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Planning for Risk and Change Geoff Leese Sept 1999 revised Sept 2001, Jan 2003, Jan 2006, Jan 2007, Jan 2008, Dec 2008 (special thanks to Geoff Leese)

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Presentation on theme: "Planning for Risk and Change Geoff Leese Sept 1999 revised Sept 2001, Jan 2003, Jan 2006, Jan 2007, Jan 2008, Dec 2008 (special thanks to Geoff Leese)"— Presentation transcript:

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2 Planning for Risk and Change Geoff Leese Sept 1999 revised Sept 2001, Jan 2003, Jan 2006, Jan 2007, Jan 2008, Dec 2008 (special thanks to Geoff Leese)

3 Risk and risk management n Much “risk management” focussed on Health and Safety risks these days n Topic is much bigger than that ä Business risk ä Security risk ä Business continuity

4 Introduction n Is it worth doing? ä Cost/benefit analysis n What might affect it if we go ahead? ä Risk management

5 Cost-benefit analysis (1) n Cashflow projection n Payback period ä Time taken to “break even” n Return on Investment (Accounting Rate of Return) ä average annual profit/total investment*100

6 Cost-benefit analysis (2) n Present value ä value in year t/(1+r) t ä “r” is discount rate as decimal value n Discount factor tables are available! n Net Present Value of a project (NPV) ä Sum of discounted values of all cashflows for that project

7 Assessment of risk “Risky” projects less likely to start. Apply “Risk premium” to discount rates for NPV

8 Expected Value Weighted average of all possible outcomes. A useful measure for comparing contracts!

9 Risk Profile Analysis n Sensitivity analysis ä Vary each factor (in turn) by + or - 5% ä Recalculate costs/benefits ä Indicates sensitivity of project to each factor ä Helps with risk assessment n Monte Carlo Method? (see Cotterill. & Hughes Chap 7)

10 Decision trees (1) Improve or replace machinery? Market will expand, or not expand? D Improve Replace Expansion No expansion NPV (£) -100,000 75, , ,

11 Decision trees (2) n Improve - ä (0.2*-100,000) +(0.8*75,000) ä =£25,600 n Replace ä (0.2*250,000) + (0.8*-50,000) ä =£10,000 n Therefore choose Improvement !

12 Project Evaluation n Evaluate on economic,strategic and technical grounds n Assess all costs & income over lifetime of project n Discount accordingly n Allow for uncertainty! n Evaluate expected outcomes and choose strategies

13 Risk management (1) n Estimation errors ä Use historical data and keep records! n Planning assumptions ä State, and be prepared to revise them! n Eventualities ä Identify, and deal with them!

14 Risk management (2) n Hazard identification n Risk analysis n Risk prioritisation n Risk reduction n Risk monitoring

15 Hazard identification n Contract Factors (is it special or different?) n Customer Factors n Staff Factors n Project Methods n Technology Factors n Changeover Factors n Supplier Factors n Environment Factors Consider for each phase or product!

16 Risk Analysis (1) n Risk Value = Likelihood * Impact n Impact expressed as monetary values? ä Likely to be difficult or impossible! n Likelihood AND impact expressed using “arbitrary scale “ (1-10) n Most likely - 10, least likely - 1 n Highest impact -10, lowest impact - 1

17 Risk Analysis (2)

18 Risk Prioritisation n Prioritise by risk value? n Consider ä Confidence in assessment ä Compound risks ä Number of risks ä Cost of action n Risk Reduction Leverage (RRL) ä = (RV(before) - RV(after))/risk reduction cost ä Use the same units!

19 Risk Reduction (1) n Hazard prevention n Likelihood reduction n Risk avoidance n Risk transfer n Contingency planning

20 Risk Reduction (2) n Personnel shortfalls ä get the best, job matching, early scheduling, personal development, team building n Unrealistic estimating ä multiple estimates, use of different techniques, standardisation of methods, use of historical data

21 Risk Monitoring n Assign INDIVIDUALS to monitor risks n Part of “change plan” n Use PERT techniques to assess potential effects of uncertainties on project schedule ä 3 way estimating ä Activity standard deviations ä Probability & “Z” values” (Cott. & Hughes)

22 Evaluation and Review n Projects should be reviewed on completion n The risk management plan should be reviewed at the end of the project. ä Risks were successfully foreseen? ä Contingencies were properly planned for? ä Lessons to be learnt? ä Improvements to be made? ä should be built into the risk management plan

23 Change Control Plan n Vital part of the project plan n Changes are almost inevitable Example: the client originally asked for sweetcorn on all sandwiches but now wants sweetcorn on tuna only. What changes will need to be made? n Project roles should include a Project Librarian, responsible for logging change requests and responses.

24 Controlling Change n Risk of “scope creep” n One big change? Lots of little ones? n Poorly documented changes make maintenance and enhancement difficult n May comprise the integrity of the design n May comprise the profitability and deliverability of the contract

25 Change Control Plan n Change Request (CRF) n Change Specification n Change Analysis n Costing & feasibility n Change decision (Change Control Board) n Change implementation & documentation

26 And the downside - n Perceived as bureaucratic, expensive & time-consuming n Likely to annoy users and may affect their relationship with the company. n Will definitely annoy production staff. n Restricts responsiveness to user needs n Emphasises costs and control rather than user needs

27 Summary n Project evaluation ä should we do it? ä How should we do it? n Risk management - ä what COULD happen if we do? ä How will we cope if it does? n Change control

28 Further Reading ä ä Link to BSI risk management Link to BSI risk management


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