IDENTIFYING AND MANAGING PROJECT RISK BY TOM KENDRICK PDF

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Kendrick, Tom How to cite this article: Kendrick, T. Project opportunity: risk sink or risk source? For project professionals, project opportunity management and project risk management are interrelated areas of focus and discussion in any project. Projects with more aggressive goals often carry greater risk. The author of this paper provides an overview of three types of project opportunity management, and explains how two of the types can incur risks while the third type serves to moderate risks.

The author discusses a variety of issues in project opportunity management, including planning and scope choices, weighing risks and benefits, trade-offs, maximizing benefits and minimizing losses, setting credible goals, creating realistic plans and managing uncertain opportunities. Both topics are complex, and there is no question that they are interrelated.

This paper discusses three types of project opportunity management, two that are a source of risk because they tend to increase overall project uncertainty and one that can serve to moderate it. The purpose of the project—the goals and expectations associated with the work—provides the primary focus for project opportunity management. Projects carrying more aggressive goals also represent more overall risk. A second focus of opportunity management for projects involves optimizing plans to better align with the most important project priorities.

Tactics such as adding resources to compress schedules can provide an opportunity to meet a tight deadline, but they also generally tend to raise the risk. Projects also contain at least some uncertainty that could potentially benefit the project. This presentation will explore all three types of opportunity management and show how project leaders can better understand and manage overall risk in each of the three cases.

Project Opportunity Management Opportunity is a hot topic in project management, especially when discussing risk. Both opportunity management and risk management are complicated, and they are without question interrelated. The first relates to choices made concerning project specifications for the expected project deliverable. The second type of opportunity for projects deals with planning decisions for the work, generally involving trade-offs.

A third type of opportunity involves potentially beneficial uncertainties inherent to project activities. Though some types of opportunity may reduce overall project risk be a risk sink , most actually increase overall project risk and serve as sources of potential project problems.

This paper will focus on all three types of project opportunities. Scoping Choices The primary meaning of opportunity related to a project involves the value anticipated from the project deliverable. The opportunity implied by this difference may be modest and realistic or wildly optimistic.

The greater the overall project opportunity, in general, the more likely it will be that the benefits will be inflated, the costs underestimated, or both. Projects that are big opportunities generally represent very high overall risk.

Planning Choices Initial bottom-up project plans rarely correspond to expected timing, cost or other objectives. To better meet the highest priorities and constraints for the project, project leaders make trade-offs and adjustments to the project plans, seeking a realistic approach to the work that conforms as much as possible to what sponsors, management, and stakeholders have requested. Uncertain Events Having Potential Benefits The final sort of opportunity encountered in project planning involves aspects of the work that are inherently uncertain.

Some work will be unknown to the team, so estimates cannot be precise. A range of outcomes, some beneficial to the project plans and some adverse, may be possible.

For purchased services or items, prices may vary unpredictably over time, and there are many other project parameters that may be difficult to estimate with precision. Adverse variances can be assessed using standard risk measures of loss and likelihood. Similarly, potential savings or other beneficial outcomes that could occur may be similarly assessed based on probability and potential benefits.

Risk and Scoping Choices One of the main reasons that project risk management is so important originates with the pursuit of project opportunities.

Projects are by definition unique undertakings, so the results they are expected to deliver inevitably involve unknowns. For uncomplicated, routine projects, there may be very good reasons to accept the starting assumptions regarding performance, deadlines, budgets and other project parameters.

In many cases, however, initial project assumptions are based more on wishful thinking than on reliable, analytical analysis. Generating significant benefits often requires taking on significant risk.

The more substantial we expect the returns from a project to be, the more potential issues in achieving them we are likely to run into. Managing this sort of overall opportunity requires making choices regarding objectives and constraints. Stakeholder Risk Appetites and Thresholds Organizations in different businesses deal with risk in different ways. Start-ups and speculative businesses such as those engaged in oil exploration have a high tolerance for risk; though the risks of failure are high, the rewards of success are seen as sufficient to make the undertaking worthwhile.

More conservative organizations, such as governments or companies providing contract project services on a fee-for-service basis, will be risk averse. They tend to expect consistent success but only modest returns on each project. New project goals should represent opportunities in line with prevailing appetites and tolerance for risk. Sometimes risks inherent in project work may not be apparent to project stakeholders, especially during initiation.

Work to understand the appetite for risk of your key stakeholders, especially the project sponsor. In your interactions, ask questions to uncover clues to their risk tolerance, such as the following: Worst case, how much overall would they be willing to invest?

What are the minimum results that they would find acceptable? What concerns do they have about the project? The Tilted Playing Field The overall opportunity represented by a project is the reason for doing it, but not all assumed opportunities are credible or realistic. We get all the benefits at half the costs! Scoping Risk Example There are many examples of overheated pursuit of excessive opportunity that resulted in high risk and major project problems.

