This document discusses managing risk in complex project environments. It begins by explaining that projects exist within complex financial, environmental, technological and political systems. It then discusses reframing how we view reality and risk when dealing with complexity and ambiguity. It also explains the duality of risk in terms of reward and regret from different stakeholder perspectives. The document then provides methods for managing risk, such as assumptions analysis and understanding interdependencies between risks. It advocates adapting project management approaches to account for complexity rather than relying only on past trends and data from less complex environments.

1. Perfect Storm Reality and Risk, Reward and Regret in Complex Project Environments PMOZ 2010, Brisbane, 23 – 26 August 2010 Terry McKenna CDipAF MBA MProjMgt PMP

2. contents complexityrules  projects: in the eye of the (perfect) storm complicated or complex? reframing reality  a mirror of our assumptions  accommodating stakeholder perspectives in projects a different look at risk recognising risk risk,reward & regret managingrisk assumptions analysis seeing complexity: analysis of risk interdependencies risk containment: source and scope 2

3. Financial Markets Security The Australian, 23rd March 2010, p.21 Financial Times, 17th October 2006 Special Report, p.1 Environment Globalisation HOT RISK AFR, 23rd March 2010, p.1 BRW, 8 - 16th March 2007 It’s impossible to ignore the dominant impact of Risk in business and investments.. ..and in a projectised world, projects are at the Epicentre of Risk So, the challenge is to confront our conventional perspective of projects... 3

4. Projects are Evolutionary (changing the Triangle) Complexity rules “Dynamic” Path for “radical innovation?” Mechanistic Synchronistic Environment Identity Reductionistic Time Cost “Static” Ruled by “Iron Triangle” Multiple characteristics Scope [Project well defined and bounded] [Project part of a greater world] “Epistemic Object” “Eco-System” Project Identity 4

5. complex? or complicated Component relationships (cause and effect) understood Component relationships (cause and effect) unclear Many, but finite, combinations and permutations Infinite, unknown combinations and permutations Rule-driven Behaviour-driven Ability to accurately model and validate Hypothesis-based models / simulations Deductive thinking Inductive thinking 5

6. complex? or complicated Invalidated assumptions Complex Complicated Increased Understanding Complicated system can become ‘complex’ as the assumptions constrain our interpretation... ... Some “complexities” become ‘merely’ complicated as our understanding grows Similarily, Project Management is emerging to cope with complexity... 6

7. coping withcomplexity SCRUM (from Software Engineering) recognizes the distinction between ‘Complicated’ and ‘Complex’, driven by degrees of uncertainty(technology) and ambiguity (requirements)... Source: http://lostgarden.com/2006/04/managing-game-design-risk-part-i.html 7

8. coping withcomplexity HOW to Implement Objectives Unclear Clear in the work of project management, the CCPM and DMO recognise that “complex” projects are different... Unclear Domain of “Complexity” WHAT Objectives are to be Achieved ...but is this always ‘complex’ or merely ‘highly complicated’... Clear Adapted from CCPM/DMO Complex Project Managers Standard Version 2.0 (2006) 8

9. coping withcomplexity Technology Shenhar and Dvir (2007) anticipate the need for a ‘new model’ for managing projects... Super-High-Tech High-Tech Medium-Tech System Array Assembly Lo-Tech Novelty Complexity Regular Derivative Platform Breakthrough ...evaluating them on their performance/characteristics. Fast/competitive Time-critical Blitz Pace Shenhar, A.J. & Dvir, D. (2007), Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation, Harvard Business School Press : Boston, MA. 9

10. reframingreality in a complex world, project “reality” becomes: Ambiguous Subjective ...a ‘mirror of our assumptions’ For Risk Managers, the challenge is to determine the ‘reality’ in the eyes of the stakeholders... The lack of evidence of something is not conclusive proof of its non-existence... We need to focus upon recognising risks in this reality... 10

12. arabic: رزق,"rizk", to seek propensityThese two perspectives are critical to appreciating the diversity of stakeholder interests when addressing risk... 11

14. risk is measureable, true uncertainty is not (Knight)12

16. “degrees of belief” in probability of future outcomes

17. priority: ‘probability’ vs ‘impact’: worried more about the catastrophic ‘black swan’ or the more likely, lower-impact event

