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INSTRUCTORS RESOURCE MANUAL

CHAPTER SEVEN
Risk Management

1.Do you agree with the following statement: With proper planning it is possible to eliminate most/all risks from a project. Why or why not? 2.In evaluating projects across industries, it is sometimes possible to detect patterns in terms of the more common types of risks they routinely face. Consider the development of a new software product and compare it to coordinating an event, such as a school dance. What likely forms
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of risk would your project team face in either of these circumstances? 3.Analyze Figure 7.2 (degree of risk over the project life cycle). What is the practical significance of this model? What implications does it suggest for managing risk? 4.What are the benefits and drawbacks of using the various forms of risk identification mentioned in the chapter (e.g., brainstorming meetings, expert opinion, etc.)? 5.What are the benefits and drawbacks of using a qualitative risk assessment matrix for classifying the various types of project risk?

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6.What are the benefits and drawbacks of using a quantitative risk assessment tool such as the one shown in the chapter? 7.Give some examples of projects using each of the risk mitigation strategies (accept, minimize, share, or transfer). How successful were these strategies? In hindsight, would another approach have been better? 8.Explain the difference between managerial contingency and task contingency? 9.What are the advantages of developing and using a systematic risk management approach, such as PRAMs methodology? Do you perceive any disadvantages with this approach?
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10. Consider the following statement: The problem with risk analysis is that it is possible to imagine virtually anything going wrong on a project. Where do you draw the line; in other words, how far do you take risk analysis before it becomes overkill? How would you respond to this observation?

CHAPTER SEVEN
PROJECT PROFILE Project Moses: Keeping Venice Above Water INTRODUCTION PROJECT MANAGERS IN PRACTICE Mohammed Al-Sadiq, Aramco Oil Company 7.1 RISK MANAGEMENT: A FOUR-STAGE PROCESS Risk Identification Analysis of Probability and Consequences Risk Mitigation Strategies Use of Contingency Reserves Other Mitigation Strategies Control and Documentation PROJECT PROFILE Ferris Wheels: Bigger and Higher
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7.2 PROJECT RISK MANAGEMENT AN INTEGRATED APPROACH Summary Key Terms Solved Problems Discussion Questions Problems Case Study 7.1: DeHavillands Falling Comet Case Study 7.2: Tacoma Narrows Bridge Integrated Project Project Risk Assessment Internet Exercises PMP Certification Exam Questions Bibliography

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TRANSPARENCIES
7.1

RISK VERSUS AMOUNT AT STAKE

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7.2 TYPICAL RISK FACTORS

1. FINANCIAL RISKS

2. TECHNICAL RISKS

3. COMMERCIAL RISKS

4. EXECUTION RISKS

5. CONTRACTUAL OR LEGAL RISKS

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7.3 QUALITATIVE RISK ASSESSMENT MATRIX

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7.4 QUANTITATIVE RISK ASSESSMENT CALCULATIONS

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7.4 QUANTITATIVE RISK ASSESSMENT CALCULATIONS (COND)

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7.4 QUANTITATIVE RISK ASSESSMENT CALCULATIONS (COND)

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7.5 CONTINGENCY DOCUMENT FOR ADJUSTMENTS TO PROJECT PLAN

Probable Event ADJUSTMENT TO PLANS

Absenteesim

Resignation

Pull-aways

Unavailable Staff/skills

Spec Change

Added work

Need more training

Vendors late

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DISCUSSION QUESTIONS

10.

Do you agree with the following

statement: With proper planning it is possible to eliminate most/all risks from a project. Why or why not?

It is not possible to eliminate risk from a project regardless of planning. The role of risk management is to identify and analyze potential risks associated with a project. Once risks have been identified, preventative action or contingency plans may be established to reduce the impact of the risk on the success of the project. While this presents a way to help control the effects of risk, it does not eliminate risk from the project management equation.

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11.

