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Chapter 7 Managing Risk Chapter Outline 1. Risk Management Process 2. Step 1: Risk Identification 3. Step 2: Risk Assessment A. Probability Analysis 4. Step 3: Risk Response Development A. Mitigating Risk B. Avoiding Risk C. Transferring Risk D. Accept Risk 5. Contingency Planning A. Technical Risks B. Schedule Risks C. Cost Risks D. Funding Risks 6. Opportunity Management 7. Contingency Funding and Time Buffers A. Budget Reserves B. Management Reserves C. Time Buffers 8. Step 4: Risk Response Control 9. Change Control Management 10. Summary 11. Key Terms 12. Review Questions 13. Exercises 14. Case 7.1: Alaska Fly-Fishing Expedition 15. Case 7.2: Silver Fiddle Construction 16. Case 7.3: Trans LAN Project 17. Case 7.4: XSU Spring Concert 18. Case 7.5: Sustaining Project Risk Management during Implementation 19. Appendix 7.1: PERT and PERT Simulation A. PERT—Program Evaluation Review Technique B. A Hypothetical Example Using the PERT Technique C. Exercises 21. Case A7.1: International Capital, Inc.—Part A 22. Case A7.2: Advantage Energy Technology Data Migration—Part B Chapter Learning Objectives After reading this chapter you should be able to: LO 7-1 Describe the risk management process. LO 7-2 Understand how to identify project risks. LO 7-3 Assess the significance of different project risks. LO 7-4 Describe the four different responses to managing risks. LO 7-5 Understand the role contingency plans play in risk management process. LO 7-6 Understand opportunity management and describe the four different approaches to responding to opportunities in a project. LO 7-7 Understand how contingency funds and time buffers are used to manage risks on a project. LO 7-8 Recognize the need for risk management being an on-going activity. LO 7-9 Describe the change control process. Appendix Learning Objective After reading this appendix you should be able to: LO A7-1 Calculate basic Pert Simulation projections. Review Questions 1. Project risks can/cannot be eliminated if the project is carefully planned. Explain. Project risks cannot be eliminated. It is impossible to be aware of all things that might happen when a project is being implemented. Undesirable events identified before the project begins can be transferred, retained/reduced, or shared. Contingency plans with trigger points and responsibility should be established before the project begins. 2. The chances of risk events occurring and their respective costs increasing change over the project life cycle. What is the significance of this phenomenon to a project manager? The chances of risk events and estimated costs changing over the project life cycle are high. These events will impact project change control mechanisms. Moreover, such changes could be significant enough to require changes in scope. The project manager must ensure that these changes are recorded and kept updated. Otherwise the integrity of the project control system will quickly deteriorate and become useless as a management tool. 3. What is the difference between avoiding a risk and accepting a risk? Avoiding a risk is changing the project plan in advance so as to eliminate specific risks from occurring while accepting a risk means no preventive action is taken; contingency plans may be used if the risk materializes. 4. What is the difference between mitigating a risk and contingency planning? Mitigating a risk refers to taking action to either reduce the likelihood that a risk (bad event) will happen and/or reduce the impact the risk has on the project. Contingency planning is developing a response if the risk occurs. Mitigating is preventive while contingency is reactive. 5. Explain the difference between budget reserves and management reserves. Budget reserves are established to cover identified risks that occur while implementing a project work package or activity. If the risk does not materialize, the funds are removed from the budget reserve. The management reserve covers unforeseen risks and applies to the total project. These reserves are usually controlled by top management, the owner, and/or the project manager. Budget and management reserves are independent of each other. 6. How are the work breakdown structure and change control connected? The WBS and change control are directly linked. Any change from the baseline developed from the WBS needs to be recorded. This link allows management to trace changes and problems directly to deliverables and the organization unit responsible. 7. What are the likely outcomes if a change control process is not used? Why? If a change control process is not used, budgets and plans will self-destruct quickly. Tracking changes facilitates control and accountability of budgets and time. In addition, change control allows for coordination of changes further on in the project. 8. What are the major differences between managing negative risks versus positive risks (opportunities)? Essentially the same process that is used to manage negative risks is applied to positive risks. The major differences occur in the responses. Instead of avoiding negative risks, project managers often try to exploit positive risks by taking action to ensure that the opportunity occurs. Instead of transferring risks to another party, project managers often share positive risks to increase the likelihood the opportunity can be exploited. Instead of mitigating negative risks, project managers will take action to enhance the likelihood the opportunity will occur and/or increase the positive impact of the opportunity. Finally, project managers will often choose to accept both negative and positive risks, but be prepared to respond if either occurs. Exercises 1. Gather a small team of students. Think of a project most students would understand; the kinds of tasks involved should also be familiar. Identify and assess major and minor risks inherent to the project. Decide on a response type. Develop a contingency plan for two to four identified risks. Estimate costs. Assign contingency reserves. How much reserve would your team estimate for the whole project? Justify your choices and estimates. Sure, let's gather a small team of students to work on a project that most students would understand. How about we choose the project of organizing a student-led music festival on campus? This project involves various tasks that are familiar to students, such as booking performers, securing venues, marketing the event, managing ticket sales, and coordinating logistics. Let's identify and assess major and minor risks inherent to the project: Major Risks: 1. Performer Cancellations: One of the headlining performers may cancel last minute, leading to disappointment among attendees and potential loss of ticket sales. 2. Weather Conditions: Inclement weather could impact the outdoor venue, affecting attendance and potentially causing damage to equipment or infrastructure. 3. Budget Overruns: Unexpected expenses or underestimation of costs could lead to budget overruns, impacting the overall financial viability of the event. 4. Low Ticket Sales: If ticket sales are lower than anticipated, it may result in financial losses and difficulty covering expenses. Minor Risks: 1. Technical Issues: Equipment failure or technical glitches during the event could disrupt performances and negatively impact attendee experience. 2. Vendor Delays: Delays in delivery of equipment, merchandise, or other vendor services could hinder event preparation and execution. 3. Permitting Issues: Difficulty obtaining necessary permits or approvals from the university or local authorities may delay the event or result in additional costs. 4. Volunteer Availability: Reliance on student volunteers for various tasks may pose a risk if there is a shortage of available volunteers or if they are not adequately trained or motivated. Response Type: For the identified risks, the response type would primarily involve a combination of risk mitigation and contingency planning. Contingency Plan: 1. Performer Cancellations: • Mitigation: Sign contracts with backup performers to ensure replacements are readily available. • Contingency Plan: Allocate a portion of the budget as a reserve fund to cover additional expenses for securing replacement performers or offering refunds to attendees. • Estimated Cost: $5,000 • Contingency Reserve: 10% of estimated cost ($500) 2. Weather Conditions: • Mitigation: Secure a backup indoor venue or invest in weather-proofing measures for the outdoor venue. • Contingency Plan: Allocate funds for additional infrastructure and equipment rental to mitigate the impact of adverse weather conditions. • Estimated Cost: $3,000 • Contingency Reserve: 10% of estimated cost ($300) 3. Budget Overruns: • Mitigation: Conduct thorough budget planning and regularly monitor expenses to identify potential overruns early. • Contingency Plan: Allocate a contingency reserve fund to cover unexpected expenses and prevent budget deficits. • Estimated Cost: $7,000 • Contingency Reserve: 10% of estimated cost ($700) 4. Low Ticket Sales: • Mitigation: Implement effective marketing strategies to maximize ticket sales and diversify revenue streams (e.g., sponsorships, merchandise sales). • Contingency Plan: Allocate funds for promotional activities or discounted ticket offers to stimulate demand and boost ticket sales. • Estimated Cost: $4,000 • Contingency Reserve: 10% of estimated cost ($400) Total Project Contingency Reserve: The total contingency reserve for the entire project would be the sum of the contingency reserves for each identified risk: $500 (Performer Cancellations) + $300 (Weather Conditions) + $700 (Budget Overruns) + $400 (Low Ticket Sales) = $1,900 Justification: The 10% contingency reserve for each identified risk is based on a conservative estimate to account for unforeseen circumstances and provide a buffer to ensure the successful execution of the project. By allocating a contingency reserve for each major risk, the project team can mitigate the impact of potential disruptions and maintain project objectives within the established budget and timeline. 2. You have been assigned to a project risk team of five members. Because this is the first time your organization has formally set up a risk team for a project, it is hoped that your team will develop a process that can be used on all future projects. Your first team meeting is next Monday morning. Each team member has been asked to prepare for the meeting by developing, in as much detail as possible, an outline that describes how you believe the team should proceed in handling project risks. Each team member will hand out their proposed outline at the beginning of the meeting. Your outline should include but not be limited to the following information: a. Team objectives. b. Process for handling risk events. c. Team activities. d. Team outputs. This exercise has been used in executive development seminars and college project management classes. The assumed type of firm and type of projects will make for interesting variations in presentations before a class or group. The responses from participants with project experience are very different from those of undergraduate students. Undergraduates usually follow the chapter outline with small deviations related to the kinds of risk events which might occur and team objectives. The team activities and output requirements are sometimes weak for undergrads. More experienced managers will be more creative in types of objectives and outputs. Differences frequently relate to the background of the participants and their experience—e.g., marketing or construction. For example, one information technology group of managers organized their model around the type of project and the key factors influencing risk—“Size, complexity, people problems, novelty, control issues.” Managers with project experience sometimes divide risk events into segments of the project life cycle--defining, planning, executing, delivery. Experienced managers are very good at assessing downstream secondary risks which result from a risk event occurring; some of their models will cover secondary risks. This exercise requires very little guidance from the instructor. Each group will provide some unique views and approaches. The session can be supplemented with discussion questions such as the following: How do you get people to talk about risk in a practical manner? How can you articulate risk? Where is the greatest opportunity to reduce project risks? How do you get management to support contingency funds? How can we improve estimating procedures for time, cost, and technical risks? The wrap-up comes back to the minimum requirements for a risk model for a firm and the kinds of activities a risk team might perform—before, during, and after the project. Picking two or three of the unique approaches teams come up with can be used to demonstrate important points. 3. The Manchester United Soccer Tournament project team (Review Manchester United case at the end of Chapter 4) has identified the following potential risks to their project: Referees failing to show up at designated games. Fighting between teams. Pivotal error committed by a referee that determines the outcome of a game. Abusive behavior along the sidelines by parents. Inadequate parking. Not enough teams sign up for different age brackets. Serious injury. How would you recommend that they respond (i.e., avoid, accept, …) to these risks and why? Below are typical responses to this question: Event Response Contingency Referees fail to show up Mitigate—contact referees night before games Referee(s) on call who can fill in Fighting Mitigate—train referees on how to diffuse potentially violent situations/publicize stiff penalties for fighting Referees, game officials, and coaches intervene Error Mitigate—recruit seasoned referees and assign best referees to most important games Have a tournament czar who adjudicates appeals Abusive parents Transfer—assign responsibility to coaches to manage Referees empowered to penalize team and dismiss parents Inadequate parking Mitigate—level game schedule Shuttle service Not enough teams Mitigate—PR campaign Collapse age groups Injury Accept Contact ER in advance, setup field communication system 4. Search the Web using the key words: “best practices, project management.” What did you find? How might this information be useful to a project manager? Here are some typical best practices: 1. Effective Communication: • Maintaining open and transparent communication with stakeholders. • Regularly updating project status and progress. 2. Clear Project Scope and Objectives: • Clearly defining project scope, objectives, and deliverables. • Ensuring alignment between project goals and stakeholder expectations. 3. Detailed Project Planning: • Creating a detailed project plan outlining tasks, timelines, dependencies, and resources. • Developing a Work Breakdown Structure (WBS) to organize and manage project tasks. 4. Risk Management: • Identifying potential risks and developing strategies to mitigate them. • Regularly assessing and monitoring project risks throughout the project lifecycle. 5. Resource Management: • Efficiently allocating and managing project resources, including human resources, budget, and materials. 6. Stakeholder Engagement: • Engaging stakeholders throughout the project to gather requirements, provide updates, and address concerns. 7. Quality Management: • Establishing quality standards and processes to ensure deliverables meet or exceed expectations. • Conducting regular quality assurance and quality control activities. 8. Change Management: • Developing a change management process to address changes in project scope, schedule, or requirements. • Evaluating the impact of changes on project objectives and adjusting plans accordingly. 9. Project Monitoring and Control: • Monitoring project performance against the project plan. • Implementing corrective actions as needed to keep the project on track. 10. Lessons Learned: • Conducting post-project reviews to identify lessons learned and areas for improvement. • Documenting best practices and insights for future projects. This information can be extremely useful to a project manager as it provides a set of proven strategies and techniques for effectively planning, executing, and controlling projects. By following best practices in project management, a project manager can increase the likelihood of project success, minimize risks, and deliver high-quality results within the constraints of time, cost, and scope. Case 7.1 Alaska Fly-Fishing Expedition You are sitting around the fire at a lodge in Dillingham, Alaska, discussing a fishing expedition you are planning with your colleagues at Great Alaska Adventures (GAA). Earlier in the day you received a fax from the president of BlueNote, Inc. The president wants to reward her top management team by taking them on an all-expense-paid fly-fishing adventure in Alaska. She would like GAA to organize and lead the expedition. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. Brainstorm potential risks associated with this project. Try to come up with at least five different risks. Certainly! Here are five potential risks associated with organizing and leading the Alaska fly-fishing expedition for Blue Note, Inc.: 1. Weather Conditions: Unpredictable weather in Alaska, including storms, heavy rainfall, or extreme cold, could disrupt the expedition, affecting travel plans, outdoor activities, and overall safety of participants. 2. Logistical Challenges: Coordinating logistics for a remote location like Alaska, including transportation, accommodations, equipment rental, and provisioning, may pose challenges due to limited infrastructure, remote access, and potential supply chain disruptions. 3. Health and Safety Concerns: Participants may face health and safety risks associated with outdoor activities in Alaska, such as wildlife encounters, rough terrain, water-related accidents, or exposure to extreme weather conditions. Adequate emergency response plans and medical support must be in place to address potential incidents. 4. Skill Level Disparity: Participants with varying levels of fly-fishing experience and physical fitness may struggle to keep up with the demands of the expedition, leading to frustration, accidents, or disengagement. Proper training, guidance, and support should be provided to ensure all participants can safely and enjoyably participate. 5. Environmental Impact: Conducting the fly-fishing expedition in ecologically sensitive areas of Alaska may raise concerns about environmental conservation and sustainability. Activities such as fishing practices, waste management, and habitat preservation must be carefully managed to minimize negative impacts on the local ecosystem. Addressing these potential risks proactively through risk assessment, mitigation strategies, and contingency planning will be essential for ensuring the success and safety of the Alaska fly-fishing expedition for Blue Note, Inc. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. To analyze the identified risks for the Alaska fly-fishing expedition project, we can use a risk assessment form similar to Figure 7.6. Risk Assessment Form Project Name: Alaska Fly-Fishing Expedition Project Manager: [Your Name] Date: [Date] Risk Response Plan: 1. R1 - Unpredictable weather conditions: Mitigation: Monitor weather forecasts closely and have contingency plans for indoor activities if necessary. 