7-1 Risk Management

7-2 Risk Risk (in general, in finance): deviation, variance The change can be positive or negative Project risk: any possible event that can negatively affect the viability of a project Project Risk = (Probability of Event) (Consequences of Event) Project opportunity: possible events that can positively affect the project Expected value of the risk

Risk management Risk management = the art and science of identifying, analyzing, and responding to risk factors throughout the life of a project and in the best interest of its objectives. 7-3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

7-4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Risk Vs Amount at Stake Phase 1 Conceive (C) Phase 2 Develop (D) Phase 3 Execute (E) Phase 4 Finish (F) Time $ Value Increasing Risk Total Project Life Cycle Amount at stake PlanProduce Opportunity and risk Period of highest risk impact Combined risk impact

7-5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Process of Risk Management What is likely to happen? What can be done? What are the warning signs? What are the likely outcomes?

7-6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Four Stages of Risk Management 1.Risk identification: reasonable risk factors 2.Analysis of probability and consequences 3.Risk mitigation strategies 4.Control and documentation: knowledge base

7-7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Identification: Risk Clusters Financial Technical Contractual/Legal Commercial Execution Common Types Absenteeism Resignation Staff pulled away Time overruns Skills unavailable Ineffective Training Specs incomplete Change orders

7-8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Risk Factor Identification  Brainstorming meetings  Expert opinion  Past history  Multiple (or team based) assessments

Project Risk Scoring I. Identify factors and assess the probability and consequences of failure Measure the factors individally and their effect Summarize them Two factors: –Technological failure –Market failure

Project Risk Scoring I. Probability of failure: –Probability of techn. failure: 0.3 –Probability of market failure: 0.1 Consequence of failure: –Consequence of techn. failure: 1000 dollar –Consequence of market failure: dollar Overall project risk: 0.3* *10000

7-11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Risk Impact Matrix Consequences Likelihood High Low High

7-12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Project Risk Scoring II. 1.Identify factors and assess the probability (P f ) and consequences (C f ) of failure 2.Create scaling for both dimensions that is generally used in the whole organization 3.Calculate overall probability & consequence 4.Calculate overall risk factor

Project Risk Scoring II. Sources (factors) of risks: –Maturity: low (0.2) –Complexity: low (0.1) –Dependency: high (0.8) Effects (consequences) of failure: –Cost: medium (0.5) –Schedule: medium (0.4) –Reliabilty: medium (0.6) –Performance: high (0.8)

7-14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Risk Mitigation Strategies Accept/ignore: if risk is not strong Minimize Share Transfer Contingency Reserves – Task contingency – Managerial contingency Mentoring & Cross training

7-15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Control & Documentation Help managers classify and codify risks, responses, and outcomes Change management report system answers What? Who? When? Why? How?

7-16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Project Risk Analysis & Management Extends risk management over project’s life cycle Key Features of PRAM  Risk management follows a life cycle  Risk management strategy changes over the project life cycle  Synthesized, coherent approach

7-17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Nine Phases of Risk Assessment 1.Define 2.Focus 3.Identify 4.Structure 5.Clarify ownership of risks 6.Estimate 7.Evaluate 8.Plan 9.Manage

Thanks for your attention! 7-18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall