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E-kniha: Focus on risk management - Manage risks to improve project success - Luc De Ceuster

Focus on risk management - Manage risks to improve project success

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Jazyk: anglickýAnotace: Focus on Risk Management – Manage Risks to improve Project Success concentrates on risk management within the project management process and life cycle. Since the financial ... (celý popis)
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Popis / resumé

Příručka vysvětluje principy projektového a rizikového managementu.

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Jazyk: anglický Anotace:
Focus on Risk Management – Manage Risks to improve Project Success concentrates on risk management within the project management process and life cycle. Since the financial and economical crisis hit the world, everybody realized how important a good risk management plan is. Unfortunately, today still many companies limit their risk management to identify and prioritize risks. A systematic approach to isk management is not common. This book focuses on the nature of uncertainty. It describes echniques to qualify, quantify and integrate risks in the final project plan and introduces a structured approach to risk that is dvantageous for project team and client.
Fault tree analysis, FMEA, three point estimate (PERT) and MonteCarlo analysis are introduced, explained and demonstrated with xamples.

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APraCom

©

Project

Management

Focus on

Risk Management

Manage Risks to Improve Project Success

First Edition, 2010

Ir. Luc De Ceuster, PMP

Published in the Czech Republic by APraCom s.r.o.


First Edition, December 2010

© Ir. Luc De Ceuster, PMP

Content and Language review: Dan Fiala, PMP, PMI-RMP

Cover Design: René Slauka

ISBN 978-80-254-8708-2


Copyright © 2010

By Luc De Ceuster

All rights reserved. No part of this publication may be

reproduced in any form or by any electronic or

mechanical means, including information storage and

retrieval system without permission in writing from the

publisher. In no circumstances can this work be

retransmitted in any form, repackaged in any way or

resold through any media.

Published by:

APraCom s.r.o.

Strakonická 1165/15

150 00 Praha 5 - Smìchov

The Czech Republic

www.APraCom.cz



Table of Contents

Introduction ............................................................................ 1

Chapter I

The Nature of Uncertainty in Projects ..................................... 3

1 What is uncertainty? .............................................................. 7

2 Uncertainty or Risk categories .............................................. 10

3 Do Uncertainties or Risks only have a negative impact? ....... 13

4 Uncertainty and the rolling wave concept ............................ 14

5 Risks and company culture ................................................... 15

5.1 Risk taker or risk avoider............................................... 15

5.2 Attitude towards risks ................................................... 16

Chapter II

Uncertainty and Probability .................................................. 19

6 Introducing statistics ............................................................ 23

7 Numbers............................................................................... 23

7.1 Discrete and Continuous data ....................................... 23

7.2 Rounding numbers ........................................................ 24

7.3 Significant numbers ...................................................... 24

7.4 Representing data in graphs ......................................... 26

7.5 Possible problems with graphics ................................... 27

8 Populations and Distributions .............................................. 30

8.1 Normal Distribution (Gauss) ......................................... 30

8.2 Beta-distribution ........................................................... 34

8.3 Bar charts ...................................................................... 36

9 Statistical measures for a distribution .................................. 36

9.1 Notations ...................................................................... 36

9.2 Mean ............................................................................. 37

9.3 Median .......................................................................... 37

9.4 Variance and Standard deviation .................................. 38

10 Probability............................................................................ 39

10.1 Game of “Craps” ........................................................... 40

10.2 Calculating chances for Lotto ........................................ 40

10.3 Law of “large numbers” ................................................ 41 Expected Value ............................................................. 43

11 Cautions to take when using statistical data ........................ 44

Chapter III

Identifying Uncertainties in Projects ...................................... 47

12 Identifying uncertainties or risks in projects ......................... 49

12.1 Documents at our disposal ........................................... 49

12.2 ABC – Process ............................................................... 49

12.3 Risks and Assumptions ................................................. 50

12.4 Risks and the constraints .............................................. 51

12.5 Barriers to Good Risk Identification and Remedies ...... 57 13 Risk Management Planning ................................................. 59

