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Stephen Ward: Performance uncertainty management is a more effective approach than risk management


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Risk SIG conference: 24th October 2013

Published in: Business, Economy & Finance
  • "How to Manage Project Opportunity and Risk" is a good read that is filled with insight. Stephen Ward clarifies that unexpected events, what we often call "risk", is merely one instantiation of the broader phenomena called "uncertainty". The epiphany for me was to see all ambiguity as potential for risk, and subsequently engage clarification tools to see what lurks beneath this fog. If we are willing to expend some time, effort, and methodology to see through the fog, we'll encounter fewer surprises, see new possibilities, and better understand our world.
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Stephen Ward: Performance uncertainty management is a more effective approach than risk management

  1. 1. apm risk SIG 24 October 2013 Uncertainty or risk - is there a difference? Performance uncertainty management is a more effective approach than risk management Stephen Ward Southampton Management School University of Southampton
  2. 2. Cause (source) Source of Risk (threat) Effect (on some aspect of performance) Possible unwelcome effect on performance ‘Risk’ Source of opportunity Possible welcome effect on performance
  3. 3. Welcome Performance level outcomes Look for opportunities Aspiration level Unwelcome outcomes Look out for threats
  4. 4. Threat or opportunity – what’s the difference? A typical opportunity (weigh up) The free lunch (take up) -ve A +ve -ve A A pure threat (avoid/reduce) A mixed bag (pass up) -ve A +ve +ve -ve A +ve A = aspiration level • Most opportunities involve some possibility of downside • Some important sources of uncertainty are not easily classified as threat or opportunity
  5. 5. True or False? Threat management is about 1. decreasing the probability of downside effects or 2. reducing downside effects Opportunity management is about 3. increasing the probability of upside effects or 4. increasing upside effects
  6. 6. Threat and opportunity management Threat management ? (No change in probability of failure) A A Uncertainty management ? Opportunity management ? (No change in probability of success) A A A = aspiration level
  7. 7. Observations 1. Opportunity and threat management may be separable, but it is inefficient to use separate processes. 2. A combined approach should increase the scope of improvements obtainable. 3. There is no need for separate processes focused on threats or opportunities. Management of uncertainty is the key issue - explore and understand the origins of performance related uncertainty, before seeking to manage it.
  8. 8. Some obvious implications about uncertainty, objectives, and risk 1. Setting objectives (aspiration levels) drives risk. 2. If performance is multi-dimensional, so is risk. 3. Uncertainty management (and risk management) should recognise trade-offs between performance objectives 4. Different stakeholders may have different views of project uncertainty, objectives, associated risk, opportunities, and their management.
  9. 9. Uncertainty management More than just threat or opportunity management Threats Opportunities Uncertainties Understand where and why uncertainty is important in a given performance context, before seeking to manage it.
  10. 10. Cause (source) Effect (on some aspect of performance) Uncertainty about: • Relevant aspects of performance • Nature of causes (possible intended actions, conditions, events) • The current and future state of causes • The possible effects of causes on different aspects of performance • The probability of a particular cause producing a particular effect • Linkages between various causes and/or various effects • Underlying (component) causes (and the decomposition problem)
  11. 11. A very simple cause – effect chain Cause Cause Cause Effect 1 Cause Effect 2 Cause Effect 3 Cause Effect 1 = effect on performance attribute 1 etc.
  12. 12. A knowledge perspective - Relevant to all management processes Address roots of uncertainty – – – – – – – What do we need to know – for what purpose? When do we need to know it? What knowledge have we got? When is knowledge available? Where is knowledge? – Who has it? How do we get it? – What resources do we need to get it? What is the value of different pieces of knowledge? How does this change over time as the situation changes?
  13. 13. Project specific knowledge Address roots of uncertainty – Who is involved? – Why are they involved? – What is the subject matter? – Which way is the work to be done? – What resources are required? – When does the work have to be done?
  14. 14. Four types of uncertainty 1. Event uncertainty – possibilities due to specific events or conditions 2. Inherent variability – in factors that are always present 3. Systemic uncertainty – associated with relationships between sources of uncertainty 4. Ambiguity uncertainty – associated with lack of knowledge, understanding or agreed plans, and a residual of all uncertainty not included in 1-3 above.
  15. 15. Sources of uncertainty associated with estimates • Lack of clear specification of what is required • Novelty or lack of experience • Complexity – number of influencing factors and associated interdependencies • Limited analysis of the processes involved • Possible events or conditions which might affect the activity • Bias