In evaluating projects across industries,

it is sometimes possible to detect patterns in terms of the more common types of risks they routinely face. Consider the development of a new software product and compare it to coordinating an event, such as a school dance. What likely forms of risk would your project team face in either of these circumstances?

A new software product would include a higher amount of risk than a school dance. The software project would be subject to risk related to market volume/price, technical risk, financing, scheduling, resignation, organizational, and operating risk. Coordinating
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a school dance would run risks associated with availability of staff and an appropriate facility as well as adequate funding. Both projects would involve risk variables such as cost estimate risk, integration risk, acts of God, inadequate skills availability, and absenteeism.

12.

Analyze Figure 7.2 (degree of risk over

the project life cycle). What is the practical significance of this model? What implications does it suggest for managing risk?

The diagram demonstrates the relationship between level of opportunity and risk throughout the project life cycle. This is helpful in
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determining points at which uncertainty is at its highest and when the greatest amount of risk may be realized. Project teams can focus their risk analysis in these areas or use the diagram to give weight or perspective to potential risk variables. The diagram also depicts the riskreward (opportunity) trade off for various stages of a project. Managers can use this information to determine if risk at a certain point is worth the potential payoffs.

13.

What are the benefits and drawbacks of

using the various forms of risk identification mentioned in the chapter (e.g., brainstorming meetings, expert opinion, etc.)?
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Brainstorming, expert opinion and multiple assessment approaches share similar benefits and drawbacks. The benefits include a variety of experience and multiple angles of analysis due to different points of view and areas of expertise. Synergy among group members may also create a wider range of risk identification. Although there are shortcomings to these approaches. It may be difficult to come to an agreement or consensus in such processes due to conflicting opinions and personal issues. Brainstorming, expert opinion (when performed in a forum setting rather than through the Delphi approach) and multiple assessments may also have difficulty reaching consensus due to egos/authority issues and functional biases
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(when members of different departments are present). When the Delphi technique is employed many of these issues are resolved because members do not meet face-to-face. The process becomes anonymous reducing interference of egos and personal problems. However, the Delphi approach can take considerable time to complete successfully.

Past history is a unique approach to the other three. It uses historical facts to reach conclusions, which removes many obstacles that the other techniques encounter. The benefits of risk identification through past history is that, if past projects were well documented, information related to similar projects can easily be found and project teams can avoid pitfalls by learning
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from the mistakes of others. Unfortunately, the drawback is that past performance does not always predict future performance. Projectspecific data (i.e. competitive environment, economy, etc.) is unaccounted for. Thus, past history may do little to forecast present risks.

14.

What are the benefits and drawbacks of

using a qualitative risk assessment matrix for classifying the various types of project risk?

Qualitative risk assessment matrix is beneficial in providing a visual depiction of potential risk factors. The matrix enables the project team to prioritize risk based on severity of consequences
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and likelihood of occurrence. For instance, those that rest in the high portion of both consequences and likelihood would be top priorities during project planning. Drawbacks of the matrix may revolve around differences in opinion as to where risk variables should be placed on the matrix. It may also create tunnel vision where the team fails to acknowledge the significance of tasks that fall outside of the high priority areas.

15.

What are the benefits and drawbacks of

using a quantitative risk assessment tool such as the one shown in the chapter?

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One benefit of such tools is in the ability to set thresholds based on calculations of probability and consequence. A numerical point system creates an easy way to compare different risk variables. This point system also provides more detail than a matrix in depicting the level of risk. Additionally, once the point system is designed it can be used over and over to compare risk factors of future projects. Problems with these tools may arise in disagreement over assigning points and creating thresholds. Also, the point system is not an exact science. It relies on rules of thumb and may be subject to interpretation.

16.

Give some examples of projects using

each of the risk mitigation strategies (accept,

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minimize, share, or transfer). How successful were these strategies? In hindsight, would another approach have been better?

This question requires students to do some online research, investigating projects and analyzing them in terms of various risk mitigation approaches. One suggestion is to assign a specific project, such as the new Airbus A-380 and have the students research it, address relevant risks factors, and the mitigation strategies the company employed.

