Project Management Risk Management
Outline <ul><li>Introduction </li></ul><ul><li>Definition of Risk </li></ul><ul><li>Tolerance of Risk </li></ul><ul><li>De...
Outline <ul><li>Risk Analysis </li></ul><ul><li>The Monte Carlo Process </li></ul><ul><li>Risk Handling </li></ul><ul><li>...
Basic Concept <ul><li>Risk management focuses on : </li></ul><ul><ul><li>Known unknowns </li></ul></ul><ul><ul><li>Proacti...
The alternative to proactive management is  reactive management , also called crisis management. This requires significant...
Risk Management <ul><li>Risk management focuses on the future </li></ul><ul><li>Risk and information are inversely related...
Risk Management  (CONT.) <ul><li>Historically, we focused our attentions on schedule and cost risk management. </li></ul><...
Definition Of Risk(1/2) Risk  =  f ( Likelihood, Impact ) <ul><li>Likelihood is the probability of occurrence </li></ul><u...
Definition of Risk(2/2) Risk  =  f (Hazard, Safeguard )
Risk is a Function of its Components
Tolerance For Risk <ul><li>Risk avoider </li></ul><ul><li>Risk neutral </li></ul><ul><li>Risk lover </li></ul>
Risk Types
Definition of Risk Management <ul><li>Risk management is the act or practice of dealing with risk. </li></ul><ul><li>It in...
Decision-Making Categories <ul><li>Complete uncertainty </li></ul><ul><li>Relative uncertainty (partial information) </li>...
Developing and Using Payoff Tables Maximin Approach Maximax Approach Minimax regret Approach Insufficient Reason Approach ...
Five Steps To Develop Payoff Table <ul><li>List all the alternatives. </li></ul><ul><li>List the future consequences of ea...
Decision-Making under  Certainty (1/2) <ul><li>A company wish to invest $50 M to develop a new product </li></ul><ul><li>T...
Decision-Making under  Certainty (2/2) Note: 1. Profit in Million 2.  S 3  is the best regarding how market is
Decision-Making under  Risk  (1/2) <ul><li>A company wish to invest $50 M to develop a new product </li></ul><ul><li>Three...
Decision-Making under  Risk  (2/2) Note: 1.  E 1 =56,  E 2 =52, and  E 3 =66  2.  S 3  is the best choice
Decision-Making under  Uncertainty  (1/9) <ul><li>Uncertainty: </li></ul><ul><ul><li>Meaningful assignment of probabilitie...
Decision-Making under  Uncertainty  (2/9) <ul><li>Maximax (Hurwicz) </li></ul><ul><ul><li>Optimistic </li></ul></ul><ul><u...
Decision-Making under  Uncertainty  (3/9) <ul><li>Maximin (Wald) </li></ul><ul><ul><li>Concerns how much he can afford to ...
Decision-Making under  Uncertainty  (4/9) <ul><li>Minimax (Savage) </li></ul><ul><ul><li>Sore loser </li></ul></ul><ul><ul...
Decision-Making under  Uncertainty  (5/9)
Decision-Making under  Uncertainty  (6/9) <ul><li>Laplace </li></ul><ul><ul><li>Transform the decision making under uncert...
Decision-Making under  Uncertainty  (7/9) 1/3 1/3 1/3
Decision-Making under  Uncertainty  (8/9) <ul><li>Decision Tree </li></ul>
Decision-Making under  Uncertainty  (9/9) <ul><li>Decision Tree Example </li></ul>Direction of computation
Risk Management Processes <ul><li>Risk planning </li></ul><ul><li>Risk assessment </li></ul><ul><ul><li>Risk identificatio...
Risk Planning Poor Risk Management Technical Inability Customer Expectations Actual Performance Performance Time
Risk Assessment <ul><li>The problem definition stage of risk management </li></ul><ul><li>Identify  and  analyze  program ...
Life Cycle Risk Analysis
Types Of Risks (General) <ul><li>Business risks </li></ul><ul><li>Insurable (pure) risk </li></ul><ul><ul><li>Direct prope...
Types Of Risk (PMI Method) <ul><li>External – unpredictable </li></ul><ul><li>External – predictable </li></ul><ul><li>Int...
Risk Types at Boeing <ul><li>Financial risks </li></ul><ul><li>Market risks </li></ul><ul><li>Technical risks </li></ul><u...