2. R2 - Inadequate experience of participants: Avoidance: Provide pre-trip training sessions for participants to ensure they have the necessary skills and knowledge. 3. R3 - Equipment failure: Contingency Planning: Carry backup equipment and have access to repair services in remote areas. 4. R4 - Wildlife encounters: Mitigation: Educate participants about wildlife safety and have bear deterrents readily available. 5. R5 - Logistics challenges: Contingency Planning: Have alternative transportation and accommodation arrangements in place. This risk assessment form helps in identifying, assessing, and planning responses for potential risks associated with the Alaska fly-fishing expedition project. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal with each of the risks. (Rest of case not shown due to length.) (See Comments at the End of Case 7.4.) Case 7.2 Silver Fiddle Construction You are the president of Silver Fiddle Construction (SFC), which specializes in building high-quality, customized homes in the Grand Junction, Colorado, area. You have just been hired by the Czopeks to build their dream home. You operate as a general contractor and employ only a part-time bookkeeper. You subcontract work to local trade professionals. Housing construction in Grand Junction is booming. You are tentatively scheduled to complete 11 houses this year. You have promised the Czopeks that the final costs will range from $450,000 to $500,000 and that it will take five months to complete the house once groundbreaking has begun. The Czopeks are willing to have the project delayed in order to save costs. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. Identify potential risks associated with this project. Try to come up with at least five different risks. 1. Weather Delays : Grand Junction's weather can be unpredictable, leading to potential delays in construction due to rain, snow, or extreme temperatures. 2. Supply Chain Disruptions : With the booming construction industry in the area, there is a risk of delays due to shortages of building materials or sudden price increases. 3. Subcontractor Performance : Reliance on local trade professionals may pose a risk if subcontractors do not perform as expected, leading to delays or quality issues. 4. Permitting and Regulatory Delays : Delays in obtaining necessary permits or complying with local regulations could prolong the project timeline and increase costs. 5. Changes in Customer Requirements : The Czopeks may change their minds about design elements or materials during the construction process, leading to additional costs and delays if not managed effectively. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. Sure, here's a risk assessment form for the identified risks: Note: Risk Score = Probability × Impact Develop a risk response matrix similar to Figure 7.8 to outline how you would deal with each of the risks. Here's a risk response matrix for the identified risks: Each response strategy is tailored to address the specific risks identified, considering their probability and impact. (Rest of case not shown due to length.) (See Comments at the End of Case 7.4.) Case 7.3 Trans LAN Project Trans Systems is a small information systems consulting firm located in Meridian, Louisiana. Trans has just been hired to design and install a local area network (LAN) for the city of Meridian’s social welfare agency. You are the manager for the project, which includes one Trans professional and two interns from a local university. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. Identify potential risks associated with this project. Try to come up with at least five different risks. Potential risks associated with the Trans LAN project: 1. Hardware or Software Compatibility Issues : There might be compatibility issues between different hardware components or between hardware and software, leading to delays or system malfunctions. 2. Security Breaches : The LAN could be vulnerable to security breaches, compromising sensitive data of the social welfare agency and its clients. 3. Data Loss or Corruption : There is a risk of data loss or corruption during the LAN installation process, leading to potential disruptions in agency operations. 4. Inadequate Network Performance : The LAN might not perform as expected, leading to slow network speeds or frequent downtime, affecting the efficiency of the social welfare agency. 5. Budget Overrun : Unexpected expenses or changes in project requirements could lead to the project exceeding its budget, putting financial strain on Trans Systems and potentially damaging its reputation. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. Certainly, here's a risk assessment form for the identified risks: Note: Risk Score = Probability × Impact Develop a risk response matrix similar to Figure 7.8 to outline how you would deal with each of the risks. Here's a risk response matrix for the identified risks: These response strategies are tailored to address the specific risks identified, considering their probability and impact. (Rest of case not shown due to length.) (See Comments at the End of Case 7.4.) Case 7.4 XSU Spring Concert You are a member of the X State University (XSU) student body entertainment committee. Your committee has agreed to sponsor a spring concert. The motive behind this concert is to offer a safe alternative to Hasta Weekend. Hasta Weekend is a spring event in which students from XSU rent houseboats and engage in heavy partying. Traditionally this occurs during the last weekend in May. Unfortunately, the partying has a long history of getting out of hand, sometimes leading to fatal accidents. After one such tragedy last spring, your committee wants to offer an alternative experience for those who are eager to celebrate the change in weather and the pending end of the school year. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. Identify potential risks associated with this project. Try to come up with at least five different risks. Potential risks associated with the XSU Spring Concert project: 1. Poor Weather Conditions : Inclement weather such as rain or storms could impact attendance and the overall success of the outdoor concert. 2. Low Attendance : Despite efforts to provide an alternative to Hasta Weekend, there is a risk of low attendance if students still prefer to participate in the traditional activities. 3. Safety and Security Concerns : Large gatherings can present safety and security challenges, including crowd control, medical emergencies, and the potential for fights or other disturbances. 