Risk Management

Topic 6
Risk Management

Paulo Faroleiro
Project Management
Part VII
Risk Management Risk Management

Parts Copyright 2014 Wiley

BASIC CONCEPT

Risk management focuses on:

• Known unknowns
• Proactive management

THE ALTERNATIVE TO PROACTIVE

MANAGEMENT IS REACTIVE MANAGEMENT,
ALSO CALLED CRISIS MANAGEMENT.
THIS REQUIRES SIGNIFICANTLY MORE
RESOURCES AND TAKES LONGER FOR
PROBLEMS TO SURFACE.
RISK MANAGEMENT

Risk Management Focuses On The Future

Risk And Information Are Inversely Related

Historically, We Focused Our Attentions On Schedule And

Cost Risk Management.

Today, Our Primary Emphasis Is On Technological Risk

Management:
• Can We Design It And Build It?
• What Is The Risk Of Obsolescence?
DEFINITION OF RISK

Riskevent= f(Likelihood, Impact)

Likelihood is the probability of occurrence

Impact is the amount at stake
TOLERANCE FOR RISK

From a PM point of view:

• Risk avoider

• Risk neutral

• Risk lover
DECISION-MAKING CATEGORIES

From a PM point of view:

• Complete uncertainty

• Relative uncertainty (partial

information)

• Complete certainty
DEVELOPING AND USING PAYOFF
TABLES
Establishing the
procedure to follow

Construct the
Payoff table

Decision-making
Decision-making Decision-making
under complete
under certainty under risk
uncertainty

Maximin Approach
Maximax Approach
Minimax regret Approach
Insufficient Reason Approach

Expected Monetary Value (EMV) Approach

Expected Opportunity Loss (EOL) Approach
Expected Value of Perfect Information (EVPI) Approach
FIVE STEPS TO DEVELOP PAYOFF
TABLE

• List all the alternatives.

• List the future consequences of each alternative.

• Identify the payoffs associated with each combination.

• Assess the degree of certainty that these combinations

will materialize

• Decide on a decision criterion.

RISK MANAGEMENT PROCESSES

Risk planning
Risk assessment
• Risk identification
• Risk analysis/quantification
Risk handling
Risk monitoring
 DEVELOPING
CONTINGENCY
PLANS
TYPES OF RISKS (GENERAL)

Business risks
Insurable (pure) risk
• Direct property damage
• Indirect consequential loss
• Legal liability
• Personnel
TYPES OF RISK (PMI METHOD)

External – unpredictable
External – predictable
Internal – non-technical
Internal – technical
Legal
RISK TYPES AT BOEING
(PROJECT ROCKET
DEVELOPMENT)

Financial risks

Market risks

Technical risks

Production risks
 RISK QUANTIFICATION

STAGE I STAGE II GUID- WARHEAD

ANCE

PROGRAM
SUMMARY

DESIGN LEGEND

TEST HIGH

MANU. MEDIUM

COST LOW
RISK HANDLING

Assumption (retention)

Avoidance

Control (mitigation)

Transfer
RISK PROBLEM-
SOLVING
 IDEA
GENERATION:
BRAINSTORMING
 SPECIAL
TOPICS IN RISK
MANAGEMENT
 FUTURE RISKS

Inexperienced

Customer’s
Knowledge

Experienced

Simple Complex
Contract Type
 FUTURE RISKS

Inexperienced

Customer’s
Knowledge

Experienced

Simple Complex
Contract Type
HOW MUCH RISK IS
ACCEPTABLE?

High tolerance for risk

Medium tolerance for risk

Low tolerance for risk

DEGREES OF DOWNSTREAM RISK
Low Risk

R&D

Manufacturing

Marketing

Time
DEGREES OF DOWNSTREAM RISK
Moderate Risk

Information
R&D Exchange

Manufacturing

Marketing

Time
DEGREES OF DOWNSTREAM RISK
High Risk

R&D

Manufacturing

Marketing

Time
PRIORITIZATION OF RISKS
Technical
Schedule Cost Performance
or Quality
First
(Highest)
Priority

Second
Priority

Third
Priority
 RISK CONTROLS
Too
Long
Schedule Length

Appropriate

Too Many
No Risk Management
Risk Plan Filters and
Gates

Low High
Risk Controls
 RISK CONTROL MEASURES

Extreme Range of Controls

Intensity of Controls

Standard
Controls

Low
Low High
Risk Intensity
WHICH METHOD TO USE?

Rigid
Policies/ Avoidance
Procedures
Project Procedural

Transfer
Documentation

Reduction

Assumption
Guidelines
High Low
Tolerance for Risk
THE RISK-REWARD MATRIX

High

Risk
Medium

Low

Low Medium High

Reward
INTERACTING RISKS

Desirable
Specification Limit
On Characteristic B
Product Feature A

Undesirable
Undesirable Desirable
Product Feature B
RISK PLANNING

Poor Risk
Management
Performance

Technical
Inability

Time
SUMMARY

1. There are six steps in risk management:

• Identify sources of risk
• Asses impact of individual risks
• Prioritize risks for further analysis
• Assess overall impact of risks
• Develop risk-reduction plans
• Control the identified risks

2. Techniques for identifying risk include

• Brainstorming
• A mechanistic process based on plan decomposition and
expert judgment
SUMMARY

3. There are two types of risk:

• Business risk
• Insurable risk

4. There are five sources of risk

• External—unpredictable
• External—predictable
• Internal—technical
• Internal—nontechnical
• Legal
SUMMARY

5. The impact of individual risks is a product of the likelihood

they will occur, the consequence if they do occur, and the
public perception of that consequence.

6. In assessing the combined effect of several risks, you can use

• A top-down approach, based on plan decomposition
• A bottom-up approach and Monte Carlo analysis
• Influence diagrams

7. There are three ways of reducing risk:

• Avoidance
• Deflection, either by insurance or through the contract
• Contingency
SUMMARY

8. Risks passed from client to contractor should be high

likelihood, low consequence risks. An alliance should be
formed to control coupled risks.

9. There are three types of contingency:

• Pure contingency
• Contingency with essential prior action
• Contingency with mitigating prior action

10. The strategy adopted depends on the type of risk.

SUMMARY

11. There are four steps in controlling risk:

• Draw up a risk management plan consisting of risk item–
tracking forms.
• Monitor progress of the significant few using the risk
register.
• Reassess risks at regular intervals, and at key milestones
or stage transition.
• Take action to overcome any divergence from plan.
Part VI
Risk Management

1. Prepare for exam