Understanding Risk before
you start managing it
Richard Newey
Davis Langdon LLP

Lets look at Risk

Defining Risk
• “An uncertain event or set of
circumstances that, should it or they occur,
will have an effect on the achievement of
the (business or) project’s objectives” APM
PRAM Guide 1997
• “Project risk is an uncertain event or
condition that, if it occurs, has a positive or
negative effect on a project objective. A
risk has a cause, and if it occurs, an
impact” Revised PMBOK 2000.

Overview - Risk Management
Definitions
Edwards & Bowen (1998) define risk management as:
‘…a systematic approach to dealing with risk. A risk management system should:
establish an appropriate context; set goals and objectives; identify and analyse risks;
influence risk decision making; and monitor and review risk responses.’ (p.339)
MoR:
‘The term ‘management of risk’ incorporates all the activities required to identify and
control the exposure to risk which may have an impact on the achievement of an
organisation’s business objectives.’
The Project Management Institute:
‘Risk Management is the systematic process of identifying, analysing and responding to
project risk. It includes maximising the probability and consequences of positive events
and minimizing the probability and consequences of positive events and minimising the
probability and consequences of adverse events to project objectives.’
APM PRAM Guide 1997:
“The process whereby responses to the risks are formulated, justified, planned, initiated,
progressed, monitored, measured for success, reviewed, adjusted and (hopefully) closed”

Considerations
• Likelihood – Probability
• Impact –
Effect on you…severity, consequence etc
• Proximity – when?
• Perception
• Testosterone?

What are you worried about?
• Death
• Safety for you – your kids
• Economy
– House
– Taxes
– Employment – job security

Probability
Death
Disease kills 15 times more people than accidents
Of the 500,000 people that die every year
• 3000 people are killed on our roads (500 of these are
alcohol related) – 0.6% of all deaths, 0.01% of the
population.
• 4000 accidental deaths around the home - 0.8% of the
all deaths 0.07% of the population
• 18 knife fatalities this year (27 in total last year)

Safety of your children
• The chance of someone abducting your
child is so low, it would only happen once
every 200,000 years; and even then you
would almost certainly get your child back
anyway.

The food you eat
Organic…
• Plants produce toxins naturally to kill bugs – these cause cancer in
the same way as man made pesticides
• The focus of regulatory policy is on synthetic chemicals, although
99.9 percent of the chemicals humans ingest are natural.
• Plants in the human diet contain thousands of natural pesticides that
protect them from insects and other predators.
• There is no convincing evidence that synthetic chemical pollutants
are important for human cancer. Regulations that try to eliminate
minuscule levels of synthetic chemicals are enormously expensive:
• The Environmental Protection Agency has estimated that
environmental regulations cost society $140 billion per year.
• if reducing synthetic pesticides makes fruits and vegetables more
expensive, thereby decreasing consumption, then cancer will be
increased, particularly for the poor.

Breast Cancer
The commonly quoted figure of 1 in 9 extends over a woman’s
lifetime.
Magnitude of this risk will not manifest until a woman is over 80
years.
• Risk up to age 25 1 in 15000
• Risk up to age 30 1 in 1900
• Risk up to age 40 1 in 200
• Risk up to age 50 1 in 50
• Risk up to age 60 1 in 23
• Risk up to age 70 1 in 15
• Risk up to age 80 1 in 11
• Risk up to age 85 1 in 10
Source Cancer Research UK.

Travelling safely
Flying is much safer than driving a car. You'd
have to fly every day for the next 26,000 years
to die in a crash. (during that time you would
have died 20 times driving to the airport.)

Travel Perception
• Air industry will choose per Km basis as
most fatalities occur on landing and take
off
• Land based transport will select fatalities
per journey or hours of travel – risks are
uniformly spread

Repossessions
• 12,285,000 mortgages in UK
• 25840 2007 - 0.21% of all mortgages
• 45000 2008 – 0.37% of all mortgages
• % increase = 174%
• HEADLINE GRABBING
Actual increase = 0.16 of 1%

Consequences of losing
your property
• Who is actually taking the most risk?
You or the Bank?
• Most houses that are repossessed are high loan
value houses (i.e. the bank has lent you perhaps
95% of the value).
• Higher value to loan repossessions are rare – yo
have many more options (Sell, downsize etc)

What’s the worst that can happen?
Lose your job, lose your house, lose your
money…
Destitution
• an extreme state of poverty, in which a
person is almost completely lacking in
resources or means of support.
• In this country – probability is negligible.