Risk Quantification STAGE I STAGE II GUID- ANCE WARHEAD COST MANU. TEST DESIGN HIGH MEDIUM LOW LEGEND PROGRAM SUMMARY
Risk Handling <ul><li>Assumption (retention) </li></ul><ul><li>Avoidance </li></ul><ul><li>Control (mitigation) </li></ul>...
Future Risks Customer’s Knowledge Experienced Inexperienced Simple Complex Contract Type INCREASING RISKS
How Much Risk Is Acceptable? <ul><li>High tolerance for risk </li></ul><ul><li>Medium tolerance for risk </li></ul><ul><li...
Degrees of Downstream Risk R&D Manufacturing Marketing Time Low Risk
Degrees of Downstream Risk R&D Manufacturing Marketing Information Exchange Time Moderate Risk
Degrees of Downstream Risk R&D Manufacturing Marketing Time High Risk
The Risk-Reward Matrix Low High Reward Medium Risk High Low Medium Quality   of Resources   Needed Low Medium High
Which Method to Use? Project Procedural Documentation Guidelines High Low Tolerance for Risk Rigid Policies/ Procedures As...
Prioritization of Risks Schedule Cost Technical Performance or Quality First  (Highest ) Priority Second  Priority Third P...
Risk Interdependencies
Interacting Risks Specification Limit On Characteristic B Product Feature A Product Feature B Desirable Undesirable Undesi...
Risk Categories at Boeing
Tolerance for Risk
Risk Control Measures Intensity of Controls Risk Intensity Standard Controls High Low Low Extreme Range of Controls
Investment in Risk Management
Risk Controls Schedule Length Risk Controls Appropriate Too Long Low High Too Many Risk Management Filters and Gates No Ri...
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(17 Risk Management)

  1. 1. Project Management Risk Management
  2. 2. Outline <ul><li>Introduction </li></ul><ul><li>Definition of Risk </li></ul><ul><li>Tolerance of Risk </li></ul><ul><li>Definition of Risk Management </li></ul><ul><li>Certainty, Risk, and Uncertainty </li></ul><ul><li>Risk Management Process </li></ul><ul><li>Risk Planning </li></ul><ul><li>Risk Assessment </li></ul><ul><li>Risk Identification </li></ul>
  3. 3. Outline <ul><li>Risk Analysis </li></ul><ul><li>The Monte Carlo Process </li></ul><ul><li>Risk Handling </li></ul><ul><li>Selecting the Appropriate Response Mechanism </li></ul><ul><li>Risk Monitoring </li></ul><ul><li>Some Implementation Considerations </li></ul><ul><li>The Use of Lessons Learned </li></ul><ul><li>Dependencies between Risks </li></ul><ul><li>The Impact of Risk Handling Measures </li></ul><ul><li>Risk and Concurrent Engineering </li></ul>
  4. 4. Basic Concept <ul><li>Risk management focuses on : </li></ul><ul><ul><li>Known unknowns </li></ul></ul><ul><ul><li>Proactive management </li></ul></ul>
  5. 5. The alternative to proactive management is reactive management , also called crisis management. This requires significantly more resources and takes longer for problems to surface. Basic Concept
  6. 6. Risk Management <ul><li>Risk management focuses on the future </li></ul><ul><li>Risk and information are inversely related </li></ul>
  7. 7. Risk Management (CONT.) <ul><li>Historically, we focused our attentions on schedule and cost risk management. </li></ul><ul><li>Today, our primary emphasis is on technological risk management: </li></ul><ul><ul><li>Can we design it and build it? </li></ul></ul><ul><ul><li>What is the risk of obsolescence? </li></ul></ul>
  8. 8. Definition Of Risk(1/2) Risk = f ( Likelihood, Impact ) <ul><li>Likelihood is the probability of occurrence </li></ul><ul><li>Impact is the amount at stake </li></ul>event
  9. 9. Definition of Risk(2/2) Risk = f (Hazard, Safeguard )
  10. 10. Risk is a Function of its Components
  11. 11. Tolerance For Risk <ul><li>Risk avoider </li></ul><ul><li>Risk neutral </li></ul><ul><li>Risk lover </li></ul>
  12. 12. Risk Types
  13. 13. Definition of Risk Management <ul><li>Risk management is the act or practice of dealing with risk. </li></ul><ul><li>It includes: </li></ul><ul><li>planning for risk, </li></ul><ul><li>assessing risk issues, </li></ul><ul><li>developing risk handling strategies, and </li></ul><ul><li>monitoring risk to determine how they have changed. </li></ul>
  14. 14. Decision-Making Categories <ul><li>Complete uncertainty </li></ul><ul><li>Relative uncertainty (partial information) </li></ul><ul><li>Complete certainty </li></ul>
  15. 15. Developing and Using Payoff Tables Maximin Approach Maximax Approach Minimax regret Approach Insufficient Reason Approach Establishing the procedure to follow Construct the Payoff table Decision-making under certainty Decision-making under complete uncertainty Decision-making under risk Expected Monetary Value (EMV) Approach Expected Opportunity Loss (EOL) Approach Expected Value of Perfect Information (EVPI) Approach
  16. 16. Five Steps To Develop Payoff Table <ul><li>List all the alternatives. </li></ul><ul><li>List the future consequences of each alternative. </li></ul><ul><li>Identify the payoffs associated with each combination. </li></ul><ul><li>Assess the degree of certainty that these combinations will materialize </li></ul><ul><li>Decide on a decision criterion. </li></ul>
  17. 17. Decision-Making under Certainty (1/2) <ul><li>A company wish to invest $50 M to develop a new product </li></ul><ul><li>Three possible demand: </li></ul><ul><ul><li>Strong, Even, and Low </li></ul></ul><ul><li>Three ways or not to develop product </li></ul><ul><ul><li>A, B, and C </li></ul></ul>
  18. 18. Decision-Making under Certainty (2/2) Note: 1. Profit in Million 2. S 3 is the best regarding how market is
  19. 19. Decision-Making under Risk (1/2) <ul><li>A company wish to invest $50 M to develop a new product </li></ul><ul><li>Three possible demand: </li></ul><ul><ul><li>Strong, Even, and Low </li></ul></ul><ul><li>Three ways or not to develop product </li></ul><ul><ul><li>A, B, and C </li></ul></ul><ul><li>Probabilities are assigned to each possible state of nature </li></ul>
  20. 20. Decision-Making under Risk (2/2) Note: 1. E 1 =56, E 2 =52, and E 3 =66 2. S 3 is the best choice
  21. 21. Decision-Making under Uncertainty (1/9) <ul><li>Uncertainty: </li></ul><ul><ul><li>Meaningful assignment of probabilities are not possible </li></ul></ul><ul><li>No single dominant strategy </li></ul><ul><li>Maximax (Hurwicz) </li></ul><ul><li>Maximin (Wald) </li></ul><ul><li>Minimax (Savage) </li></ul><ul><li>Laplace </li></ul><ul><li>Decision Tree </li></ul>
  22. 22. Decision-Making under Uncertainty (2/9) <ul><li>Maximax (Hurwicz) </li></ul><ul><ul><li>Optimistic </li></ul></ul><ul><ul><li>Choose the strategy with maximum profit </li></ul></ul><ul><ul><li>Suitable for large company </li></ul></ul><ul><ul><li>Choose S 3 because maximum profit (100M) is S 3 </li></ul></ul>
  23. 23. Decision-Making under Uncertainty (3/9) <ul><li>Maximin (Wald) </li></ul><ul><ul><li>Concerns how much he can afford to lose </li></ul></ul><ul><ul><li>Pessimistic </li></ul></ul><ul><ul><li>Suitable for small company </li></ul></ul><ul><ul><li>Choose S 2 because maximize the minimum payoff (50M) from 40, 50, -50 </li></ul></ul>
  24. 24. Decision-Making under Uncertainty (4/9) <ul><li>Minimax (Savage) </li></ul><ul><ul><li>Sore loser </li></ul></ul><ul><ul><li>Minimize maximum regret </li></ul></ul><ul><ul><li>Subtract all elements in each column from the largest element </li></ul></ul><ul><ul><li>Maximum regret is the largest regret for each strategy </li></ul></ul><ul><ul><li>Minimize the maximum regret </li></ul></ul><ul><ul><li>Choose S 2 or S 2 because minimize the maximum regret from 50, 50, 140 </li></ul></ul>
  25. 25. Decision-Making under Uncertainty (5/9)
  26. 26. Decision-Making under Uncertainty (6/9) <ul><li>Laplace </li></ul><ul><ul><li>Transform the decision making under uncertainty into decision making under risk </li></ul></ul><ul><ul><li>Make priori assumption based on Bayesian statistics </li></ul></ul><ul><ul><li>Assuming the probability for each strategy is 1/3 </li></ul></ul><ul><ul><li>Choose S 1 because maximize the expected value from 60, 53.3, 43.3 </li></ul></ul>
  27. 27. Decision-Making under Uncertainty (7/9) 1/3 1/3 1/3
  28. 28. Decision-Making under Uncertainty (8/9) <ul><li>Decision Tree </li></ul>
  29. 29. Decision-Making under Uncertainty (9/9) <ul><li>Decision Tree Example </li></ul>Direction of computation
  30. 30. Risk Management Processes <ul><li>Risk planning </li></ul><ul><li>Risk assessment </li></ul><ul><ul><li>Risk identification </li></ul></ul><ul><ul><li>Risk analysis/quantification </li></ul></ul><ul><li>Risk handling </li></ul><ul><li>Risk monitoring </li></ul>
  31. 31. Risk Planning Poor Risk Management Technical Inability Customer Expectations Actual Performance Performance Time
  32. 32. Risk Assessment <ul><li>The problem definition stage of risk management </li></ul><ul><li>Identify and analyze program issues in terms of probability and consequences </li></ul>
  33. 33. Life Cycle Risk Analysis
  34. 34. Types Of Risks (General) <ul><li>Business risks </li></ul><ul><li>Insurable (pure) risk </li></ul><ul><ul><li>Direct property damage </li></ul></ul><ul><ul><li>Indirect consequential loss </li></ul></ul><ul><ul><li>Legal liability </li></ul></ul><ul><ul><li>Personnel </li></ul></ul>
  35. 35. Types Of Risk (PMI Method) <ul><li>External – unpredictable </li></ul><ul><li>External – predictable </li></ul><ul><li>Internal – non-technical </li></ul><ul><li>Internal – technical </li></ul><ul><li>Legal </li></ul>
  36. 36. Risk Types at Boeing <ul><li>Financial risks </li></ul><ul><li>Market risks </li></ul><ul><li>Technical risks </li></ul><ul><li>Production risks </li></ul>
  37. 37. Risk Quantification STAGE I STAGE II GUID- ANCE WARHEAD COST MANU. TEST DESIGN HIGH MEDIUM LOW LEGEND PROGRAM SUMMARY
  38. 38. Risk Handling <ul><li>Assumption (retention) </li></ul><ul><li>Avoidance </li></ul><ul><li>Control (mitigation) </li></ul><ul><li>Transfer </li></ul>
  39. 39. Future Risks Customer’s Knowledge Experienced Inexperienced Simple Complex Contract Type INCREASING RISKS
  40. 40. How Much Risk Is Acceptable? <ul><li>High tolerance for risk </li></ul><ul><li>Medium tolerance for risk </li></ul><ul><li>Low tolerance for risk </li></ul>
  41. 41. Degrees of Downstream Risk R&D Manufacturing Marketing Time Low Risk
  42. 42. Degrees of Downstream Risk R&D Manufacturing Marketing Information Exchange Time Moderate Risk
  43. 43. Degrees of Downstream Risk R&D Manufacturing Marketing Time High Risk
  44. 44. The Risk-Reward Matrix Low High Reward Medium Risk High Low Medium Quality of Resources Needed Low Medium High
  45. 45. Which Method to Use? Project Procedural Documentation Guidelines High Low Tolerance for Risk Rigid Policies/ Procedures Assumption Reduction Transfer Avoidance
  46. 46. Prioritization of Risks Schedule Cost Technical Performance or Quality First (Highest ) Priority Second Priority Third Priority
  47. 47. Risk Interdependencies
  48. 48. Interacting Risks Specification Limit On Characteristic B Product Feature A Product Feature B Desirable Undesirable Undesirable Desirable
  49. 49. Risk Categories at Boeing
  50. 50. Tolerance for Risk
  51. 51. Risk Control Measures Intensity of Controls Risk Intensity Standard Controls High Low Low Extreme Range of Controls
  52. 52. Investment in Risk Management
  53. 53. Risk Controls Schedule Length Risk Controls Appropriate Too Long Low High Too Many Risk Management Filters and Gates No Risk Plan
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