1 Risk Analysis Avoiding Future Impacts

Futron Corporation 1120 NASA Road 1, Suite 310 Houston, Texas Phone Fax Risk Analysis Techniques Schedule, Cost, and Other Aspects INCOSE Heartland Chapter October 24, 2001

3 What Is Risk and Risk Management? Risk: »Definition: Risk is an event that threatens the accomplishment of one or more future goals or objectives »A Risk is described by the likelihood that an event will occur and the severity of the consequence of that event should it occur. »Risk is about a possible future event and is often confused with issues and problems. If the likelihood is certain or near certain, then it is not a risk. Risk Management: »Definition: Risk management is the formal process of identifying risks, assessing their magnitude, making decisions about how to handle, and then tracking the progress of the handling approach.

4 The Basic Risk Management Process PlanningIdentificationAnalysisHandling Communi- cation & Tracking Build the process Allocate Responsibilities Determine What is to be Risk-Managed Comparative Analysis Assign Attributes Assign Ownership Evaluate the Impact A Risk All Risks Prepare Decision-packages A Decision-Making Process Iterative with Analysis to select mitigation Keep everyone aware of decisions made Track progress Evaluate effectiveness

5 How to State a Risk – Formula for Success A risk statement is written as follows: »If A occurs because of B, then C will be the result. A is symptomatic, B is causal, C is the outcome Common errors: »Thinking that problems and issues are risks »Using the Risk Management Database as a tool to bring attention to problems and issues

6 Exercise 1a Identify whether the following contains a risk or a problem: You have an 16 year old son who has a job at a restaurant in Baybrook Mall. He wants to drive your car to work. … a shady part of town. He works the night shift. Plus: Hes moved into an apartment with another young man who has already had his drivers license revoked

7 Exercise 1a Identify whether the following is a risk or a problem: You have an 16 year old son who has a job at a restaurant in Baybrook Mall. He wants to drive your car to work. … a shady part of town. He works the night shift. Plus: Hes moved into an apartment with another young man who has already had his drivers license revoked

8 Risk Handling Exercise: Possible Handling Actions Accept »Take no action »Make contingency plans Avoid »Change requirement »Dont do … Transfer »Give to someone else better equipped to deal with risk »Insurance underwriters Mitigate »Reduce Likelihood »Reduce Consequence

9 Exercise 3a Were back to your son…what would you do with the risk of him having an accident for which he is at fault? He is currently uninsured. How would you Avoid this risk? … Transfer : He has a good driving record, lives at home What if your son is in a hi-risk pool and collision insurance is $4500 per year? Can you think of some Mitigation actions?

10 Outline What Is Risk Analysis? What Products Do We Need To Produce? How Are They Produced?

11 What is it?: Definition Risk Assessment (about a risk) »The process of estimating the probability and impact for each risk »Assigning other relevant attributes to a risk Risk Analysis (about all risks) »Combining and studying the effects of multiple risk assessments »A "snapshot" in time of the projects risk environment »Often done with a Monte Carlo simulation »Uses models to understand characteristics of the project »Results derived include Probability of meeting the project objective such as a completion date Contingency needed to achieve an acceptable level of likely project results Finding the risks which put the objective in greatest jeopardy Source: PMI RiskSIG Lexicon:

12 Assessment – Assigning A Value To A Risk From previous Module, we have learned how to construct the Risk Matrix using qualitative techniques M L VL H M L VH H M VH= Very High H= High M= Medium L= Low VL= Very Low 3 X 3 Space Station & Genesis 4 X 4s are common, e.g. JPL/MER Does not have to be symmetrical 5 X 5 not a requirement

13 Risk n After Assessment what do you have? Ordered sets of individual risks But, no clear understanding of the integrated risk environment Risk 1 Item Description REDYellowGreen Affinity Grouping Consolidation Classification Evaluation Top – 10 (or so) --- Risk n Risk 1 Item Description

14 Now what should I do with this stuff? Decision-making with piles of risks? How? These decisions need to be made based on the total integrated risk impact to the project – That integrated impact is often counter-intuitive The easy way out is to reduce all RED risks and most YELLOW risks, but can you afford it? If, so, then stop here! The easy way out is to reduce all RED risks and most YELLOW risks, but can you afford it? If, so, then stop here!