Protecting against risk
• If you are protected – you take more risks
• If you are protected – you are in more
danger
• Children are unlikely to be able to cope
with the world unless they learned the
consequences of risk

Helmets are shown to have no statistically
significant effect on the probability of a fatality
given that a motorcycle accident has occurred.
This means that based on standard statistical
tests we cannot reject the claim that helmets do
not affect the probability that a rider will survive a
motorcycle accident.
It is shown that past a critical impact velocity to the
helmet (approximately 13 mph), helmet use has a
statistically significant effect which increases the
severity of neck injuries.
If a major concern of policy makers is the prevention
of fatalities, helmet legislation may not be effective
in achieving that objective.

Project Risk Management
helps deliver:
• Robust Management Infrastructure – can drive the
development of processes and procedures
• Informs decisions
• Clear, realistic, achievable Project Objectives
• Coherent Risk Profile and Risk Allocation Matrix
• Effective management of Risk
• Improved confidence in delivery of successful outcomes
• Quantified Risk Allowances to assist Funding and
Control
• Regular reports to all levels of Management
• Lessons Learnt for continuous Improvement

Integrating RM in the
Project Cycle
Inception
Commission Strategy
Construct Feasibility
Design

Focus on raising
the maturity
Optimised 5
Risk
Embedded 4 management
objective
3
2 Established
1 Formalised
Undeveloped

Causal mapping & Structure

Economic
Political
Social
High Inflation
Political interference Graduate Recruitment –
on the Olympics Shortage
The Global
Credit Crunch
Policy not to employ Change in
Consultants for Government
Government work Spending Policy
Fraud
New Cost Planning Software
Government imposed used by Architects
Green Tax
Environmental UK Employment Law Changes
Technological
Legal

LIKELIHOOD
The Plan - Scales and ranges
Description Scenario Code Guide RAMP Value
Letter Probability
Very High Almost certain to occur VH 90 16
High More likely to occur than not H 75 12
Medium Fairly likely to happen M 50 8
Low Low but not impossible L 25 4
IMPACT
Very Low Extremely unlikely to happen VL 5 2
Description Scenario Code RAMP Value Guide Cost Guide Time %
Letter % of Project of Prog.
Very High Critical impact on the achievement of VH 1000 2 5
objectives and overall performance. Huge
impact on costs and/or reputation. Very
difficult and possibly long-term to recover.
High Major impact on costs, objectives. Serious H 500 1.5 3
impact on output and/or quality and reputation.
Medium to long-term effect and expensive to
recover.
Medium Reduces viability significant waste of time and M 50 1 1.5
resources and impact on operational
VH 16 80 800 8000 16000
efficiency, output, and quality. Medium term
effect, which may be expensive to recover.
Low Minor loss, delay, inconvenience or L 5 0.5 0.75
H 12 60 600 6000 12000
interruption. Short to medium term effect.
Likelihood
Very Low Minimal loss, delay, inconvenience or VL 1 0.25 0.25
interruption. Can be easily and quickly M 8 40 400 4000 8000
remedied.
L 4 20 200 2000 4000
VL 2 10 100 1000 2000
VL L M H VH
Impact

The Plan - Thresholds

Analysis - Proximity
H
Immediate
area of
focus
LIKELIHOOD
DISTANT
PROXIMITY
L IMMINENT
L IMPACT H

Mitigation
• Value for money
• Appropriate
• Doable
• Success should be obvious
• Focus on:
– Reducing likelihood
– Reducing the impact
• Need not be what has been done before
• Ignore the ‘flannel’ – ask will it really make a
difference to this risk?

The Risk Manager
• Understand the risks
• Don’t sit back and wait -
monitor and drive actions
and change
• Share knowledge and
lessons
• Constantly strive to raise
maturity