13.1 Planning meeting and analysis...................................... 59

13.2 Risk Breakdown Structure (RBS) ................................... 60

13.3 Probability and Impact of Risks..................................... 61

14 Techniques for identifying Risks ........................................... 64

14.1 Brainstorming and Affinity diagram .............................. 64

14.2 Delphi and Wide Band Delphi Technique ..................... 65

14.3 Interviewing .................................................................. 66

14.4 Root cause identification .............................................. 67

14.5 Strength Weakness Opportunity Threat ....................... 69

14.6 Checklists ...................................................................... 70

14.7 Cause-and-effect diagram ............................................ 71

14.8 System or process flow charts ...................................... 72

14.9 Fault Tree Analysis ........................................................ 73

14.10 Pareto Analysis ............................................................. 75

14.11 Failure Mode and Effect Analysis .................................. 76

14.12 Five Why’s ..................................................................... 77

15 Ranking or Qualification of Risks ......................................... 78

15.1 Risk classifying .............................................................. 78

15.2 Qualitative Risk Analysis ............................................... 78

Chapter IV

Introducing Risk Quantification Techniques .......................... 81

16 Evaluating Impact of Risks on the Project ............................ 83

17 Expected Monetary Value of Risks ....................................... 83

17.1 Expected Value of Risk .................................................. 83

17.2 Expected Monetary value of Risk ................................. 84

17.3 Calculation example ..................................................... 85 Total Cost of Risk .......................................................... 85

18 The Decision Tree ................................................................. 86

18.1 Structure of the decision tree ....................................... 86

18.2 Example of a Decision Tree ........................................... 87

19 Reliability of Systems – Redundancy – Fail Safeing ............... 93

19.1 Reliability of a system ................................................... 93

19.2 Failure rate .................................................................... 94

19.3 Failures over the life span or “Bath Tub” curve ............ 96

19.4 Reliability ...................................................................... 97

19.5 Mean Time between Failure (MTBF) ............................ 98

19.6 Mean Time to Repair (MTTR) ........................................ 99

19.7 Mean Time between Removal (MTBR) ......................... 99

19.8 Availability .................................................................... 99

19.9 Introducing redundancy to systems............................ 100

19.10 Adding Fail-Safe to a system ....................................... 101

20 Introducing PERT and Beta-distribution ............................. 102

20.1 PERT ............................................................................ 102

20.2 Beta- Distribution ........................................................ 105

20.3 Example ...................................................................... 106

21 Monte-Carlo Simulations .................................................... 111

22 Comparing PERT with Monte-Carlo .................................... 118

Chapter V

Risk Management Process and Cycle ................................... 121

23 Introduction ....................................................................... 123

24 Risk Management Planning ............................................... 124

25 Risk Identification .............................................................. 125

26 Qualitative Risk Analysis .................................................... 125

27 Quantitative Risk Analysis .................................................. 126

28 Risk Response Planning ...................................................... 127

29 Risk Monitoring and Control .............................................. 128

Annex 1 – Abbreviations ...................................................... 133

Annex 2 – Definitions .......................................................... 135

Annex 3 – Formula’s and Symbols ....................................... 147

Annex 4 – Examples of Standard Normal Distribution ......... 149


Annex 5 – Standard Normal Table ....................................... 155

Annex 6 – Beta function ....................................................... 157

Annex 7 – Triangular Distribution ........................................ 161

Index .................................................................................... 165

Bibliography ........................................................................ 167


Figures

Figure 1: Rolling wave approach to project management .................. 15

Figure 2: Significant Number - Example .............................................. 25

Figure 3: line graph ............................................................................. 26

Figure 4: Bar graph (is not histogram!) ............................................... 27

Figure 5: Pie chart ............................................................................... 27

Figure 6: Exaggerated vertical scale ................................................... 28

Figure 7: Compressed vertical scale .................................................... 28

Figure 8: Normal distribution with indication of confidence

intervals ............................................................................... 31

Figure 9: Determining probability when x > μ or z>0 .......................... 32

Figure 10: Determining probability when x < μ or z<0 ........................... 32

Figure 11: Probability of occurrence between 2 values. ........................ 34

Figure 12: frequency distribution bar graph ......................................... 36

Figure 13: Game of "Craps" - Frequency distribution ............................ 40

Figure 14: Frequency distribution as function of number of

draws. .................................................................................. 42

Figure 15: Typical Risk Breakdown Structure ........................................ 61

Figure 16: Affinity Diagram using Post-it

©

notes. ................................. 65

Figure 17: SWOT Quadrant. .................................................................. 70

Figure 18: Cause-and-Effect Diagram ................................................... 72

Figure 19: Example of flow chart diagram of Sales Process

(Part) .................................................................................... 73

Figure 20: Simple fault tree with “AND” and “OR” nodes ..................... 74

Figure 21: Pareto Chart ......................................................................... 75

Figure 22: Probability and Impact Matrix for threats ........................... 79

Figure 23: Probability and Impact Matrix for opportunities.................. 80

Figure 24: Example decision tree with outcome (O) and

decision (D) nodes ................................................................ 87

Figure 25: Forward pass without indication of probabilities ................. 90


Figure 26: Bath Tub curve ..................................................................... 96

Figure 27: Network diagram with indication of critical path .............. 107

Figure 28: β-distribution for the critical path duration ....................... 110

Figure 29: Frequency distributions ...................................................... 117

Figure 30: Project Risk Management Processes .................................. 123

Figure 31: Calculating the probability for values of z>0 ...................... 150

Figure 32: Calculating the probability for values of z>0 ...................... 151

Figure 33: S-curve for data of table 46................................................ 152

Figure 34: Probability of occurrence between 2 values. ...................... 152

Figure 35: Standard Symmetrical Triangular Distribution ................... 161

Figure 36: Standard asymmetrical Triangular Distribution

with θ = 0.75 ...................................................................... 162

Figure 37: left triangular distribution .................................................. 162

Figure 38: right triangular distribution ............................................... 162

Figure 39: Triangular Distribution with a, b and m ............................. 163


Tables

Table 1: Categories of Risk or Uncertainties ...................................... 11

Table 2: Ranges and confidence intervals ......................................... 31

Table 3: Z-score and probabilities ..................................................... 33

Table 4: Probability over an interval .................................................. 34

Table 5: Beta distribution................................................................... 35

Table 6: Statistics and parameters .................................................... 37

Table 7: Mean and Median for two samples ..................................... 37

Table 8: New samples with same mean and median ......................... 38

Table 9: Variance and Standard deviation ......................................... 39

Table 10: Sales information related to 2009 ........................................ 43

Table 11: Calculated Expected Value of Revenue over 2009 ................ 44

Table 12: Overview of common project management risks ................. 57

Table 13: Barriers to good risk identification ....................................... 58

Table 14: Impact - Percentage Scale .................................................... 62

Table 15: Categories for Fishbone Diagram ......................................... 71

Table 16: Expected Value for Laurel and Hardy ................................... 85

Table 17: Calculating EMV for Laurel and Hardy ................................. 85

Table 18: Overview of demand and probabilities ................................ 88

Table 19: Options selected by the management and their

costs *indicates additional price for upgrade after

2 years .................................................................................. 88

Table 20: Solutions and expected revenue as function of

sales ..................................................................................... 89

Table 21: Probabilities ......................................................................... 91

Table 22: Sample test results ............................................................... 95

Table 23: Reliability for composed systems ......................................... 98

Table 24: Project Duration information including PERT (Beta

Distribution) ....................................................................... 104

Table 25: Shape factors and Shape of the β-distribution .................... 106


Table 26: Duration, Standard Deviation and Variance ...................... 108

Table 27: Ranges and confidence intervals ........................................ 108

Table 28: Probability and z-score ....................................................... 109