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17.

Explain the difference between

managerial contingency and task contingency?

Contingency reserves are provisions set aside in case of unforeseen problems. The primary differences between task and managerial contingency are that managerial contingency is applied at the project level while task contingency is applied at the individual task or work package level. Managerial contingencies are budgeting buffers that teams can fall back on in case of natural disasters, severe divergence from original process or technical plans or other acts of God. Task contingencies are established because estimates (made during initial planning) for individual tasks may be
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unreliable. Reserves for these contingencies may be adjusted as the project advances and estimates become more accurate.

18.

What are the advantages of developing

and using a systematic risk management approach, such as PRAMs methodology? Do you perceive any disadvantages with this approach?

PRAMs and other similar systems are advantageous because they provide a detailed step-by-step approach to risk management. This helps project teams work through each part of risk management effectively before moving on to subsequent tasks. This way the team does not
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get stalled at one stage or leave out a vital step altogether. PRAMs adds an additional feature the feedback loop that acts as a built-in safeguard to overlooking risk associated with project changes. The loop also keeps varying levels of managers and team members up-todate on project and risk adjustments. The disadvantage to the PRAMs model is that it may be too involved for low-budget or otherwise small projects. The amount of time required to learn and institute the steps may be unreasonable in a short-term, low-budget initiative. Also, it may not be feasible for smaller companies who do not have the resources or time to devote to such a system.

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10. Consider the following statement: The problem with risk analysis is that it is possible to imagine virtually anything going wrong on a project. Where do you draw the line; in other words, how far do you take risk analysis before it becomes overkill? How would you respond to this observation?

The tools in this chapter address this very problem. Looking for possible risks could be an endless process, however, it is important (as outlined in the text) to approach risk in a systematic way. The early stages of risk management may best answer this question. The prioritization of risks makes the process manageable, and when done properly, will prevent a situation of overkill. After potential
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risks have been identified (using a supervised, controlled method such as brainstorming, expert opinion, etc.), managers can use qualitative and quantitative tools to sift through scores of risks to identify what is probable enough to worry about. Once vital risk variables have been identified, then mitigation and contingencies can be established. This process does not ensure that all risks will be identified or that the right contingencies will be created. All the same, the benefits of taking part in risk management far outweigh the danger of not preparing for potential problems.

CASE STUDIES
Case Study 7.1: DeHavillands Falling Comet

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The DeHavilland story is a fascinating example of a well-respected organization that sought to be first to market with a radical new technology and cut some important safety corners, with disastrous results. The story highlights the problems when innovations in design are pushed too far, too quickly. With its unique design and all the additional features that made it radical, the Comet should have been slowly integrated into production and use, instead of being rushed to market. DeHavilland knew that Boeing was at work on its own design, the 707, and felt the need to be first to market. In this rush, they cut a number of safety corners with disastrous results.

Questions:

1) How could risk management have aided in the development of the Comet?

DeHavilland was producing an aircraft that was so revolutionary in so many ways that they may have become overawed by the push in technology for its own sake. Certainly, the original Comet included several radical design elements (embedded engines in the wing root, square windows, pressurized cabin, and so forth) that any one of them could have been a significant advance on its own. Putting them all together into the same new aircraft design without adequate testing was a disaster. The question of how much testing is enough is difficult to answer but certainly, with so many innovations in one design, it is clear that they did not engage in sufficient risk assessment and design testing.

2) Discuss the various types of risk (technical, financial, commercial, etc.) in relation to the Comet. Develop a qualitative risk matrix for these risk factors and assess them in terms of probability and consequences.

This question asks students to identify the wide variety of risks that were present in this aircraft. Commercially, DeHavilland had a huge investment in its success and perceived that first-mover advantage would allow them to pick up a big piece of the commercial jet aircraft market if they were first off the mark. Technically, the aircraft had so many new and radical features that several of them could have been perceived as risky in their own

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right. All of them together were simply too much risk, too fast. Although in might be difficult for students to reasonably comment on probability of failure, there is no question that consequences would be catastrophic (as they were).