18. risk “utility” – net gain (reward) or loss (regret)13

19. risk,reward and regret The Australian, 22 June, 2010. “Regret is the amount of self-insurance we can tolerate...a cut-off point below which we simply cannot bear the consequences of a wrong decision.” Dembo, R.S. & Freeman, A. (1998), The Rules of Risk: A Guide for Investors, John Wiley & Sons : New York, NY; p. 77. Attitude to reward and regret will be influenced by... Marginal benefit / utility: upside or downside relative to current situation Risk “portfolio”: consideration of project “liquidity” – are there sufficient reserves to cover total exposure, i.e. (P(rN) *I(rN)) 14

20. managingRISK “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.” Arrow (1992) We look to trends and patterns from past events as portents for future outcomes. Bust of Janus, Vatican Museum But in a complex world, why do we rely so very heavily upon the past as a reliable predictor to the future? 15

21. managingRISK Unknown Unknowns Unknown Knowns “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. These are things we do not know we don’t know...” Donald Rumsfeld , February 2002 Unknown Perform ‘due diligence’ Undertake Discovery Process RISK AWARENESS Known Knowns Known Unknowns Treat as Active Issues Active Risk Management Known Rumsfeld’s words won him Britain’s “Foot-in-Mouth Award”, but they are an (in)articulation of the importance of risk awareness and understanding... Unknown Known RISK UNDERSTANDING ...situational awareness is vital in knowing what to do.... 16

22. managingRISK in our ‘conventional’ Risk Management approaches, we expect phenomena to behave ‘normally’ over time... Experiments by Sir Francis Galton (1822-1911) with seed sizes c. 1875 demonstrated nature’s propensity for normal distributions and ‘regression to the mean’. +1 +2 +3 -3 -2 -3 ...but in a Complex World we struggle to find big enough sample (‘same’ event) to achieve real ‘statistical significance’ (p>=0.95) or “moral certainty”? ‘mean’ indeterminate or moving over time results from a large number of trials should be close to the expected value (mean), and will tend to become closer as more trials are performed. Law of Large Numbers & Regression to the Mean each ‘observation’ or event is independent of others. each ‘observation’ or event of interest is the culmination of other events and/or interdependent upon others . Independent Observations 17

25. controllability: how effectively can we control the risk

26. urgency: time-sensitivity of the risk H High TIME 18

27. containingRISK Risks can be assessed and contained through understanding their scope and source, relative to the project boundaries Organisational Interfaces Delivery Capability Specific RISK SCOPE Delivery Approach Governance / Engagement Systemic however, in a complex world, with fuzzy boundaries, the relationships, or inter-dependencies, between risks need to be assessed... External Internal RISK SOURCE 19

28. ARId:assessment of risk inter-dependencies Assessment of Risk Inter-dependencies (ARId) is a technique which focuses upon understanding how changes in risks have a potentially cascading effect upon other risks Impacts upon Effected Risk(e) Change to Causal Risk(c) 20

29. ARId:assessment of risk interdependencies ARId example applied to the technology portfolio of Asia-Pacific financial institution 21

30. re-cap complexityrules complexity has many expressions, reflected in financial, environmental, technological, and political environments projects often find themselves in the eye of the Perfect Storm project management is evolving rapidly in response to the challenge of dealing with complexity reframing reality re-thinking ‘reality’ in terms of being ambiguous and subjective this impacts how we address risks a differentlook at risk uncertainty is not (necessarily) the same as risk duality of risk – reward and regret understanding stakeholders’ risk attitudes managing risk knowing what we know and don’t know, and responding accordingly assumptions analysis - beyond the crystal ball seeing complexity: analysis of risk interdependencies risk containment: source and scope 22

31. Indebted to d. apgar k. baxter p. l. bernstein r.s. dembo & a. freeman a. shenhar & d. dvir n.t. taleb 23

32. 24 Perfect Storm: Reality and Risk, Reward and Regret In Complex Project Environments Terry McKenna CDipAF MBA MProjMgt PMP Phone: +61 (0)414 654 459 E-mail: terrym@startprojectmanagement.com