4. Financial Loss : If the concert does not attract enough attendees or if expenses exceed the budget, the entertainment committee could incur financial losses. 5. Logistical Issues : Issues such as technical failures, transportation problems, or vendor cancellations could disrupt the smooth execution of the event. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. Sure, here's a risk assessment form for the identified risks: Note: Risk Score = Probability × Impact Develop a risk response matrix similar to Figure 7.8 to outline how you would deal with each of the risks. Here's a risk response matrix for the identified risks: These response strategies are tailored to address the specific risks identified, considering their probability and impact. (Rest of case not shown due to length.) This set of short cases is designed to have the students use the tools and concepts introduced in Chapter 7 to do basic project risk assessment. The cases can be used as a written assignment or as an in-class assignment. In either case, students follow the risk management process by first identifying potential risks; second, assessing the implications of risks; and finally, responding to risks and developing contingency plans. When used as an in-class exercise, we ask students to identify which of the cases they want to work on and form small risk assessment teams (3-4 students). Each team is given the assignment to identify at least 5 significant risks the project may encounter. The groups are then instructed to assess each risk according to the Risk Assessment Form (Figure 7.6) described in the chapter. Once this is completed we poll the different groups and record their ideas on the risk assessment form we created on the blackboard. We discuss each project in turn and usually end each discussion by asking the students which of the risks should be major concerns for the project team. The next step is to have each group decide how they would respond to each risk using the Risk Response Matrix presented in Figure 7.8. After they have completed this assessment, we again poll the different groups as to their plans. We record their ideas on the blackboard. The class discusses the merits of alternative responses to specific risks. The entire process takes between 50-70 minutes. In general, students find this to be an interesting exercise that clearly illustrates the risk management process. The clear preference is to work on the fly-fishing expedition, but normally there are enough students who want to work on the other three cases. Students have no problems identifying meaningful risks. However, one risk that is often ignored is the project being canceled before it is completed. For example, the president of BlueNote, Inc. may decide to cancel the trip due to pressing business that requires top management attention. Similarly, the construction and LAN projects may be canceled due to a lack of funds. One can adapt this exercise by picking a project the students are likely to be familiar with. For example, we added the renovation of the local university football stadium as a fifth. Case 7.5 Sustaining Project Risk Management during Implementation Bill (Senior VP of product development): Carlos [project manager], we have to talk. I am concerned about the way we manage project risk here at Futuronics. I just came from an international “Future Mote Devices” meeting at UC Berkeley. [Note: A mote is a very small [e.g., 2–3mm square], wireless sensing pod that may be placed on land or in water to measure and communicate data.] The project management sessions receiving most attention addressed risk in product development projects. They described our management of project risk to the letter—failure to sustain risk management after the project gets rolling. It seems someone has to get burned before risk management is taken seriously. (Rest of case not shown due to length.) Divide the class into teams of three or more participants. Colette needs your help to develop her training program. You may wish to consider the questions listed below to initiate ideas. Why do project stakeholders lose interest in project risk after the project is under way? Project stakeholders may lose interest in project risk after the project is underway for several reasons: 1. Complacency : Once the project is in motion and progressing well, stakeholders may become complacent and assume that everything will continue to go smoothly. 2. Time Constraints : As the project progresses, stakeholders may become more focused on meeting deadlines and milestones, leading them to prioritize immediate tasks over ongoing risk management. 3. Resource Allocation : As the project moves forward, resources may be reallocated to other areas, leaving less attention and resources available for risk management activities. 4. Overconfidence : If the project has been successful so far, stakeholders may become overconfident and believe that they have already addressed all potential risks. 5. Lack of Visibility : Some risks may only become apparent as the project progresses, leading stakeholders to believe that risk management is no longer necessary or relevant. What are the dangers of not keeping on top of risk management during implementation? The dangers of not keeping on top of risk management during implementation include: 1. Project Delays : Unforeseen risks that are not addressed during implementation can lead to delays in project timelines, potentially impacting other projects or business objectives. 2. Cost Overruns : Failure to manage risks effectively during implementation can result in unexpected costs, such as additional resources, rework, or penalties, which can exceed the project budget. 3. Quality Issues : Risks that are not properly managed can lead to quality problems or defects in the final product, resulting in customer dissatisfaction or even product recalls. 4. Reputation Damage : Project failures due to unaddressed risks can damage the organization's reputation, leading to loss of customer trust and future business opportunities. 5. Legal and Compliance Issues : Failure to manage risks related to legal and regulatory compliance can result in lawsuits, fines, or other legal consequences for the organization. 6. Safety Concerns : Risks that pose safety hazards to employees, customers, or the public can result in accidents, injuries, or even fatalities, leading to legal and financial liabilities for the organization. 