One especially severe example is what happened in the mids during the planning and construction of the Denver International Airport DIA. Denver had been plagued with delays at its Stapleton Airport for decades, due to its small size and environmental factors.

The new planned airport was to deal with all of this with a major increase in overall size. The distance from passenger check-in to the most distant gate would be about a mile, and overall the airport would require about 17 miles of baggage handling conveyance equipment. To ensure rapid delivery and transfer of baggage, a new type of high-tech handling system was planned, based on one operating on a much smaller scale in Germany.

Much has been written about the way this project played out, but the overall impact of the decision to adopt the attractive-looking but high-risk approach for fully automated, high-speed baggage handling, the lifeblood of an airport, was a disaster.

The overaggressive scoping caused a delay in the opening of DIA from October to February , 16 months late. The delay cost hundreds of millions of dollars in additional expense and generated a great deal of embarrassment and political fallout. Unless opportunity management at the project level is realistic, it will present excessive risk and lead to project failure. Dealing with Risks Related to Project Goals and Expectations As the project charter and other documents are developed, involve people who understand what is possible, and listen to them.

A challenge is fine, and can be motivating, but aspiring to impossible goals or saddling a project with constraints of insufficient time, money, staff or other resources means that all possible variance will be adverse and no one associated with the project will achieve what they want. Most projects find that initial plans fall short of timing, cost or other stated objectives. In an attempt to meet aspirational goals, project leaders work to optimize the workflow by adopting alternatives that compress plans, conserve money or employ other trade-offs to better align with stakeholder requests.

Even when changes are devised to address critical constraints such as aggressive deadlines , the revisions often require undesirable trade-offs for example, higher costs or diminished scope , increased risk and new project failure modes.

Driving a plan to conform with project constraints will inevitably introduce new self-inflicted risks. Project Priorities and Plan Shortfalls As preliminary project plans come together, a picture of your project starts to emerge. Even the earliest versions of a project plan will provide insight into whether your project objective is possible or not. Often, planning reveals the unpleasant fact that the project at least as requested is impossible or at least over-constrained—bottom-up plans leave at least some part of your project objective unmet.

Preliminary analysis might reveal a schedule that extends beyond the deadline, resource requirements that exceed initial budgets or other significant issues. Project planning allows you to see just how much trouble you are in.

An important goal of plan analysis is to eliminate, or at least minimize, the differences between the project objective and your plans. The standard triangle diagram for examining project trade-offs is one way to show these differences, as in Exhibit 1. The plan, represented by the gray triangle, is quite a bit larger than the objective, shown as the black triangle.

Exhibit 1: Objective versus plan. For this project, bottom-up planning suggests that the deliverable is probably feasible. Because bottom-up project planning begins with a scope-oriented work breakdown structure WBS , this is fairly uncommon.

However, the initial schedule and resource plans fall wherever the WBS leads them—often at significant variance with the original project objective. The draft plan here requires both more time and higher costs for people, equipment, services, etc. Fortunately, all project constraints are not created equal.

Some parts of the objective are more important than others, and knowing the relative priorities of project parameters can guide your efforts in improving your plans. Which of these three main parameters is most flexible will vary from project to project. Exhibit 2: Project priority matrix. Armed with plans, objectives, and rank-ordered priorities, you are ready to explore plan variations that will better align with goals.

In the case of Exhibit 2, you would seek a project plan that delivers as much of the scope as you can achieve while meeting the deadline and holding spending to roughly the expected budget.

Other prioritizations are possible, but this one is typical for high-tech, modern projects. Trade-offs Based on Priorities For the example in Exhibit 1, the initial plan failed to meet the deadline and also was over budget.

This approach will not be inexpensive; it makes the budget problem even bigger, and results in the shift shown in Exhibit 3. Here, the schedule has been compressed, bringing it in line with the objective, but the resources required for the project, which already exceeded the objective, are even further out of line with the project expectations. Exhibit 3: Plan trade-offs. For projects where resources are the lowest priority, this tactic may be a good alternative.

However, for projects with the priorities in Exhibit 2 this is probably not the best plan. It may be better to re-evaluate the specifications and propose a plan that achieves its deadline within budget but falls slightly short on scope.

Other projects may propose delivering the most valuable functionality on time, and delivering the rest in a follow-on project somewhat later.

The analysis for such a scope reduction might result in a shift similar to what is seen in Exhibit 4. In this case, changes proposed to the initial plan affect all three of the project parameters, with the most significant difference between the objective and the plan being some reduction in the feature set for the deliverable.

This analysis can reveal when it might be desirable, or even necessary, to revisit the project objective and change the project definition.

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