Table 29: Probability and duration .................................................... 109

Table 30: Project Information ............................................................ 111

Table 31: Possible paths and duration for each sample .................... 112

Table 32: Calculation of Expected Value and Standard

Deviation ............................................................................ 113

Table 33: Relationship between random numbers and

confidence interval ............................................................. 114

Table 34: Relationship between random numbers and task

duration ............................................................................. 114

Table 35: 100 random numbers generated with Excel 2007

©

........... 115

Table 36: Random numbers and equivalent duration........................ 115

Table 37: Duration of paths ............................................................... 115

Table 38: Duration for all random numbers ...................................... 116

Table 39: Duration of the different paths with indication of

critical path duration ......................................................... 117

Table 40: Frequency intervals, frequency distribution and

cumulative distribution ...................................................... 117

Table 41: Risk response strategies ..................................................... 128

Table 42: Readings for positive z-score .............................................. 149

Table 43: Readings for negative z-score ............................................ 150

Table 44: Calculate probabilities for z>0 ............................................ 150

Table 45: Calculate probabilities for z<0 ............................................ 151

Table 46: Probabilities for range of values and s-curve ..................... 152

Table 47: Probabilities for different intervals .................................... 153

Table 48: Beta distribution ................................................................ 158

Table 49: Triangular and β-distribution ............................................. 163


For Franciscus De Ceuster

who left us too early



I want to thank my family and all my friends who have

always supported me and were especially there for me at

the end of last year when I was infected with H1N1 and

had very small chances to recover. Their energy, concerns

and help made it possible for me to recover remarkably

well and finish this work.

I explicitly want to thank Guy without whom I surely would

not be alive anymore. Of course my parents, my brother

Steven and my family, Ludo, Dan, Michal, Miluše, Erik and

Irena.

A special thank also for the Doctors and Nurses at the FN

MOTOL Hospital in Prague for their remarkable

persistence, professionalism and creativity for giving me

my life back.



Introduction

uring my career as project manager and in

different disciplines, I have encountered risks

in many different ways. Suddenly things went

wrong or sometimes we had some unexpected successes. In many cases, these things just happened out of our control and sometimes we knew something unexpected could happen and we prepared for it. Soon, we started to identify the fact that we did not take into account all possibilities or even forgot to look at some obvious possibilities. In many case, people just started working without thinking about the work to do. Many people still do today unfortunately and with the obvious consequences of doing it the wrong way or even failing in the things they wanted to do. Although uncertainty is a part of life, people tend to avoid it and choose certainty. Today, during the world financial crisis, people realized that certainty in fact does not exist. Many people made “certain” investments for their pensions, bought stock of solid companies and see that this is not really the case. Some people have chosen a safe job and started to work for the government and suddenly, due to market focus or European regulations, the service or department they have been working in, is privatized. Suddenly their certainty turned into uncertainty completely unexpected and against their own choices. During my career, I worked in different companies and industries and noticed many different approaches to risks. In the military, risk and even danger may be very close even in peacetime or at home in the barracks. Companies I worked with sometimes looked D

at risks as if it something they did not want to hear

about. They were putting their heads deep in the sand

like an ostrich and hoped the lion would not see them.

Risk however, offers opportunities that can bring more

success to your company. In this book, we will look at

a number of aspects of risks and how to work with

them in order to improve project success and

efficiency. In the past, companies who looked

uncertainty in the eye were more successful than

others were and for that conclusion alone is reason

enough to embrace uncertainty as an opportunity for

excellence and project success.

