SM For Project Management The Managerial Process 7th Edition By Erik W. Larson

SM For Project Management The Managerial Process 7th Edition By Erik W. Larson

Chapter 7

Managing Risk

Chapter Outline

1. Risk Management Process
2. Step 1: Risk Identification
3. Step 2: Risk Assessment
A. Probability Analysis
4. Step 3: Risk Response Development
A. Mitigating Risk
B. Avoiding Risk
C. Transferring Risk
D. Accept Risk
5. Contingency Planning
A. Technical Risks
B. Schedule Risks
C. Cost Risks
D. Funding Risks
6. Opportunity Management
7. Contingency Funding and Time Buffers
A. Budget Reserves
B. Management Reserves
C. Time Buffers
8. Step 4: Risk Response Control
9. Change Control Management
10. Summary
11. Key Terms
12. Review Questions
13. Exercises
14. Case 7.1: Alaska Fly-Fishing Expedition
15. Case 7.2: Silver Fiddle Construction
16. Case 7.3: Trans LAN Project
17. Case 7.4: XSU Spring Concert
18. Case 7.5: Sustaining Project Risk Management during Implementation

19. Appendix 7.1: PERT and PERT Simulation
A. PERT—Program Evaluation Review Technique
B. A Hypothetical Example Using the PERT Technique
C. Exercises
21. Case A7.1: International Capital, Inc.—Part A
22. Case A7.2: Advantage Energy Technology Data Migration—Part B

Chapter Learning Objectives

After reading this chapter you should be able to:

LO 7-1 Describe the risk management process.

LO 7-2 Understand how to identify project risks.

LO 7-3 Assess the significance of different project risks.

LO 7-4 Describe the four different responses to managing risks.

LO 7-5 Understand the role contingency plans play in risk management process.

LO 7-6 Understand opportunity management and describe the four different approaches to responding to opportunities in a project.

LO 7-7 Understand how contingency funds and time buffers are used to manage risks on a project.

LO 7-8 Recognize the need for risk management being an on-going activity.

LO 7-9 Describe the change control process.

Appendix Learning Objective

After reading this appendix you should be able to:

LO A7-1 Calculate basic Pert Simulation projections.

Review Questions

1. Project risks can/cannot be eliminated if the project is carefully planned. Explain.

Project risks cannot be eliminated. It is impossible to be aware of all things that might happen when a project is being implemented. Undesirable events identified before the project begins can be transferred, retained/reduced, or shared. Contingency plans with trigger points and responsibility should be established before the project begins.

2. The chances of risk events occurring and their respective costs increasing change over the project life cycle. What is the significance of this phenomenon to a project manager?

The chances of risk events and estimated costs changing over the project life cycle are high. These events will impact project change control mechanisms. Moreover, such changes could be significant enough to require changes in scope. The project manager must ensure that these changes are recorded and kept updated. Otherwise the integrity of the project control system will quickly deteriorate and become useless as a management tool.

3. What is the difference between avoiding a risk and accepting a risk?

Avoiding a risk is changing the project plan in advance so as to eliminate specific risks from occurring while accepting a risk means no preventive action is taken; contingency plans may be used if the risk materializes.

4. What is the difference between mitigating a risk and contingency planning?

Mitigating a risk refers to taking action to either reduce the likelihood that a risk (bad event) will happen and/or reduce the impact the risk has on the project. Contingency planning is developing a response if the risk occurs. Mitigating is preventive while contingency is reactive.

5. Explain the difference between budget reserves and management reserves.

Budget reserves are established to cover identified risks that occur while implementing a project work package or activity. If the risk does not materialize, the funds are removed from the budget reserve. The management reserve covers unforeseen risks and applies to the total project. These reserves are usually controlled by top management, the owner, and/or the project manager. Budget and management reserves are independent of each other.

6. How are the work breakdown structure and change control connected?

The WBS and change control are directly linked. Any change from the baseline developed from the WBS needs to be recorded. This link allows management to trace changes and problems directly to deliverables and the organization unit responsible.

7. What are the likely outcomes if a change control process is not used? Why?

If a change control process is not used, budgets and plans will self-destruct quickly. Tracking changes facilitates control and accountability of budgets and time. In addition, change control allows for coordination of changes further on in the project.

8. What are the major differences between managing negative risks versus positive risks (opportunities)?

Essentially the same process that is used to manage negative risks is applied to positive risks. The major differences occur in the responses. Instead of avoiding negative risks, project managers often try to exploit positive risks by taking action to ensure that the opportunity occurs. Instead of transferring risks to another party, project managers often share positive risks to increase the likelihood the opportunity can be exploited. Instead of mitigating negative risks, project managers will take action to enhance the likelihood the opportunity will occur and/or increase the positive impact of the opportunity. Finally, project managers will often choose to accept both negative and positive risks, but be prepared to respond if either occurs.

Exercises

1. Gather a small team of students. Think of a project most students would understand; the kinds of tasks involved should also be familiar. Identify and assess major and minor risks inherent to the project. Decide on a response type. Develop a contingency plan for two to four identified risks. Estimate costs. Assign contingency reserves. How much reserve would your team estimate for the whole project? Justify your choices and estimates.

Students enjoy this exercise; the exercise is open-ended and allows the students to think of fun projects. Some groups will follow the text materials closely. Others will depend on past experience or simply ignore the text material. The wrap-up usually requires re-focus on some formalized method which accomplishes the major issues discussed in the chapter. The discussion can be ended by reviewing the minimum building blocks needed to manage project risk events.

