1. Copyright Course Technology 1999 1 Topic 8 : Project Risk Management Chapter 10

2. Copyright Course Technology 1999 2 The Importance of Project Risk Management Project risk management is the art and science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates

3. Copyright Course Technology 1999 3 What is Risk? A dictionary definition of risk is “the possibility of loss or injury” Project risk involves understanding potential problems that might occur on the project and how they might impede project success Risk management is like a form of insurance; it is an investment

4. Copyright Course Technology 1999 4 Why Take Risks? Because of Opportunities! Opportunities Risks Try to balance risks and opportunities

5. Copyright Course Technology 1999 5 Risk Utility Risk utility or risk tolerance is the amount of satisfaction or pleasure received from a potential payoff –Utility rises at a decreasing rate for a person who is risk-averse –Those who are risk-seeking have a higher tolerance for risk and their satisfaction increases when more payoff is at stake –The risk neutral approach achieves a balance between risk and payoff

6. Copyright Course Technology 1999 6 What is Project Risk Management? The goal of project risk management is to minimize potential risks while maximizing potential opportunities. Major processes include –Risk identification: determining which risks are likely to affect a project –Risk quantification: evaluating risks to assess the range of possible project outcomes –Risk response development: taking steps to enhance opportunities and developing responses to threats –Risk response control: responding to risks over the course of the project

7. Copyright Course Technology 1999 7 Table 10-1. Information Technology Success Potential Scoring Sheet

8. Copyright Course Technology 1999 8 Table 10-2. McFarlan’s Risk Questionnaire

9. Copyright Course Technology 1999 9 Market, Financial, and Technology Risk Market risk: Will the new product be useful to the organization or marketable to others? Will users accept and use the product or service? Financial risk: Can the organization afford to undertake the project? Is this project the best way to use the company’s financial resources? Technology risk: Is the project technically feasible? Could the technology be obsolete before a useful product can be produced?

10. Copyright Course Technology 1999 10 Risk Identification Risk identification is the process of understanding what potential unsatisfactory outcomes are associated with a particular project Several risk identification tools include checklists, flowcharts, and interviews

11. Copyright Course Technology 1999 11 Table 10-3. Potential Risk Conditions Associated With Each Knowledge Area

12. Copyright Course Technology 1999 12 Risk Quantification Risk quantification or risk analysis is the process of evaluating risks to assess the range of possible project outcomes Determine the risk’s probability of occurrence and its impact to the project if the risk does occur Risk quantification techniques include expected monetary value analysis, calculation of risk factors, PERT estimations, simulations, and expert judgment

13. Copyright Course Technology 1999 13 Risk Management Plans, Contingency Plans, and Contingency Reserves A risk management plan documents the procedures for managing risk throughout the project Contingency plans are predefined actions that the project team will take if an identified risk event occurs Contingency reserves are provisions held by the project sponsor for possible changes in project scope or quality that can be used to mitigate cost and/or schedule risk

14. Copyright Course Technology 1999 14 Table 10-5. Questions Addressed in a Risk Management Plan Why is it important to take/not take this risk in relation to the project objectives? What specifically is the risk and what are the risk mitigation deliverables? How is the risk going to be mitigated? (What risk mitigation approach is to be used?) Who are the individuals responsible for implementing the risk management plan? When will the milestones associated with the mitigation approach occur? How much is required in terms of resources to mitigate risk?

15. Copyright Course Technology 1999 15 Risk Response Control Risk response control involves executing the risk management processes and the risk management plan to respond to risk events Risks must be monitored based on defined milestones and decisions made regarding risks and mitigation strategies Sometimes workarounds or unplanned responses to risk events are needed when there are no contingency plans

16. Copyright Course Technology 1999 16 Top 10 Risk Item Tracking Top 10 risk item tracking is a tool for maintaining an awareness of risk throughout the life of a project Establish a periodic review of the top 10 project risk items List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item