Chapter I

The Nature of

Uncertainty in

Projects

Focus on Risk Management

Chapter I - 5

ncertainty and risk are always around us. In

many cases, we just learned to live with these

risks and we do not even think about them

when we are doing our “everyday” things. Sometimes we are suddenly confronted with these elements of uncertainty when we have a flat tire with our car or when something else goes wrong. People, who have been investing in the US housing market or on the stock markets before the collapse, may have seen their investments becoming virtually worthless. Selling in panic would really mean disaster. However some people may have no choice. Other people, who have sufficient money available, may take this period as an opportunity to shop and eventually make a lot of money or not. Uncertainty means that we cannot predict the future. However does not mean that we cannot prepare for these uncertainties by putting some money to the side, by spreading our investments, by closing insurances and by looking at other possibilities to manage the risks. Many people have only one bank account and in case of a sudden bank crisis, it would mean that it would take a lot of time to transfer funds to a bank that does not seem to be in trouble. Spreading your money over different banks or accounts also reduces the risk of losing everything or just putting your money in a country where the state offers better guarantees than your country. In Europe, the state guarantees 20.000 € per account. On the Chanel Islands (Jersey, Guernsey and others), this is up to 90% of the money you had in the bank. Uncertainty will always be there and we will have to live with it. Sales people or other people who are working on a commission based wage plan, may have relatively low basic wages, however, in the case U

The Nature of Uncertainty and Risks in Projects

Chapter I - 6

they make their objectives or even overachieve, the

bonuses may even double or triple that low wage. You

only have to be able to live with this uncertainty.

Many people in Europe have been living for years

with false certainty. Many things have beenpre

arranged for them. The social system offers

possibilities for people who become ill or lose their

jobs. In case of dismissal, they generally get good

compensations. This is not the case in many other

countries around the world. For example, in the

United States, the “economic safety” is minimal and

many people may lose their jobs without any

significant compensation. These people have been

accustomed to this way of living and adapt quicker to

changes. People change jobs faster and are hired

and fired more easily than in a “socially protected”

economy.

Uncertainty is looked upon in different ways

depending on your situation and a lot depends on the

way you have been living. People generally get

frightened when encountering new things. When we

recognize the same things later, we already know

what is going to happen and we can prepare for it.

Focus on Risk Management

Chapter I - 7

1 What is uncertainty?

The definition, we generally find in the dictionary

relates to the fact that we don’t know how the

outcome of our actions in the future will turnout.

We do not know what numbers will fall at

Saturday evening’s lotto draw or which horse will

win the Irish Sweepstake. Many things that will

occur in the future are uncertain for us now.

Webster’s dictionary

1

defines “uncertain” as

follows:

““NNoott ssuurreellyy oorr cceerrttaaiinnllyy kknnoowwiinngg,, nnoott ssuurree oorr

cceerrttaaiinn iinn kknnoowwlleeddggee;; ddoouubbttffuull,, vvaagguuee,, nnoott

ddeeppeennddaabbllee oorr rreelliiaabbllee,, vvaarryyiinngg””

The Thesaurus

2

, contains following description:

““[[TThhaatt wwhhaatt iiss nnoott ddeetteerrmmiinneedd oorr nnoott kknnoowwnn]]

cchhaannccee,, mmuuttaabbiilliittyy,, cchhaannggee,, uunnpprreeddiiccttaabbiilliittyy,,

ppoossssiibbiilliittyy,, eemmeerrggeennccee,, bblliinndd ssppoott,, ppuuzzzzllee,, eenniiggmmaa,,

qquueessttiioonn,, bbllaannkk,, vvaaccaannccyy,, mmaazzee,, tthheeoorryy,, rriisskk,, lleeaapp

iinn tthhee ddaarrkk..””

In the description of the Thesaurus, many

synonyms really reflect the nature of uncertainty

or risk in general and of course in projects.

Uncertainty and risk are the two terms that will be

used further in this book.

In the case of Projects, Uncertainty is more of an

issue than in day-to-day operations or repetitive

things due to the nature of projects itself, which is

1

Webster’s New World Dictionary, Victoria Neufeldt, Andrew N

Sparks, Warner Books, 1990

2

Webster’s New World Thesaurus, Charlton Laird, Warner Books,

1990

The Nature of Uncertainty and Risks in Projects

Chapter I - 8

clearly described in the following definition of

project:

““AA PPrroojjeecctt iiss aa tteemmppoorraarryy oorrggaanniizzeedd aanndd mmaannaaggeedd

eennvviirroonnmmeenntt ttoo ccrreeaattee aa nneeww uunniiqquuee pprroodduucctt oorr

sseerrvviiccee..””

The key word related to uncertainty in this

definition is “unique” which indicates that what we

will be achieving with the product is something

new, something we did not do before. It is like the

opening sentence of the once popular series of

Star Trek: “ To go where no one has gone before ”.

Many projects in the past large and small have

dealt with uncertainty and from the end of the 19

th

century at the moment of the appearance of

“scientific management” or “Taylorism”

3

a more

scientific approach was introduced in the way of

doing business.

The real launch of risk management started

around the era of the Second World War together

with the appearance of the first computers.

Projects became more and more challenging and

techniques were introduced to improve project

performance. Many lessons were learned from the

3

Frederick Winslow Taylor developed the core ideas of his theory

in the 1880s and 1890s and was published at the beginning of

the 20

th

century. Taylor’s scientific management made an end to

the traditional approach of businesses where decisions were

made based upon tradition and rules of thumb. He built scientific

methods based upon careful studies of individuals at work.

Taylorism can also be seen as labor pushed to its logical

extreme where the worker is de-skilled and the workplace isdehumanized. This theory in direct contrast with the modern Total

Quality approach and Kaizen were the intelligence of the worker

is maximized and the workplace is adapted to fit people and

process.


Focus on Risk Management

Chapter I - 9

projects and failures at the end of the 19

th

and the

beginning of the 20

th

century. Some examples are

the construction of the Panama Canal which was

built in two stages. The first phase was

unsuccessful because of the large number of

people dying of Malaria. This risk was not

considered in the original project and that was the

reason of the initial failure. A second trial was

done some time later and started with the fight

against the Malaria Mosquito by destroying its

habitat, the swamps.

You can imagine the uncertainties that would have

lead to the operation “Overlord” when the allied

forces invaded German occupied France or the

Manhattan Project or even the race to the moon.

Starting projects with so much uncertainty could

only be completed successfully with a structured

way to manage these uncertainties. The risk

management methodology that project managers

worldwide are using today developed during that

era.

The experiences gained and the processes set up

came in handy when the ICT industry started

booming. We all know today that writing programs

for computers that contain so many different other

programs become very complicated. The

complexity increased exponentially and the

interferences between all these programs written

by different people worldwide could not be

considered completely when writing the programs.

We all know the “bugs” that accompany the new

versions, the fact that sometimes very quickly

after a new launch many changes have to be

implemented.


The Nature of Uncertainty and Risks in Projects

Chapter I - 10

2 Uncertainty or Risk categories

When looking at risks, different specifications can

be given and the risks we will encounter in our

projects. Of course, we dispose of a large

database of information related to what happened

in the past. We all remember the history classes

at school in which our teachers explained to us

what our ancestors did (sometimes things were

and still are hidden or false information is used).

The history records contain a great number of

“lessons learned” and when carefully studying

these records, we can learn and avoid the same

mistakes again.

In Europe, the tendency exists to reduce the

history classes to a minimum or even to take them

out of the program. However, Military History is

still one of the main subjects in military academies

worldwide. We can sometimes also find record

related to business decisions and reasons of

failure and success.

One famous writer was Machiavelli who described

the reasons of success or failure of existing

kingdoms. In his book, he clearly described how

the rulers ruled and why they were successful or

not. When you look around closely, you may even

recognize the governments and regimes that still

apply his lessons.

History provides us with a valuable database of

information but that information is not necessarily

applicable to our projects. When a company starts

to implement a Project Management Methodology,

it will probably start with probably also implement

a Project Management Office where, amongst

others, historical data related to projects is stored

and made available to all project managers who

would need it.

Focus on Risk Management

Chapter I - 11

Looking at projects, we can identify in fact three

types of uncertainties: Known Unknowns,

Unknown Unknowns and Catastrophes as

summarized in table 1 on the following page.

One problem related to keeping historical records

is that companies do not like to be reminded

about their failures and records may just be

destroyed in order to “keep up appearances”.

Companies who do this may actually repeat the

same errors with probability and increasing

impact.

Category Description Comment

Known

Unknowns

Events that have

happened in the

past and may occur

again in this project

We can find this

information in the

lessons learned from

previous projects

Unknown

Unknowns

Events that have

not happened

before and are

inconceivable yet

It didn’t happen yet,

so difficult to imagine,

no known references

for us

Catastrophes

“Acts of God”

War, weather and

political events that

can affect the

entire business and

are very difficult if

not impossible to

predict

Some evolutions can

be anticipated like

unrest in countries or

long term trends.

Tsunamis and earth

quakes are more

difficult to predict

Table 1: Categories of Risk or Uncertainties

“KKnnoowwnn UUnnkknnoowwnnss” is the easiest category to

identify since these risks already occurred during

pervious projects and we can learn from the

history how to protect against them. On the other

hand, it may also be that the circumstances are

very different from your project and you may

The Nature of Uncertainty and Risks in Projects

Chapter I - 12

wrongfully suppose that they are similar.

In general, we tend to stay within our “world of

existence” and most of the time people do not

change much between industries or functions.

Some examples are the people working in the

automotive sector or the construction sector; they

rarely step over to another industry. Consequently,

they will only know how everything is working in

their industry and will not be aware of solutions

applied in other industries and that are applicable

in theirs.

When you look around, you would be surprised

how people in different sectors resolve the same

problems in different ways. It may be very

valuable to identify the solutions that would also

be interesting in your domain. You could identify

the parts that are not working properly and finding

the things that are working good or better in

different sectors and industries. You will be

surprised of the outcome.

“UUnnkknnoowwnnss UUnnkknnoowwnnss” are the events that did

not happen before, nevertheless, are you sure

that they did not occur yet in a similar or very

different situation or industry? Looking around and

learning from others may be an option or today it

becomes quite easy to find a multitude of

information on the Internet. It is best to validate

that information, but it may help you to improve

your risk management on your projects.

Reducing the probability to encounter risk of the

“unknown unknown” type will improve the success

of your projects. As I said before, an unknown for

you may be a known for others. Project

Management does not mean that you have to do

everything yourself or stay within the safe harbor

of your normal habitat. Gathering expert advice or

sharing information with other project managers or

other people may be very helpful for your projects.

Focus on Risk Management

Chapter I - 13

“CCaattaassttrroopphheess” are of course of a different

nature. Predicting “acts of God” is not possible

and may have an important impact on your

projects. On the other hand, we may have

information about typical weather conditions,

probability of power changes, political unrest and

others that may give you an early warning of

catastrophes preparing. In many occasions

however, it will be impossible to predict and when

it happens, we can only accept and see what the

final impact on the project is.

3 Do Uncertainties or Risks only have

a negative impact?

In many cases, people interpret the term “risk” as

something negative. For them risk is an indication

of the things that may go wrong. When we look at

the description given in the Webster’s Thesaurus,

we also find words that may indicate something

positive like: • Chance • Change • Possibility

• Blind Spot

The fact that an uncertainty or risk may relate to

threats but also to opportunities may surprise the

people you will be working with since they have

the warning sign built in that a risk is something

negative. This is clearly not true.

We can define pprroojjeecctt rriisskk as follows:

““PPrroojjeecctt rriisskkss aarree uunncceerrttaaiinnttiieess tthhaatt mmaayy hhaavvee

eeiitthheerr aa ppoossiittiivvee oorr aa nneeggaattiivvee iinnfflluueennccee oonn aatt

lleeaasstt oonnee ooff tthhee pprroojjeecctt’’ss ccoonnssttrraaiinnttss””

The fact that a risk may have a positive or a

negative impact determines the way we will look

The Nature of Uncertainty and Risks in Projects

Chapter I - 14

at risks. Risks with a positive effect on the project

are opportunities and risks with a negative effect

are threats.