3) Given that a modified version of the Comet (the Comet IV) is still in use with the British Government as an anti-submarine warfare aircraft, it is clear that the design flaws could have been corrected given enough time. What, then, do you see as DeHavillands critical error in the development of the Comet?

Over time, the fundamental aircraft design (minus the original square windows) has been proven to be a success, though the company never again attempted to launch it in the commercial jet market. DeHavilland tried to do too much too fast and created an unsafe design due to inadequate testing. Students are quick to recognize this basic error on DeHavillands part. It is often instructive to note that this foray into the commercial jet aircraft market was DeHavillands last and they never returned to the level of technical or commercial success they had enjoyed during and just after the Second World War.

4) Comment on the statement: Failure is the price we pay for technological advancement.

This question can generate several opinions from students as evidence demonstrates again and again that organizations continue to push the edges of the technological envelope with new designs for buildings, aircraft, automobiles, etc. The issue that we have to address is just how far one should be allowed to push this envelope and at what point does some system of controls come into play. Clearly, the greater the consequences of failure, the greater the oversight needed to ensure that sufficient risk analysis and management has taken place prior to opening Pandoras Box.

Case Study 7.2: Tacoma Narrows Bridge

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The famous story of the bridge that shook itself to pieces is familiar to many students. The background of the story is not as well known and illustrates what happens when we attempt to be too innovative without recognizing the full implications of our choices. The Tacoma Narrows Bridge (TNB) was built at a sight with numerous design challenges and difficulties, including physical location, size and length of the bridge, use of nonoptimal materials, and so forth. From a risk analysis perspective, the TNB represents another example of journeying too far into the unknown and only belatedly recognizing the implications of major design decisions.

Questions:

1) In what ways was the projects planning and scope management appropriate and when did they begin taking unknowing or unnecessary risks? Discuss the issue of project constraints and other unique aspects of the bridge in the risk management process. Did they take them sufficiently into consideration? Why or why not?

It is easy, in hindsight, for students to criticize several elements in the TNB development and construction; however, it is important that instructors not allow them to take the easy way out and focus on the result of the construction. Rather, it is useful to examine how the development of this bridge actually led to the understanding of an entirely new field of engineering aerodynamics. It was thought, up to that point, that bridge-building was simply a static engineering problem, concerned with downward loads. It took this failure for engineers and scientists to understand the implications of entirely new forces. In developing the answers to this question, it is useful to consider all the constraints (known and discovered) that they were dealing with at the sight and with the design they had. In those circumstances, ask student what they did correctly and where they ignored ample warning signs of problems to come.

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2) Conduct either a qualitative or quantitative risk assessment on this project. Identify the risk factors that you consider most important for the suspension bridge construction. How would you assess the riskiness of this project? Why?

This exercise allows faculty to tease out the various risk factors that the TNB project encountered. After listing them on the board develop a qualitative risk matrix and ask students to help classify the various risk elements. Ask the question: Why was so little risk analysis done at the time? The answer is that they did not recognize the risk in the design, sighting of the bridge, or construction until after it had been constructed.

3) What forms of risk mitigation would you consider appropriate for this project?

Instructors can discuss various risk mitigation strategies in light of the TNB example (share it, transfer it, etc.). It is useful to ask how each mitigation strategy might be used, who it would be used with (which stakeholder parties), and how effective each strategy might be.

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PROBLEMS

1. Assessing Risk Factors. Consider the planned construction of a new office building in downtown Houston at a time when office space is in surplus demand (more office space than users). Construct a risk analysis that examines the various forms of risk (technical, commercial, financial, etc.) related to the creation of this office building. How would your analysis change if office space was in high demand?

Solution:
This question can be answered by students in a number of ways. The key point is to get them thinking in terms of potential risks that are bound to exist prior to initiating a new project. Commercial risk is paramount here because office space is in low demand, making any new office building project questionable from a financial perspective.

