Project Risk Management

Risk Management Process

• Risk
– Uncertain or chance events that planning can not
overcome or control.
• Risk Management
– A proactive attempt to recognize and manage internal
events and external threats that affect the likelihood
of a project’s success.
• What can go wrong (risk event).
• How to minimize the risk event’s impact (consequences).
• What can be done before an event occurs (anticipation).
• What to do when an event occurs (contingency plans).
 Risk Management
• “The process involved with identifying,
analyzing, and responding to risk. It includes
maximizing the results of positive risks and
minimizing the consequences of negative
events”
 Risk Management’s Benefits
• A proactive rather than reactive approach.
• Reduces surprises and negative consequences.
• Prepares the project manager to take advantage
of appropriate risks.
• Provides better control over the future.
• Improves chances of reaching project
performance objectives within budget and on
time.
 Key Terms
• Risk Tolerance – The amount of acceptable
risk
• Risk Adverse – Someone that does not want to
take risks
• Risk Factors
– Probability of occurrence
– Range of possible outcomes (impact or amount at
stake
– Expected Timing of event
– Anticipated frequency of risk events from that
source
 Why Do We Manage Risk?
• Project problems can be reduced as much as
90% by using risk analysis
• Positives:
– More info available during planning
– Improved probability of success/optimum project
• Negatives:
– Belief that all risks are accounted for
– Project cut due to risk level
 Managing risks
When analyzing the data; consider these three
issues:
• What events might occur during your project
and what would their impacts be?
• What is the probability that they will occur?
• What can we do to either minimize or take
advantage of these events?
 Managing Risks
• Step 1: Risk Identification
– Generate a list of possible risks through
brainstorming, problem identification and risk
profiling.
• Macro risks first, then specific events
• Step 2: Risk Assessment
– Qualitative risk analysis
– Quantitative risk analysis
 Risk Assessment
a) Qualitative Risk Assesment
• Qualitative risk analysis is the process of
assessing the impact and likelihood of identified
risks
• Qualitative risk analysis requires that the
probability and consequences of risks be
evaluated using established qualitative methods
and tools.
• Most commonly used tool is Probability matrix or
Impact Risk Rating matrix
 Methodologies
• Probability and Impact Matrix
– Based on Failure Modes and Effects Analysis
(FMEA)
– From 1950’s analysis of military systems
Define Probability Scale & Impact Scale
 Quantitative Risk Analysis
• Analyze numerically the probability and
consequence of each risk
• Monte Carlo analysis popular
• Decision Tree analysis on test
– Diagram that describes a decision and
probabilities associated with the choices
• Expected Monetary Value Analysis (EMV)
 Expected Monetary Value (EMV)

Building
Cost Probability
Optimistic Outcome $150K 0.2 $30K
Likely Outcome $225K 0.5 $113K
Pessimistic $300K 0.3 $100K
Outcome

Expected Value $243K

 Decision Trees
A decision tree is a graphic display of the
decision process that indicates decision
alternatives, states of nature and their
respective probabilities and payoffs for
each combinations of decision alternatives
and state of nature.
Analyzing problems with decision tree
involves
Analyzing problems with decision tree involves
Define the problem
Structure or draw the decision tree
Assign probabilities to the state of nature
Estimates problems for each possible
combinations of decision alternatives and states
of nature
Solve the problem by computing EMV for each
state of nature node
Decision Tree Analysis
 Risk Responses-Negative
• The four categories for negative risk responses
are
• Risk avoidance. A risk response strategy whereby
the project team acts to eliminate the threat or
protect the project from its impact.
• Risk transference. A risk response strategy
whereby the project team shifts the impact of a
threat to a third party, together with ownership
of the response.eg insurance policy
 Risk Responses-Negative
• Risk mitigation. A risk response strategy
whereby the project team acts to reduce the
probability of occurrence or impact of a risk.
• Risk acceptance. A risk response strategy
whereby the project team decides to
acknowledge the risk and not take any action
unless the risk occurs.
Risk Responses-Positive Risks
Risk Responses-Positive