  16. 16. Effective project governance needs effective uncertainty management to ensure appropriate: • levels of planning and decision making • assessment and management of uncertainty and risk • evaluation of projects at various stages of the life cycle • implementation of plans
  17. 17. Life cycle stage Governance focus Concept shaping Business case from a corporate strategy perspective Design, operations and termination strategy shaping Operations planning from an operations management perspective Execution & delivery strategy shaping Execution and delivery planning from a project management perspective Tactics shaping Provision of detail necessary to implement strategy Execution & Delivery Implementation of plans, monitoring and control Operations & Support Implementation of plans, monitoring and control Termination Implementation of plans, monitoring and control
  18. 18. Performance uncertainty management in the project life cycle needs to consider: • ongoing evaluation of uncertainty about future performance • modifications to design and base plans • development of contingency plans • monitoring and managing uncertainty • remaining life cycle stages
  19. 19. Moving from Risk Management to Performance Uncertainty Management One step- revise common practice risk management terminology – Replace the term ‘risk’ with ‘uncertainty’ – Replace • Problem issue • Weakness issue • Impact consequence • Mitigate modify resolve uncertainty • avoid risk
  20. 20. Moving from Risk Management to Performance Uncertainty Management  Expose and investigate pertinent uncertainty  transparent analysis  clarify the quality of estimates  variability assessment  Clarity efficient effort in analysis and planning  Address uncertainty about priorities and tradeoffs  clarify priorities and tradeoffs  motivate efficient tradeoffs  Opportunity efficient planning and plans
  21. 21. Recommended reading! Chris Chapman and Stephen Ward (2011) How to manage project opportunity and risk – why uncertainty management can be a much better approach than risk management. Wiley David Cleden (2009) Managing project uncertainty. Gower Publishing Douglas Hubbard (2009) The failure of risk management - why its broken and how to fix it. Wiley Professor Stephen Ward Southampton Management School, University of Southampton, Highfield, Southampton, SO17 1BJ
  22. 22. Appendices
  23. 23. Some definitions of ‘risk’ Something happening that may have an impact on the achievement of objectives…. (National Audit Office , 2000) An uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective. (Project Management Institute, A guide to the project management body of knowledge, 2000 edition. USA: project management institute, 2000, p127) The implications of significant uncertainty about the level of project performance achievable. (C Chapman and S Ward , Project risk management: processes, techniques and insights. Wiley, 2003)
  24. 24. Some initial thoughts about threats Threats - unwelcome things that might happen to us (bad luck?). - mostly don’t need to do anything, or omit to do something, to create a threat Threat management – avoid or reduce circumstances that could generate losses relative to aspirations. A key question: Are aspirations too ambitious?
  25. 25. Some initial thoughts about opportunities Opportunities - favourable combinations of circumstances that might happen (good luck ?) or that can be created. - mostly need to do something (proactively), to create and exploit an opportunity. Opportunity management – proactive action to increase potential for gains relative to aspirations. A key question: Are aspirations too modest?
  26. 26. Implications of a focus on threats • Impaired ability/incentive to pursue upside • Unintended consequences of budgetary controls (exception based control, seeking to just meet performance targets) • Diverts attention from upside possibilities (avoidance/reduction, neutralisation) • Risk attitude is influenced by the way choices are framed • Concern to set challenging targets (threshold levels) for performance don’t think about the effect on other performance criteria
  27. 27. Identifying opportunities • Adopt same perspectives as for threats: • a corporate strategy perspective • an asset management perspective • a people perspective • a project perspective • a systems perspective • Potential synergy – make wider use of existing resources • Sources of good luck • Consider good general strategies for coping with uncertainty (flexibility, resilience, robustness, incrementalism)
  28. 28. Identifying opportunities via threats • Understand the full implications of a threat management action • Consider the scope of responses to threats • Consider interdependencies between threats and general responses that address a range of threats • Absence or inverse of threats (or neutral descriptions) • Scrutinise constraints
  29. 29. A traditional four stage asset lifecycle example Basic lifecycle Dominant management aspect stages Conceptualisatio Operations or corporate management n initially, then corporate management Planning Corporate management initially, then project management Execution and Project management delivery Utilisation Operations management
  30. 30. Management responses • Information systems • Infrastructure to manage project portfolio • Asset Management • Value management • Whole Life Cycle Costing • Project management • Procurement arrangements • Risk management • Performance uncertainty management