17. Copyright Course Technology 1999 17 Table 10-6. Example of Top 10 Risk Item Tracking

18. Copyright Course Technology 1999 18 Topic 8 : (Continued) Project Procurement Management Chapter 11

19. Copyright Course Technology 1999 19 Importance of Project Procurement Management Procurement means acquiring goods and/or services from an outside source Other terms include purchasing and outsourcing Experts predict that by the year 2000 the worldwide information technology outsourcing market will grow to over $100 billion

20. Copyright Course Technology 1999 20 Why Outsource? To reduce both fixed and recurrent costs To allow the client organization to focus on its core business To access skills and technologies To provide flexibility To increase accountability

21. Copyright Course Technology 1999 21 Project Procurement Management Processes Procurement planning: determining what to procure and when Solicitation planning: documenting product requirements and identifying potential sources Solicitation: obtaining quotations, bids, offers, or proposals as appropriate Source selection: choosing from among potential vendors Contract administration: managing the relationship with the vendor Contract close-out: completion and settlement of the contract

22. Copyright Course Technology 1999 22 Figure 11-1. Project Procurement Management Processes and Key Outputs

23. Copyright Course Technology 1999 23 Procurement Planning Procurement planning involves identifying which project needs can be best met by using products or services outside the organization. It includes deciding –whether to procure –how to procure –what to procure –how much to procure –when to procure

24. Copyright Course Technology 1999 24 Collaborative Procurement Several organizations, even competitors, have found that it makes sense to collaborate on procurement for some projects Kodak worked with several competitors to develop the Advantix Advanced Photo System (see What Went Right? on pg. 303)

25. Copyright Course Technology 1999 25 Procurement Planning Tools and Techniques Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis Experts, both internal and external, can provide valuable inputs in procurement decisions

26. Copyright Course Technology 1999 26 Types of Contracts Fixed price or lump sum: involve a fixed total price for a well-defined product or service Cost reimbursable: involve payment to the seller for direct and indirect costs Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service

27. Copyright Course Technology 1999 27 Cost Reimbursable Contracts Cost plus incentive fee (CPIF): the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs

28. Copyright Course Technology 1999 28 Figure 11-2. Contract Types Versus Risk

29. Copyright Course Technology 1999 29 Statement of Work (SOW) A statement of work is a description of the work required for the procurement Many contracts, or other mutually binding agreements, include SOWs A good SOW gives bidders a better understanding of the buyer’s expectations

30. Copyright Course Technology 1999 30 Figure 11-3. Statement of Work (SOW) Template

31. Copyright Course Technology 1999 31 Solicitation Planning Solicitation planning involves preparing several documents: –Request for Proposals: used to solicit proposals from prospective sellers where there are several ways to meet the sellers’ needs –Requests for Quotes: used to solicit quotes for well-defined procurements –Invitations for bid or negotiation, and initial contractor responses are also part of solicitation planning

32. Copyright Course Technology 1999 32 Figure 11-4. Outline for a Request for Proposal (RFP)

33. Copyright Course Technology 1999 33 Solicitation Solicitation involves obtaining proposals or bids from prospective sellers Organizations can advertise to procure goods and services in several ways –approaching the preferred vendor –approaching several potential vendors –advertising to anyone interested A bidders’ conference can help clarify the buyer’s expectations

34. Copyright Course Technology 1999 34 Source Selection Source selection involves –evaluating bidders’ proposals –choosing the best one –negotiating the contract –awarding the contract It is helpful to prepare formal evaluation procedures for selecting vendors Buyers often create a “short list”

35. Copyright Course Technology 1999 35 Figure 11-5. Sample Proposal Evaluation Sheet

36. Copyright Course Technology 1999 36 Figure 11-6. Detailed Criteria for Selecting Vendors

37. Copyright Course Technology 1999 37 Contract Administration Contract administration ensures that the seller’s performance meets contractual requirements Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts Many project managers ignore contractual issues, which can result in serious problems (see What Went Wrong? on pg. 315)

38. Copyright Course Technology 1999 38 Suggestions on Change Control for Contracts Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided? Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls