Risk Management

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9. Managing project risk
 Project risk management is the art and
science of identifying, assigning, and
responding to risk throughout the life of a
project and in the best interests of meeting
project objectives
 Risk management is often overlooked, but it
can help improve project success by helping
select good projects, determining project
scope, and developing realistic estimates

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9. What is risk?
 A dictionary definition of risk is “the possibility
of loss or injury”
 Project risk involves understanding potential
problems that might occur on the project and
how they might impede project success
 Risk management is like a form of insurance;
it is an investment.

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9. Why take risks?
Opportunities
Risks
Try to balance risks and opportunities

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9. Risk utility
 Risk utility or risk tolerance is the amount of
satisfaction or pleasure received from a
potential payoff
 Utility rises at a decreasing rate for a person
who is risk-averse
 Those who are risk-seeking have a higher
tolerance for risk and their satisfaction
increases when more payoff is at stake
 The risk neutral approach achieves a balance
between risk and payoff

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9. Risk utility function

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9. Common source of risks for
IT projects
 Several studies show that IT projects share
some common sources of risk
 The Standish Group developed an IT
success potential scoring sheet based on
potential risks
 McFarlan developed a risk questionnaire to
help assess risk
 Other broad categories of risk help identify
potential risks

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9. McFarlan’s risk questionnaire
1. What is the project estimate in calendar (elapsed) time?
( ) 12 months or less Low = 1 point
( ) 13 months to 24 months Medium = 2 points
( ) Over 24 months High = 3 points
2. What is the estimated number of person days for the system?
( ) 12 to 375 Low = 1 point
( ) 375 to 1875 Medium = 2 points
( ) 1875 to 3750 Medium = 3 points
( ) Over 3750 High = 4 points
3. Number of departments involved (excluding IT)
( ) One Low = 1 point
( ) Two Medium = 2 points
( ) Three or more High = 3 points
4. Is additional hardware required for the project?
( ) None Low = 0 points
( ) Central processor type change Low = 1 point
( ) Peripheral/storage device changes Low = 1
( ) Terminals Med = 2
( ) Change of platform, for example High = 3
PCs replacing mainframes

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9. Risk types
 Market risk: Will the new product be useful to the
organization or marketable to others? Will users
accept and use the product or service?
 Financial risk: Can the organization afford to
undertake the project? Is this project the best way to
use the company’s financial resources?
 Technology risk: Is the project technically feasible?
Could the technology be obsolete before a useful
product can be produced?

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9. Technology risk
David Anderson, a project manager for Kaman Sciences
Corp., shared his lessons learned from a project failure in
an article for CIO Enterprise Magazine. After spending two
years and several hundred thousand dollars on a project to
provide new client-server based financial and human
resources information systems for their company, Anderson
and his team finally admitted they had a failure on their
hands. Anderson admitted that he was too enamored by
using cutting edge technology and took a high-risk approach
on the project. He "ramrodded through" what the project
team was going to do, and he admitted that he was wrong.
The company finally decided to switch to a more stable
technology to meet the business needs of the company.
Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, 1998

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9. What is project risk?
 The goal of project risk management is to minimize
potential risks while maximizing potential
opportunities. Major processes include
 Risk identification: determining which risks are likely
to affect a project
 Risk quantification: evaluating risks to assess the
range of possible project outcomes
 Risk response development: taking steps to
enhance opportunities and developing responses to
threats
 Risk response control: responding to risks over the
course of the project

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9. Identifying risk
 Risk identification is the process of
understanding what potential unsatisfactory
outcomes are associated with a particular
project
 Several risk identification tools include
checklists, flowcharts, and interviews

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9. Potential risk areas
Knowledge Area Risk Conditions
Integration Inadequate planning; poor resource allocation; poor integration
management; lack of post-project review
Scope Poor definition of scope or work packages; incomplete definition
of quality requirements; inadequate scope control
Time Errors in estimating time or resource availability; poor allocation
and management of float; early release of competitive products
Cost Estimating errors; inadequate productivity, cost, change, or
contingency control; poor maintenance, security, purchasing, etc.
Quality Poor attitude toward quality; substandard
design/materials/workmanship; inadequate quality assurance
program
Human Resources Poor conflict management; poor project organization and
definition of responsibilities; absence of leadership
Communications Carelessness in planning or communicating; lack of consultation
with key stakeholders
Risk Ignoring risk; unclear assignment of risk; poor insurance
management
Procurement Unenforceable conditions or contract clauses; adversarial relations

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9. Quantifying risk
 Risk quantification or risk analysis is the
process of evaluating risks to assess the
range of possible project outcomes
 Determine the risk’s probability of occurrence
and its impact to the project if the risk does
occur
 Risk quantification techniques include
expected monetary value analysis,
calculation of risk factors, PERT estimations,
simulations, and expert judgment

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9. Expected Monetary Value

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Bid the Best Project by utilizing EMV
and your personal risk tolerance
Project Chance of Outcome Estimated Profits
Project 1
50%
50%
$120,000
-$50,000
Project 2
30%
40%
30%
$100,000
$50,000
-$60,000
Project 3
70%
30%
$20,000
-$5,000
Project 4
30%
30%
20%
20%
$40,000
$30,000
$20,000
-$50,000

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9. Simulation for quantifying risk
McDonnell Aircraft Company used Monte Carlo simulation to help
quantify risks on several advanced-design engineering projects. The
National Aerospace Plan (NASP) project involved many risks. The
purpose of this multi-billion dollar project was to design and develop a
vehicle that could fly into space using a single-stage-to-orbit approach.
A single-stage-to-orbit approach meant the vehicle would have to
achieve a speed of Mach 25 (25 times the speed of sound) without a
rocket booster. A team of engineers and business professionals
worked together in the mid-1980s to develop a software model for
estimating the time and cost of developing the NASP. This model was
then linked with Monte Carlo simulation software to determine the
sources of cost and schedule risk for the project. The results of the
simulation were then used to determine how the company would invest
its internal research and development funds. Although the NASP
project was terminated, the resulting research has helped develop
more advanced materials and propulsion systems used on many
modern aircraft.

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9. Expert judgment
 Many organizations rely on the intuitive
feelings and past experience of experts to
help identify potential project risks
 The Delphi method is a technique for
deriving a consensus among a panel of
experts to make predictions about future
developments

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9. Response to risk
 Risk avoidance: eliminating a specific threat
or risk, usually by eliminating its causes
 Risk acceptance: accepting the
consequences should a risk occur
 Risk mitigation: reducing the impact of a risk
event by reducing the probability of its
occurrence

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9. Risk Mitigation Strategies
Technical Risks Cost Risks Schedule Risks
Emphasize team support
and avoid stand alone
project structure
Increase the frequency of
project monitoring
Increase the frequency of
project monitoring
Increase project manager
authority
Use WBS and PERT/CPM Use WBS and PERT/CPM
Improve problem handling
and communication
Improve communication,
project goals understanding
and team support
Select the most experienced
project manager
Increase the frequency of
project monitoring
Increase project manager
authority
Use WBS and PERT/CPM

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9. Risk planning
 A risk management plan documents the
procedures for managing risk throughout the
project
 Contingency plans are predefined actions
that the project team will take if an identified
risk event occurs
 Contingency reserves are provisions held by
the project sponsor for possible changes in
project scope or quality that can be used to
mitigate cost and/or schedule risk

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9. Risk management questions
 Why is it important to take/not take this risk in
relation to the project objectives?
 What specifically is the risk and what are the risk
mitigation deliverables?
 How is the risk going to be mitigated? (What risk
mitigation approach is to be used?)
 Who are the individuals responsible for implementing
the risk management plan?
 When will the milestones associated with the
mitigation approach occur?
 How much is required in terms of resources to
mitigate risk?

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9. Response to risks
 Risk response control involves executing the
risk management processes and the risk
management plan to respond to risk events
 Risks must be monitored based on defined
milestones and decisions made regarding
risks and mitigation strategies
 Sometimes workarounds or unplanned
responses to risk events are needed when
there are no contingency plans

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9. Tracking risks
 Top 10 risk item tracking is a tool for
maintaining an awareness of risk throughout
the life of a project
 Establish a periodic review of the top 10
project risk items
 List the current ranking, previous ranking,
number of times the risk appears on the list
over a period of time, and a summary of
progress made in resolving the risk item

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9. Example for risk tracking
Monthly Ranking
Risk Item This
Month
Last
Month
Number
of Months
Risk Resolution
Progress
Inadequate
planning
1 2 4 Working on revising the
entire project plan
Poor definition
of scope
2 3 3 Holding meetings with
project customer and
sponsor to clarify scope
Absence of
leadership
3 1 2 Just assigned a new
project manager to lead
the project after old one
quit
Poor cost
estimates
4 4 3 Revising cost estimates
Poor time
estimates
5 5 3 Revising schedule
estimates

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9. Tools for tracking risks
 Databases can keep track of risks
 Spreadsheets can aid in tracking and
quantifying risks
 More sophisticated risk management
software helps develop models and uses
simulation to analyze and respond to
various project risks

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9. Good project risk management
 Unlike crisis management, good project risk
management often goes unnoticed
 Well-run projects appear to be almost
effortless, but a lot of work goes into running
a project well
 Project managers should strive to make
their jobs look easy to reflect the results of
well-run projects

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9. Discussion questions
 Can you avoid risks?
 What are common sources of risk for IT
projects?
 How does spreadsheet help to quantify risk?
 How does simulation help to quantify risk?
 What is the best way to plan for risks?
 What is the difference between contingency
plan and contingency reserve?

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9. Discussion questions
 Read and comment on interview questions
and answers at the end of this chapter.
What question or which response do you
find interesting and why?
 Which group of risks (internal, external)
described in this chapter is more critical to
an information system project? Why? What
is the most critical risk for any information
system project?

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9. Discussion questions
 Is user involvement important to risk
management? Why?
 Comment on sources of risk:
 continued management support
 top management style
 alignment with organizational needs
 user acceptance
 shifting goals and objectives

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9. Discussion questions
 Comment on sources of risk:
 vendors
 consultants
 contract employees
 market and change fluctuation
 government regulation
 What are effective ways of avoiding the risk
of losing internal talents to external
providers?