15 Outline What Is Risk Analysis? What Products Do We Need To Produce? How Are They Produced?

16 Typical Decision Support Data Products Risk-based reserve allocation Double Pareto Boxes Analytical Hierarchy Process Bubble charts Stochastic critical path analyses Risk-based schedule margin allocation Cumulative distribution functions and their utility in decision- makingCumulative distribution functions and their utility in decision- making Probability density functions and their utility in decision-making Cost utility functions and their utility in decision-making Stochastic trending charts Importance Values Hyperlink indicates that a sample follows

17 Double Pareto Box Focus management attention on drivers »Reduced list by order of magnitude: ~100 => ~10 (ISS Experience) Make effective decisions: »Which risks to accept »Which risks to manage The Double - Pareto box is a very useful decision support tool for making mitigation decisions Whining

18 Stochastic Critical Path Critical Paths »Deterministic »Stochastic Risk-based Sensitivity -- Problem-based Provide Decision Support and Watch Items for Project Manager »Where can I relax my vigil »Where/when should I intensely focus ATLO Launch Other Bus Components Star Tracker FSW 1 & 2 FSW 3 & 4 SRC Canister FSW 5 PPIC, C&DH, PCAs

19 AA Utility of Cumulative Distribution Functions, CDFs To provide the decision maker with information to make risk-handling investments Gives you a much richer decision-making environment Decisions will be more mature 100% 80% 60% 40% 20% 0% Cost What cost would you propose? A 100% 80% 60% 40% 20% 0% B Cost Which Option would you choose? Margin

20 8% Chance You will be ready!!! Probability Density Functions You were told to be ready to launch to the ISS on: 2/99 However, in your heart, you know that the ISS will not be ready for you!! What do you do? How do you plan? 76% chance current plan will deliver facility when space station is ready

21 Section Recap There exist tools and techniques that produce good quality information that relate risk and probable future outcomes that threaten cost, schedule and mission success These tools and techniques greatly enhances the decision-makers quality of decisions So, How is this done?? Reminder: Tools Handout

22 Outline What Is Risk Analysis? What Products Do We Need To Produce? How Are They Produced?

23 How Is It Done? Step 1. Decide What is to be risk-managed Step 2. Build a model Step 3. Select risks for simulation Step 4. Evaluate risks and input Step 5. Analyze, perform the trade studies Step 6. Create the decision-support reports for your project manager What? 1 Model 2 Select Risks 3 Evaluate 4 Analyze 5 Create Reports 6

24 There are only three classes of models needed Integrated Cost, Schedule, Technical »(Class participative Simulation) WBS Task 100 Task 101 Task 102 Task 103 Task 104 Task 105 Task 106 Event Trees Using Failure Rates From Analogies Mission Models »Performance »Mission success »(Overview and set-up only) Defects Re-work Process Models »Operations and support »(Example not presented)

25 CST Model – Project Network* CST Model WBS Task 100 Task 101 Task 102 Task 103 Task 104 Task 105 Task 106 Days, Facilities, Parts, People* *This is KEY! This is the part of the technique that integrates the cost and schedule risk impacts Probability Density Function Research Project Find Analogies Execute Questionnaire Analyze Databases What can go wrong? How likely is it? What is the cause? What would be the consequence? Monte Carlo Sim. Tool Days, Facilities, Parts, People Cumulative Distribution Function

26 Data Sources-1 Data Required »CST: Days at-risk, dollars at-risk »Mission: Probability of failure, failure rate Data Type »Probability distributions »3-point distributions are fine: Pessimistic, Most-likely, and optimistic Expert opinion Analogies and databases of prior experiences Risk Correlation Factors Project Risk Information Example: Q-Model