7. Stakeholder Discontent : Stakeholders, including customers, employees, investors, and regulatory agencies, may become discontented if project risks are not effectively managed, leading to strained relationships and decreased confidence in the organization. What kind of business is Futuronics in? Futuronics is in the business of product development, specifically focusing on the development of "mote devices." Mote devices are small, wireless sensing pods that can be placed on land or in water to measure and communicate data. Therefore, Futuronics is likely involved in technology and electronics manufacturing, specializing in the development of innovative sensor technology. Brainstorm specific actions that will encourage project stakeholders to continue to scan and track the project environment for risk events. Suggest three concrete actions or scenarios that will encourage project stakeholders to change their behavior and truly support risk management while projects are being implemented. The following outline headings may be helpful in developing possible actions that would improve/enhance stakeholder support. Improving the risk management process Organization actions Motivating participation This case demonstrates a common problem of sustaining risk management while the project is being executed. It also suggests there is no pat answer to an important problem that cannot be ignored! The topic is repeatedly discussed at PMI Roundtables. The fundamental take-away of the case is that if you do not continuously review project risks, the occurrence of a risk event can seriously impact project objectives (and your future as a project manager). Risk surprises are not daily occurrences, but when they happen because of neglect and inattention, the blame gets passed back to the project manager. You could start of the discussion with some basic questions: What kind of business is Futuronics in? The potential for new risks showing up during product development of products that are at least seven years ahead of the market would be very large! A good way to get started with the case is to begin with the old analogy of a stock portfolio. If conditions change and you fail to manage the portfolio, what happens? For example, what corrective action is necessary if interest rates change; inflation increases, shortage of oil? Were triggers in place? Constant management of project risk is an on-going process; it does not end with the original risk plan. Another question to get started is to ask what are the risks of not doing risk analysis as the project progresses? New risks will not be identified early as new information becomes available. Ask the class to identify project risks they have experienced or are aware of from past projects. In practice, a frequent risk that is often neglected as is resource turnover and loss of expertise. This is a good time to differentiate the terms “issue” and “risk event.” And then focus on specific challenges raised in the case: Why do project stakeholders lose interest in project risk after the project is underway? There are many reasons including: Do not see it as necessary - the project is progressing well. Too busy trying to complete the project. They think someone else is paying attention to risk. Fear that the identification of new risks may lead to the project being cancelled. Fear of recrimination that identification of new risks will be traced back to individual mistakes. What are the dangers of not keeping on top of risk management during implementation? The most obvious danger is that new risks will disrupt the project and lead to failure. Another related danger is that risk identification will be late and the impact and cost will be significant. Remember the Risk Event Graph (Figure 7.1). It is much more cost effective to identify a potential risk and mitigate it rather deal with it after it occurs. Brainstorm specific actions that will encourage stakeholders to continue to scan and track the project environment for risk events? Some sample actions suggested by practicing project managers are below: PM A: I use past retrospectives (lessons learned) to show positive or negative examples of the importance of sustaining risk management. Since the retrospectives are our past projects, it encourages participation. Another idea I use is to work hard at making the project sponsor well aware of known project risks and the need for contingency funds. If I do a good job of getting buy-in on risk and contingency from the sponsor, it is easier to get support to sustain risk management throughout the project. PM B: We find the best way to sustain risk management during the project is to make a big point of assigning the responsibility for a known risk to one person. As the project progresses, if the responsible individual for a specific risk even has a hint that the probability of their identified risk is increasing, they will want every stakeholder to be aware. This model often results in gaining support for sustaining risk management over the lifecycle. (Be careful that the person assigned is conscientious and responsible.) When tracking risk events, ask each person responsible for a known risk event to report status (e.g., 0-5, five being high probability it could happen). Ask if potential new risks can impact the risk which they are responsible. PM C: I bring in positive risk (“opportunities”) to remind team members there can be risks with positive outcomes. PM D: I depend on the sponsor for support of sustaining risk management. The sponsor can be one of the strongest advocates because he or she controls resources. PM E: Consistent, frequent communication among all stakeholders is important. Ask all stakeholders to identify new potential risks that could occur. Set dates for risk review. Summary of suggestions: Use retrospectives to increase awareness Assign responsibility Focus also on opportunities so it just isn’t looking for threats Have project sponsor insist of risk updates Schedule formal risk reviews. Other suggestions may include: Have risk assessment an integral part of progress reports Give prizes to individuals who identify legitimate new risks Include on-going risk management as a significant criteria for evaluating project performance. Students will add many suggestions. Typical topics include sponsor, tracking, communication, risk register, retrospectives, and positive/negative risks Below are additional suggestions by another team: Note similarities and differences. I. Improving the Process: Potential topics to include and develop. Check risk status at each gating review in life cycle or milestones (develop a process chart marking input at each gate review). Regular risk status standup meetings--new and old risks. 