Unit-3

Unit-3 Risk and Uncertainty Decisions

1)  Project risk:

Risk is the possibility of loss or injury. Project risk is an uncertain event or condition that, if it occurs, has an effect on at least one project objective. Risk management focuses on identifying and assessing the risks to the project and managing those risks to minimize the impact on the project. There are no risk-free projects because there are an infinite number of events that can have a negative effect on the project. Risk management is not about eliminating risk but about identifying, assessing, and managing risk.

a.    Risk management is not widely used.

b.   The projects that were most likely to have a risk management plan were those that were perceived to be high risk.

c.    When risk management practices were applied to projects, they appeared to be positively related to the success of the project.

d.   The risk management approach influenced project schedules and cost goals but exerted less influence on project product quality.

e.    Good risk management increases the likelihood of a successful project.

f.     Risk deals with the uncertainty of events that could affect the project. Some potential negative project events have a high likelihood of occurring on specific projects. Examples are as follows:

g.   Safety risks are common on construction projects.

h.   Changes in the value of local currency during a project affect purchasing power and budgets on projects with large international components.

i.      Projects that depend on good weather, such as road construction or coastal projects, face risk of delays due to exceptionally wet or windy weather.

j.      Project risk is the possibility that project events will not occur as planned or that unplanned events will occur that will have a negative impact on the project.

k.   Known risks can be identified before they occur, while unknown risks are unforeseen.

l.      Organizational risks are associated with the business purpose of the project and assumed by the client when deciding to do the project.

2)  Types of project risk:

The most common project risks are:

1.   Cost risk: typically escalation of project costs due to poor cost estimating accuracy and scope creep.

2.   Schedule risk: the risk that activities will take longer than expected. Slippages in schedule typically increase costs and, also, delay the receipt of project benefits, with a possible loss of competitive advantage.

3.   Performance risk: the risk that the project will fail to produce results consistent with project specifications.

4.   There are many other types of risks of concern to projects.             These   risks can result in cost, schedule, or performance problems and create other types of adverse consequences for the organization.

5.   Governance risk: relates to board and management performance with regard to ethics, community stewardship, and company reputation.

6.   Strategic risks: result from errors in strategy, such as choosing a technology that can’t be made to work.

7.   Operational risk: includes risks from poor implementation and process problems such as procurement, production, and distribution.

8.   Market risks: include competition, foreign exchange, commodity markets, and interest rate risk, as well as liquidity and credit risks.

9.   Legal risks: arise from legal and regulatory obligations, including contract risks and litigation brought against the organization.

10.   Risks associated with external hazards: including storms, floods, and earthquakes; vandalism, sabotage, and terrorism; labor strikes; and civil unrest.

3)  Identifying the risk

The risk identification process on a project is typically one of     brainstorming, and the usual rules of brainstorming apply:

·                     The full project team should be actively involved.

·             Potential risks should be identified by all members of the       project team.

·                     No criticism of any suggestion is permitted.

·           Any potential risk identified by anyone should be recorded,      regardless of whether other members of the group consider       it  to be significant.

·              All potential risks identified by brainstorming should be  

       documented and followed up by the IPT.

The objective of risk identification is to identify all possible risks, not to eliminate risks from consideration or to develop solutions for mitigating risks—those functions are carried out during the risk assessment and risk mitigation steps. Some of the documentation and materials that should be used in risk identification as they become available include these:

·         Sponsor mission, objectives, and strategy; and project      goals to achieve this strategy,

·         SOW,

· Project justification and cost-effectiveness (project benefits, present worth, rate of return, etc.),

·         WBS,

· Project performance specifications and technical specifications,

·         Project schedule and milestones,

·         Project financing plan,

·         Project procurement plan,

·         Project execution plan,

·         Project benefits projection,

·         Project cost estimate,

·         Project environmental impact statement,

·         Regulations and congressional reports that may affect the project,

· News articles about how the project is viewed by regulators, politicians, and the public, and

·         Historical safety performance.

4)  Risk category

To relate the risk categories to the levels of project objectives, the three categories are defined as follows:

A. Operational risks: This term refers to risks related to operational objectives of the project. This means risks restricted to the direct results from the project—that is, its products.

B. Short-term strategic risks: This term refers to risks related to the short-term strategic objectives of the project.

In other words, short-term strategic risks are risks related to the objectives for project owner's use of the project results after the project has been completed. It may also mean the risk for first-order effects of the project—that is, risk for the effects that should be achieved for the target group or users.

C . Long-term strategic risks: This term refers to risks related to  long-term strategic objectives of the project—in other words, risks related to the project purpose, or, the long-term objective that the project is meant to contribute to.

Operational criteria, used to evaluate whether a given risk element is long-term strategic, short-term strategic, or operational include the following:

1. The risk element is considered an operational risk when: the risk element is a risk to the project output (which should be specified in a project definition/delivery contract)—i.e., a risk to the project's ability to deliver.

2. The risk element is a short-term strategic risk when: the risk element is a risk to a functionality not clearly specified in project definition/delivery contract, but is necessary in order to achieve the effects of the project (restricted to the first-order effects for the target group/users).

3. The risk element is a long-term strategic risk when: the risk element is a risk to achieving the long-term objectives of the project, but not a risk of the two categories mentioned above (i.e., operational or short-term strategic risk).

1. Political

Most projects will be affected by organizational politics, but you should also be aware of the possibilities of impact from local or national politics (or even international politics, if that’s appropriate for your project).

A change in government will affect policy decisions and potentially funding, especially for projects with an element of public sector work or those working with government bodies.