2. Qualitative Risk Assessment. Imagine that you are a member of a project team that has been charged to develop a new product for the residential building industry. Using a qualitative risk analysis matrix, develop a risk assessment for a project based on the following information:

Identified risk factors

Likelihood

1. Key team members pulled off project 2. Chance of economic downturn 3. Project funding cut 4. Project scope changes 5. Poor spec. performance

1. High 2. Low 3. Medium 4. High 5. Low

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Based on the above information, how would you rate the consequences of each of the identified risk factors? Why? Construct the risk matrix and classify each of the risk factors in the matrix.

Solution:
Student can draw a simple 3x3 risk matrix with Probability and Consequences as the two axes. Depending upon how they view the consequences of each of the above risks, it is possible to classify them into one of the quadrants of the qualitative risk matrix. The key is that students justify their classification by giving a logical reason for the consequences they perceive for each risk factor, should the problem actually occur.

3. Developing Risk Mitigation Strategies. Develop a preliminary risk mitigation strategy for each of the risk factors identified in problem 2 above. If you were to prioritize your efforts, which risk factors would you address first? Why?

Solution:
Students can construct a risk mitigation approach (accept it, transfer it, etc.) for each of the risk factors identified. They must justify their mitigation strategy on the basis of how severe the risk effect could be, the alternatives, and the reasons why they selected the mitigation strategy they chose.

4. Quantitative Risk Assessment. Assume the following information: Probability of Failure Maturity = .3 Complexity = .3 Dependency = .5 Consequences of Failure Cost = .1 Schedule = .7 Performance = .5

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Please calculate the Overall risk factor for this project. Would you assess this level of risk as low, moderate, or high? Why?

Solution:
Using the formula from the chapter, the solution to this problem is:

Pf = (.3 + .3 + .5)/3 = .37 Cf = (.1 + .7 + .5)/3 = .43

Risk Factor = .37 + .43 (.37 x .43) = .6409, or .64 According to the severity levels, this would be classified as medium risk.

5. Developing Risk Mitigation Strategies. Assume that you are a project team member for a highly complex project, based on a new technology that has never been directly proven in the marketplace. Further, you require the services of a number of subcontractors to complete the design and development of this project. Because you are facing severe penalties in the event the project is late to market, your boss has asked you and your project team to develop risk mitigation strategies to minimize your companys exposure on this project. Discuss the various types of risk that you are likely to encounter. How should your company deal with them (accept them, share them, transfer them, or minimize them)? Justify your answers.

Solution:
This question is not intended to elicit a specific answer, but to make students consider all potential issues that could arise and begin to formulate strategies for mitigating those risks. The more interesting discussion typically emerge around the question of which mitigation strategies are best for different risks. Some creative thinking of the part of

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students can often identify alternatives to standard approaches for risk mitigation, although it is also useful to have them recognize that for certain low impact risks, simply accepting them is often the best (least expensive and fastest) solution.

6. Assessing Risk and Benefits. Suppose you are a member of a project team that is evaluating the bids of potential contractors for developing some sub-assemblies for your project. Your boss makes it clear that any successful bid must demonstrate a balance between risk and price. Explain how this is so; specifically, why are price and risk seen as equally important but opposite issues in determining the winner of the contract? Is a low price/high risk bid acceptable? Is a high price/low risk bid acceptable? Why or why not?

Solution:
The issue of price and risk and critical for understanding the thought process that often goes on with clients when deciding which contractor to award the project. At times, a higher price bid can win a contract, provided that the client recognizes a lower risk level with a certain contractor. For example, in cases where an older, well established firm bids a contract, they may offer a higher bid but it is attractive because their obvious project management expertise lower concomitant risk. On the other hand, an untested or problematic contractors low bid may be refused because they bring unacceptable levels of risk to the project. Price and risk thus serve as the weights on two opposite scale pans. Too much risk requires exceptionally lower prices, whereas a higher bid can be offset with significant reductions in risk.

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