5-10-minute maximum. Attendance rules. Increased governance of risks—policies. Assign responsibility—who? Clarification of responsibility. How risks are communicated—team, sponsor, owner. New risks. Seek them out. (2-5% are new) Develop early warning indicators—increase in probability? II. Organization Actions Organization oversight policies supporting risk practices: Sponsor support Project office support Project manager support Team support III. Motivating participation Organization culture and importance of strong risk support Organization governance policies Sponsor communications and commitment Training Recognition—e.g., Early identification of a new risk or a risk whose probability is increasing Debriefing and Take-Away: Sustaining interest in risk management is an often neglected problem. The costs of not carefully managing project risk have been proven to be significant; hence, the problem. Addressing the problem will require an organizational support. This case includes several topics. The embedded key concepts from the case are organization support, risk management, training, stakeholder management, conflict resolution, and strategic management. The case is an example of the sociocultural and technical dimensions of project management. Appendix Exercises 1. Given the project information below, what is the probability of completing the National Holiday Toy project in 93 time units? A Gantt and network chart from Microsoft Project are shown below. Four notes are in order. First, Project no longer performs PERT analysis so the expected completion times were calculated manually to be entered into Project. Those calculations are shown below: Second, the problem does not give the time units so days were selected. Third, January 2, 2017 was arbitrarily selected as the start date. Forth, a summary activity was added to show project duration so the numbers on the left in Project do not match the Activity ID numbers shown above. For the critical path, the variance is 9+4+25+1+1=40. The resulting Z-value is: Using Table A7.2 and Z=1.1, we have about a 0.863 or about an 86.3 percent chance of it taking 93 or fewer time units to complete the project. The Excel function “=NORM.DIST(93,86,SQRT(40),TRUE)” can be used to compute the probability directly. It returns a value of 0.865809. 2. The Global Tea and Organic Juice companies have merged. The following information has been collected for the “Consolidation Project.” 1. Compute the expected time for each activity. 2. Compute the variance for each activity. Activity Opt. (a) ML. (m) Pess. (b) te Variance Critical? 1 16 19 28 20 4 x 2 30 30 30 30 0 3 60 72 90 73 25 4 18 27 30 26 4 5 17 29 47 30 25 x 6 4 7 10 7 1 7 12 15 18 15 1 x 8 6 12 24 13 9 x 9 18 27 30 26 4 10 20 35 50 35 25 11 40 55 100 60 100 12 11 20 29 20 9 x 13 14 23 26 22 4 14 13 16 19 16 1 x 15 0 0 0 0 0 These calculations are easy to perform in Excel, as the screen show below shows. This demonstration Excel file is available for downloading in McGraw-Hill Connect. The project was entered into Microsoft Project. See Project notes from Exercise 7A.1. The Gantt and network charts are shown below. 3. Compute the expected project duration. Duration = 114 days This value can be found using Microsoft Project or by adding up the expected completion times along the critical path. 4. What is the probability of completing the project by day 112? Within 116 days? Within 112 days P .39 Using the Excel formula “=NORM.DIST(112,114,SQRT(4+25+1+9+9+1),TRUE)” we obtain 0.387548. Within 116 days P ≈ .61 Using Excel, we obtain 0.612452. 5. What is the probability of completing “Negotiate with Unions” by day 90? This part is a little tricky. The student must realize that this includes the full path from the start of the project through negotiating with the union and not just the Negotiate with Unions activity. That path is (4) Unify personnel policies (11) Negotiate with unions. The expected completion time along that path is 26+60=86 and the variance along that path is 4+100=104. That gives us: Probability of within 90 days ≈ .65 Note: It is interesting to see the Monte Carlo results of the Consolidation Project when it is simulated 200 times using a triangular distribution to represent the activity distributions. Critical path Number of times critical Probability Average duration 1, 5, 7, 8, 12, 14 106 .530 118.7 3, 10 40 .200 122.0 4, 11, 13 54 .270 125.8 The average simulated project duration for each path (e.g., 118.7) demonstrates the impact of merge bias from the manual computed method that yielded a duration of 114 time units. The fact that two paths, other than the critical path, have probabilities of .200 and .270 respectively, suggests there is at least a good chance one could become critical. if they have a serious delay. The simulated results allow more for objective assessment of scheduling risk. 3. The expected times and variances for the project activities are given below. What is the probability of completing the project in 25 periods? Using Project, we see that the completion time is 28 time periods and the critical path is 1-4-6-8 using the ID numbers above. ID te Variance Critical 1 6 3 x 2 7 4 3 4 2 4 4 2 x 5 10 5 6 16 10 x 7 3 2 8 2 1 x P .23 Case A7.1 International Capital, Inc.—Part A International Capital, Inc. (IC), is a small investment banking firm that specializes in securing funds for small- to medium-sized firms. IC is able to use a standardized project format for each engagement. Only activity times and unusual circumstances change the standard network. Beth Brown has been assigned to this client as project manager partner and has compiled the network information and activity times for the latest client as follows: Brown and other broker partners have a policy of passing their plan through a project review committee of colleagues. This committee traditionally checks that all details are covered, times are realistic, and resources are available. Brown wishes you to develop a report that presents a planned schedule and expected project completion time in workdays. Include a project network in your report. The average duration for a sourcing capital project is 70 workdays. IC partners have agreed it is good business to set up projects with a 95 percent chance of attaining the plan. How does this project stack up with the average project? What would the average have to be to ensure a 95 percent chance of completing the project in 70 