Escalating Risk - Notifying the appropriate people within the organization of the threat for them to deal with it. - E.g., employees unhappy with pay escalated to HR 5. Retaining Risk and planning in case it happens - Making a conscious decision to accept the risk of an event occurring - Develop a contingency plan in case the risk event occurs - E.g., what to do if there is a snowstorm © McGraw-Hill Education 21  7.5 Contingency Planning Contingency Plan Defined - Is an alternative plan that will be used if a possible foreseen risk event becomes a reality. - Is a plan of action that will reduce or mitigate the negative impact of the risk event. - A key distinction between a risk response and a contingency plan is that a response is part of the actual implementation plan and action is taken before the risk can materialize - The contingency plan is not a part of the initial implementation plan and only goes into effect after the risk is recognized. © McGraw-Hill Education 22  7.5 Contingency Planning Risks of the absence of a contingency plan - May lead to panic and acceptance of the first remedy suggested - Make the decision making under pressure which can be dangerous and costly - Implement a poorly thought-out plan © McGraw-Hill Education 23  7.5 Contingency Planning Contingency planning evaluates alternative remedies for possible foreseen events before the risk event occurs and selects the best plan among alternatives. Conditions for activating the implementation of the contingency plan should be decided and clearly documented. The plan should include a cost estimate and identify the source of funding. All parties affected should agree to the contingency plan and have authority to make commitments. All contingency plans should be communicated to team members so that surprise and resistance are minimized. © McGraw-Hill Education 24  7.5 Contingency Planning Here is an example: A high-tech niche computer company intends to introduce a new “platform” product at a very specific target date. The project’s 47 teams all agree delays will not be acceptable. Their contingency plans for two large component suppliers: One supplier’s plant sits on the San Andreas Fault, which is prone to earthquakes. The contingency plan has an alternative supplier, who is constantly updated, producing a replica of the component in another plant. Another key supplier in Toronto, Canada, presents a delivery risk on their due date because of potential bad weather. This contingency plan calls for a chartered plane (already contracted to be on standby) if overland transportation presents a delay problem. © McGraw-Hill Education 25  Contingency Planning - Risk Response Matrix 1. The first step is to identify whether to mitigate, avoid, transfer, escalate, or retain the risk. 2. identify contingency plans in case the risk still occurs If the risk occurs © McGraw-Hill Education FIGURE 7.8 26  Types of Risk 1. Technical Risks - Backup strategies if chosen technology fails - Assess whether technical uncertainties can be resolved 2. Schedule Risks - Expedite or “crash” the project to get it back on track - Schedule activities in parallel - Use the best people for high-risk tasks 3. Cost Risks - Risk of Inflation – Monitor prices of materials 4. Funding Risks - Evaluate the risk of reductions in funding—a cut in the project © McGraw-Hill Education 27  7.6 Opportunity Management An opportunity is an event that can have a positive impact on project objectives. E.g., favorable weather 1. Identify the opportunity 2. Assess the opportunity in terms of likelihood and impact 3. Plan responses There are five types of response to opportunity © McGraw-Hill Education 28  7.6 Opportunity Management The five responses to opportunities: 1. Exploit - E.g., put in extra hours of work during good weather 2. Share - E.g., pay contractors a premium to get the work done during good weather 3. Enhance - E.g., bring in newer equipment to accelerate the work rate 4. Escalate - E.g., tell the CEO of the construction company of an opportunity to construct office buildings on land close to the project the company is working on 5. Accept - Be willing to take advantage of the opportunity if it occurs, but not taking action to pursue it. Don’t get distracted © McGraw-Hill Education 29  7.7 Contingency Funding and Time Buffers Contingency Funds - Are funds used to cover project risks - For control purposes, contingency funds are divided into 1. Contingency reserves—cover identified risks and allocated to specific segments or deliverables of the project 2. Management reserves—are allocated to risks associated with the total project Time Buffers - Are amounts of time used to cushion against potential delays in the project Add to activities with severe risks Add to merge activities that are prone to delays Add to noncritical activities to reduce the likelihood that they will create another critical path Add to activities that require scare resources © McGraw-Hill Education 30  Budget Estimate © McGraw-Hill Education TABLE 7.1 31  7.8 Step 4: Risk Response Control – Execution phase Risk Register – formal document that summarizes the first three steps - Details all identified risks, including descriptions, category, probability of occurring, impact, responses, contingency plans, owners, and current status Risk Control Process involves - Executing the risk response strategy - Monitoring triggering events - Initiating contingency plans - Monitoring the risk response - Watching for new risks - Establishing a change control process - formal changes in the scope, budget, and/or schedule of the project © McGraw-Hill Education 32  Monitoring Project Risks Project managers need to monitor risks just as they track project progress. Risk assessment and updating need to be part of every status meeting and progress report system. The project team needs to be on constant alert for new, unforeseen risks. Readiness to respond to the unexpected is a critical element of risk management. Management needs to be sensitive that others may not be forthright in acknowledging new risks and problems. Project managers need to establish an environment in which participants feel comfortable raising concerns and admitting mistakes © McGraw-Hill Education 33  7.9 Change Control Management Sources of Change - Project scope changes: customers request a new feature - Implementation of contingency plans - Improvement changes Need a Change Management System 1. Identify proposed changes 2. List expected effects of proposed change(s) on schedule and budget 3. Review, evaluate, and approve or disapprove of changes formally 4. Negotiate and resolve conflicts of change, condition, and cost 5. Communicate changes to parties affected 6. Assign responsibility for implementing change 7. Adjust master schedule and budget 8. Track all changes that are to be implemented © McGraw-Hill Education 34  Change Control Process © McGraw-Hill Education FIGURE 7.9 35  Benefits of Change Control Systems 1. Inconsequential changes are discouraged by the formal process. 2. Costs of changes are maintained in a log. 3. Integrity of the WBS and performance measures is maintained. 4. Allocation and use of contingency and management reserves are tracked. 5. Responsibility for implementation is clarified. 6. Effect of changes is visible to all parties involved. 7. Implementation of change is monitored. 8. Scope changes will be quickly reflected in baseline and performance measures. © McGraw-Hill Education 36  Sample Change Request © McGraw-Hill Education FIGURE 7.10 37  Change Request Log © McGraw-Hill Education FIGURE 7.11 38  Summary 7.1 Risk Management Process 7.2 Step 1: Risk Identification 7.3 Step 2: Risk Assessment 7.4 Step 3: Risk Response Development 7.5 Contingency Planning 7.6 Opportunity Management 7.7 Contingency Funding and Time Buffers 7.8 Step 4: Risk Response Control 7.9 Change Control Management © McGraw-Hill Education 39