27 Data Sources-2 Projects are at-risk of significant overrun if they proceed before they are ready INVESTMENT IN DEFINITION PHASES VS GROWTH Definition Ratio, % Total Project Cost Invested In Definition Phases Project Cost Growth, % (Source: NASA Comptrollers Office)

28 Data Sources-3 System Management Process Maturity Deviations from norm introduce risk Optimizing Initial Performed Managed Defined Measured Reference: EIA/IS 731, System Engineering Capability Maturity Model Level

Futron Corporation 1120 NASA Road 1, Suite 310 Houston, Texas Phone Fax Hands-on Class Exercise Managing Cost Schedule and Technical Risk in a Project

30 Format of Class Exercise A simplified space project will be presented Project simulation of the project will be presented The model will be run to assess the impact of the risks The students will be presented with the risks as identified by the simulated project, question? Is the risk list complete? The students must select a mitigation plan from several options presented The case will be rerun with the selected mitigation plan A random number generator will be used to obtain final outcome The Genesis Model will be shown using a more complex simulation tool in order to demonstrate other capabilities

31 Risk List

32 Risk Managers Report Launch Window Cost Cap

33 Handling Options – Pick Your Poison! Accept – Build contingency planAccept Avoid – Switch to PVAvoid Transfer – Sorry, not allowed by your organization! Mitigate Consequence »Reduce mass »Add thermal margin »Buy better Telecom eqpt Mitigate Likelihood – Insert advanced tech development project up frontMitigate Likelihood Other??? Skip to Closing

34 Accept Its a trap!!! All you have done is add cost and more risk The likelihood and consequences of the risks are unchanged You have done nothing to help your case Unfortunately this is a very common approach and very ineffective

35 Avoid Results Launch Window Cost Cap

36 The Winner: Avoid & Outsource SW Launch Window Cost Cap

37 Mitigate Consequence Launch Window Cost Cap

38 Mitigate Likelihood Launch Window Cost Cap

39 What About Good Luck?? – 1.00

40 A few carry-away thoughts … "History is a vast early warning system." Norman Cousins Those who cannot remember the past are condemned to repeat it. George Santayana "Insanity: doing the same thing over and over again and expecting different results. Albert Einstein

Futron Corporation 1120 NASA Road 1, Suite 310 Houston, Texas Phone Fax Closing

42 QUALITY ASSURANCE AND THE SINKING OF THE LARGEST OFFSHORE OIL PLATFORM March 2001

43 For those of you who may be involved in project cost control (at whatever level),

44 please read this quote from a Petrobras executive,

45 extolling the benefits of cutting quality assurance and inspection costs,

46 on the project that sunk into the Atlantic Ocean off the coast of Brazil in March 2001.

47 "Petrobras has established new global benchmarks for the generation of exceptional shareholder wealth

48 through an aggressive and innovative programme of cost cutting on its P36 production facility.

49 Conventional constraints have been successfully challenged

50 and replaced with new paradigms appropriate to the globalised corporate market place.

51 Through an integrated network of facilitated workshops,

52 the project successfully rejected the established constricting and negative influences of prescriptive engineering,

53 onerous quality requirements, and outdated concepts of inspection and client control.

54 Elimination of these unnecessary straitjackets has empowered the project's suppliers and contractors to propose highly economical solutions,

55 with the win-win bonus of enhanced profitability margins for themselves.

56 The P36 platform shows the shape of things to come

57 in unregulated global market economy of the 21st Century.

58 And now you have seen the final result of this proud achievement by Petrobras.

59 QUIZ: 1.How many lives were lost to this cost saving effort and how did this impact the environment, needlessly? 2.Did the person giving this speech or anyone in upper management connected with this decision lose their job/bonus? 3.How much did Petrobras really save? 4.Does your company have a cost saving effort? If so, youd better know how to swim.