workdays? Activity Optimistic Most likely Pessimistic te Variance A 4 7 10 7 1 B 2 4 8 4 1 C 2 5 8 5 1 D 16 19 28 20 4 E 6 9 24 11 9 F 1 7 13 7 4 G 4 10 28 12 16 H 2 5 14 6 4 I 5 8 17 9 4 J 2 5 8 5 1 K 17 29 45 30 22 It is possible to compress the project to reach about a 95% chance of hitting the average. This would require compression down to 61 days from the current plan of 73 days. See below. Chance of average (70) with initial plan (73) Z=(T_s-T_E)/√(Sum of critical path variances)=(70-73)/√36=-0.5 From Table A7.2, P = .31 This does not meet the 95% chance criterion. Getting to the average of 70 days and upping the chance of making it would require compressing the project. Compressing to 61 days will improve the chance of meeting the 95% confidence level (but probably increase the risk and lower the real chance of 95 percent). Z=(70-61)/√36=+1.5 From Table A7.2, P = .93 Which is near the 95 percent criterion. Case A7.2 Advantage Energy Technology Data Center Migration—Part B In Chapter 6, Brian Smith, network administrator at Advanced Energy Technology (AET), was given the responsibility of implementing the migration of a large data center to a new office location. Careful planning was needed because AET operates in the highly competitive petroleum industry. AET is one of five national software companies that provide an accounting and business management package for oil jobbers and gasoline distributors. A few years ago, AET jumped into the “application service provider” world. Their large data center provides clients with remote access to AET’s complete suite of application software systems. Traditionally, one of AET’s primary competitive advantages has been the company’s trademark IT reliability. Due to the complexity of this project, the Executive Committee insisted that preliminary analysis of the anticipated completion date be conducted. Brian compiled the following information, in preparation for some PERT analysis: Expected durations and variances are shown in the table below. 1. Based on these estimates and the resultant expected project duration of 69 days, the executive committee wants to know what the probability is of completing the project before a scheduled time (TS) of 68 days. Z=(T_S-T_E)/√(∑▒σ_(T_E)^2 )=(67-69)/√6.639=(-2)/2.5766=-0.776 P[Z < -0.776] ≈ 0.24 From Table A7.2 Therefore, probability of completing the project before TS = 0.24 or about 24 percent. 2. The significance of this project has the executive committee very concerned. The committee has decided that more analysis of the duration of each activity is needed. Prior to conducting that effort, they asked Brian to calculate what the expected project duration would have to be to ensure a 93 percent chance of completion within 68 days. Using Table A7.2, a Z value of +1.5 would be required to ensure that the probability of Z being less than +1.5 equals 0.93 (or a 93% chance). That is: P[Z < +1.5] ≈ 0.93 From Table A7.2; therefore, The expected project duration would have to be compressed to 64 days to provide a 93% chance of completion within 68 days. Advantage Energy Technology (AET)—Accounts Payable System The AET sales department has been concerned about a new start-up company that is about to release an accounts payable system. Their investigation indicates that this new package will provide features which will seriously compete with AET’s current Accounts Payable system and in some cases exceed what AET offers. Tom Wright, senior applications developer at AET, has been given the responsibility of analyzing, designing, developing, and delivering a new accounts payable system (A/P) for AET customers. Complicating the issue is the concern of the sales department about AET’s recent inability to meet promised delivery dates. They have convinced CEO (Larry Martain) that a significant marketing effort will have to be expended to convince the clients they should wait for the AET product rather than jump to a package provided by a new entry to the petroleum software business. Companion to this effort is the importance of the performance of the software development group. Consequently, Tom has decided to take the following action: tighten up the estimating effort by his developers; incorporate some new estimating procedures; and use some PERT techniques to generate probabilities associated with his delivery dates. Tom’s planning team made a first-cut at the set of activities and associated durations: The revised expected completion times and variances are shown below. 3. Based on these estimates and the critical path, the project duration is estimated at 149 days. But an AET salesperson in the Southeast Region has discovered that the competing A/P package (with significant improvements) is scheduled for delivery in approximately 145 days. The sales force is very anxious to beat that delivery time. The executive committee asks Tom for an estimated probability of reducing his expected project duration by two days. The revised expected completion time is 149 with a variance of 7.806. P[Z < -0.7158] ≈ 0.24 From Table A7.2 Therefore, probability of beating the delivery date by two day (147 days) = 0.24. 4. The executive committee is advised by Tom that after all the estimating was completed, he determined that one of his two critical systems analysts might have to move out of the area for critical family reasons. Tom is still very confident that with some staff rearrangements, assistance from a subcontractor, and some “hands on” activities on his part he can still meet the original delivery date, based on 149 days. This news is very disconcerting to the committee and the sales staff. At this point, the committee decides that based on the most recent delivery performance of AET, a modified, comfortable delivery date should be communicated to AET clients—one that Tom and his staff are very likely to meet. Consequently, Tom is asked to calculate what the expected project duration would have to be to ensure a 98 percent chance of completion within 160 days—that is a “published, drop dead date” that can be communicated to the clients. 4. Using Table A7.2, a Z value of +2.0 would be required to ensure that the probability of Z being less than +2.0 equals 0.98 (or a 98% chance). That is: P[Z < +2.0] ≈ 0.98 From Table A7.2; therefore, The expected project duration (TE) would have to be compressed to 154 days to provide a 98% chance of completion within 160 days. Solution Manual for Project Management: The Managerial Process Erik Larson, Clifford F. Gray 9781259666094, 9780078096594