4 Uncertainty and the rolling wave

concept

Uncertainty is a time related factor. Today, we

probably already have a relative clear idea what

we will do tomorrow or next week. We may

already have made plans for some future holiday

or trip. On the other hand, further in the future,

things may be unclear and difficult to foresee what

will happen.

In the book “Focus on Project Succes”, we

described this as “the rolling wave concept” where

the project manager only has a limited view into

the future of the project. In addition to this,

projects are in a way uncertain because they

relate to the creation of new products or services

and it may take several years to complete. In that

case, the project manager will not be able to

foresee the far future (many of us would already

be happy to foresee the near future). Going through a project is like climbing a mountain for the first time. The mountaineer only has a limited view of the mountain and cannot see the hidden parts of the mountain and in the visible part; he or she cannot see all the details that are necessary to choose the safest passage. It is only after passing some obstacles, that the mountaineer will learn more about the hidden parts of the trajectory as shown in figure 1 on the next page. When we start with the project and more particular in the planning phase, we just can see the front of the mountain and cannot see the hidden parts on the way up nor the back of the mountain. During

Focus on Risk Management

Chapter I - 15

this phase, the project manager and his or hers

team have to make assumptions related to certain

conditions they may encounter or sometimes they

do not even know there is a possible risk.

It is only when we start going, we will be able to

see farther than the initial “planning horizon” and

that we will have more information about the

uncertainties. In some cases, we will see that

some of the uncertainties disappear while others

are worse or better and new may appear.

Figure 1: Rolling wave approach to project management

5 Risks and company culture

5.1 Risk taker or risk avoider

Company culture influences the attitude towards

uncertainty or risk. Each company has its own

level of certainty that drives their businesses.

Older companies rather thrive on “certainty” while

newer companies may thrive on risk.

The Nature of Uncertainty and Risks in Projects

Chapter I - 16

Risk and uncertainties rule all business. We do

not really know how our potential customers will

accept our ideas, services or products and how

the competition will react to it.

Risk is everywhere; nevertheless, some people

are open to accept more risks than others are.

A company that has the profile of “risk avoider” will

carefully select its projects that comply with this

profile and their investments or projects may look

a bit “dull”, nevertheless, they may offer certainty

to their customers and clients.

Companies or people that are more risk taking

may show greater results and projects. On the

other hand, the risk that something goes wrong is

higher than with the other companies or people.

Banks offer today different investment profiles for

their investors going from high risk to stable

investments. You can imagine that the high-risk

investments may bring high returns, but they are

more sensitive to market fluctuations and may

tumble down very quickly.

We will see later that certainty has a price. When

your company wants to be sure about the project

costs, they will have to budget a higher amount for

their projects. On the other hand, companies

using a higher risk profile will budget a lower

amount and they probably will be able to schedule

more projects.

5.2 Attitude towards risks

When you start talking with people about risks,

many people will react defensively and you will

hear statements that they do not accept risks.

People may be frightened when hearing the words

“risk” and “uncertainties” because they want to live

with certainties.

Focus on Risk Management

Chapter I - 17

In many cases, they do not recognize the risks

and uncertainties in their day-to-day work and do

not know the project environments. Many times, I

got similar reactions when discussing the project

risks during a project kick-off meeting.

The meeting even may end up in a fight between

the project team and the client. It is clear that your

client should be “educated” in the project way of

doing things. It may be better to use a different

word for the first few times and then move slowly

to the more appropriate terms. Of course, all

depends on the relationship built during thepre

sales and sales phases.

Unfortunately, in some cases, sales people tend

to better present things because they are afraid to

lose the contract. After contract signature, the

project manager together with the implementation

team will have to solve this problem. It is not the

first that something like this happens and the first

steps after project kick off may be turbulent.

Chapter II

Uncertainty

and Probability

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