2. You have been assigned to a project risk team of five members. Because this is the first time your organization has formally set up a risk team for a project, it is hoped that your team will develop a process that can be used on all future projects. Your first team meeting is next Monday morning. Each team member has been asked to prepare for the meeting by developing, in as much detail as possible, an outline that describes how you believe the team should proceed in handling project risks. Each team member will hand out their proposed outline at the beginning of the meeting. Your outline should include but not be limited to the following information:

a. Team objectives.
b. Process for handling risk events.
c. Team activities.
d. Team outputs.

This exercise has been used in executive development seminars and college project management classes. The assumed type of firm and type of projects will make for interesting variations in presentations before a class or group. The responses from participants with project experience are very different from those of undergraduate students. Undergraduates usually follow the chapter outline with small deviations related to the kinds of risk events which might occur and team objectives. The team activities and output requirements are sometimes weak for undergrads. More experienced managers will be more creative in types of objectives and outputs. Differences frequently relate to the background of the participants and their experience—e.g., marketing or construction. For example, one information technology group of managers organized their model around the type of project and the key factors influencing risk—“Size, complexity, people problems, novelty, control issues.” Managers with project experience sometimes divide risk events into segments of the project life cycle–defining, planning, executing, delivery. Experienced managers are very good at assessing downstream secondary risks which result from a risk event occurring; some of their models will cover secondary risks.

This exercise requires very little guidance from the instructor. Each group will provide some unique views and approaches.

The session can be supplemented with discussion questions such as the following:

• How do you get people to talk about risk in a practical manner?
• How can you articulate risk?
• Where is the greatest opportunity to reduce project risks?
• How do you get management to support contingency funds?
• How can we improve estimating procedures for time, cost, and technical risks?

The wrap-up comes back to the minimum requirements for a risk model for a firm and the kinds of activities a risk team might perform—before, during, and after the project. Picking two or three of the unique approaches teams come up with can be used to demonstrate important points.

3. The Manchester United Soccer Tournament project team (Review Manchester United case at the end of Chapter 4) has identified the following potential risks to their project:

a. Referees failing to show up at designated games.
b. Fighting between teams.
c. Pivotal error committed by a referee that determines the outcome of a game.
d. Abusive behavior along the sidelines by parents.
e. Inadequate parking.
f. Not enough teams sign up for different age brackets.
g. Serious injury.

How would you recommend that they respond (i.e., avoid, accept, …) to these risks and why?

Below are typical responses to this question:

Event Response Contingency
Referees fail to show up Mitigate—contact referees night before games Referee(s) on call who can fill in
Fighting Mitigate—train referees on how to diffuse potentially violent situations/publicize stiff penalties for fighting Referees, game officials, and coaches intervene
Error Mitigate—recruit seasoned referees and assign best referees to most important games Have a tournament czar who adjudicates appeals
Abusive parents Transfer—assign responsibility to coaches to manage Referees empowered to penalize team and dismiss parents
Inadequate parking Mitigate—level game schedule Shuttle service
Not enough teams Mitigate—PR campaign Collapse age groups
Injury Accept Contact ER in advance, setup field communication system

4. Search the Web using the key words: “best practices, project management.” What did you find? How might this information be useful to a project manager?

Students should discover a wide range of information with this search. Among the sites the authors found included consulting firms, advertising, training and assessments, open forums concerning specific kinds of projects, benchmarking information, and risk portfolios. In addition to finding consulting firms that may provide valuable services, students should be aware of the variety of Internet communities related to project management that provide valuable information not only about risk management, but project execution.

For a more risk specific exercise, ask students to conduct a similar search with the key words “risk project management.”

Case 7.1
Alaska Fly-Fishing Expedition

You are sitting around the fire at a lodge in Dillingham, Alaska, discussing a fishing expedition you are planning with your colleagues at Great Alaska Adventures (GAA). Earlier in the day you received a fax from the president of BlueNote, Inc. The president wants to reward her top management team by taking them on an all-expense-paid fly-fishing adventure in Alaska. She would like GAA to organize and lead the expedition.

You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project.

1. Brainstorm potential risks associated with this project. Try to come up with at least five different risks.

2. Use a risk assessment form similar to Figure 7.6 to analyze identified risks.

3. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal with each of the risks.

(Rest of case not shown due to length.)

(See Comments at the End of Case 7.4.)

Case 7.2
Silver Fiddle Construction

You are the president of Silver Fiddle Construction (SFC), which specializes in building high-quality, customized homes in the Grand Junction, Colorado, area. You have just been hired by the Czopeks to build their dream home. You operate as a general contractor and employ only a part-time bookkeeper. You subcontract work to local trade professionals. Housing construction in Grand Junction is booming. You are tentatively scheduled to complete 11 houses this year. You have promised the Czopeks that the final costs will range from $450,000 to $500,000 and that it will take five months to complete the house once groundbreaking has begun. The Czopeks are willing to have the project delayed in order to save costs.

You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project.

1. Identify potential risks associated with this project. Try to come up with at least five different risks.

2. Use a risk assessment form similar to Figure 7.6 to analyze identified risks.

3. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal with each of the risks.

(Rest of case not shown due to length.)

(See Comments at the End of Case 7.4.)