2. Economic

The economy has a huge impact on businesses, and that filters down to have an impact on certain projects. At a macro level you might be looking at the national economy and the implications on your product set, for example. You could also use this category as a discussion point for the ‘economy’ of your organization, looking at the impact of funding cycles for multi-year projects or considering what would happen to your project budget if certain conditions were true.

3. Technological

Technology is moving on at a rapid speed, and it’s possible that technological changes could make your project more or less viable over a period of time. This should be built into your approach to managing volatile projects.

There are also risks relating to using new technology for the first time, or in an immature way.

4. Legal

Your Legal team or advisors should be connected to changes in the law and regulations affecting your industry. These may have implications for projects that should be considered. A risk resulting from legal changes that may mean your project is no longer viable.

Alternatively, your project may be to make your business compliant with new regulations. This can introduce risk around what would happen if the timescales for the project were not met and the business was not compliant when the deadline comes into force.

5. Market

Some industries have a more stable marketplace than others, and you’ll know your own market well. Risks relating to your position in the market, the demand for your goods and services and the rise of new competitors can all affect your project. Staying close to how your market is changing is crucial for any business wanting to compete, so you’ll need to make sure that the people who truly understand what is happening are well-connected to your project teams so that the information is passed on.

6. Supply Chain

Rarely these days will you do a project that has no reliance on anyone else. Whether that’s the manufacturer of a critical part for your product, or a vendor supplying you with cloud-based software, our organizations are more linked together than ever before.

7. Organizational

This type of risk relates to changes in the organizational structure. This might apply if you have a change of leadership, which might in turn lead to a change in strategic direction. It’s crucial to make sure project teams are aware of these risks and then what to do if they happen, because something like this could quickly make a project unviable.

8. Operations

These risks relate to impacts on how your business is run. That could be anything from risk that would impact the ability to keep a critical process running in the factory through to making sure the project goes ahead without impacting your customer services.

9. Environmental

Environmental risks range from those that could expose your organization to fines or even legislative action, such as illegal dumping, through to ensuring that your internal environmental policies are adhered to.

Risks in this category are likely to be heavily tied to your position on corporate and social responsibility, and can also affect reputational risk, for example if your business is seen to be polluting.

10. Financial

Financial risks on projects relate to funding cycles, access to funding and making sure that the cash flow is available to pay invoices on time. It’s prudent to consider financial risks to projects because if there are problems in this area, projects could stall, putting all prior investment at risk of being wasted.

11. Resources

Specifically, non-people resources. This kind of risk relates to whether you can get access to the equipment, materials and other resources required to deliver the project in a timely fashion. Risks around delivery of equipment or the inability to source specialist materials would fall into this category.

12. Staffing

Alongside non-people resources, you also have to consider staffing risks. These are things like the right people not being available at the right time due to other projects overrunning, or lack of expertise within your business. It would also extend to the risk of staff sickness, and poorly timed vacations.

13. Scheduling

Risks in this category affect the project timeline. A common risk here is that a task turns out to be more complicated than expected, and so it takes longer. This would add delay to the schedule if the task is on the critical path.

14. Reputation

Reputational risk was touched on earlier in the section about environmental risk, but it is worth mentioning again. Today, when it seems like an organization’s reputation can be won or lost on a Tweet, it is definitely worth considering the risk to reputation when you work through the identification exercise. As well as focusing on the public face of your business, think about the impact on investors and on your own staff. Reputation matters when it comes to retaining talent in your organization.

15. Other

It’s useful to have an ‘other’ category! This prompts the question: “What have we forgotten?” during risk identification discussions. You need space to be able to think about things that don’t neatly fall into the categories above, or perhaps fall into several and need to be split out in a different way.

5)  Methods using risk identification

a.     Reviewing documentation from past projects

b.    Conducting brainstorming sessions

c.     Engaging subject matter experts

d.    Working directly with stakeholders via questionnaire or survey

e.     Facilitating a “Why This Won’t Work” meeting

6)  Project risk Analysis

Risk Analysis is the sequence of processes of risk management planning, analysis of risks, identification and controlling risk on a project.

Risk Management Process primarily involves following activities

1.   Plan risk management:It is the procedure of defining how to perform risk management activities for a project.

2.   Identify risk: It is the procedure of determining which risk may affect the project most. This process involves documentation of existing risks.

The input for identifying risk will be

·         Risk management plan

·         Project scope statement

·         Cost management plan

·         Schedule management plan

·         Human resource management plan

·         Scope baseline

·         Activity cost estimates

·         Activity duration estimates

·         Stakeholder register

·         Project documents

·         Procurement documents

·         Communication management plan

·         Enterprise environmental factor

·         Organizational process assets

·         Perform qualitative risk analysis

·         Perform quantitative risk analysis

·         Plan risk responses

·         Monitor and control risks

3.   Perform qualitative risk analysis: It is the process of prioritizing risks for further analysis or action by combining and assessing their probability of occurrence and impact. It helps managers to lessen the uncertainty level and concentrate on high priority risks.

Plan risk management should take place early in the project, it can  impact on various aspects like cost, time, scope, quality and procurement.

The inputs for qualitative risk analysis includes

·         Risk management plan

·         Scope baseline

·         Risk register

·         Enterprise environmental factors

·         Organizational process assets

4.   Quantitative risk analysis: It is the procedure of numerically analyzing the effect of identified risks on overall project objectives. In order to minimize the project uncertainty, this kind of analysis are quite helpful for decision making.

The input of this stage is

·         Risk management plan

·         Cost management plan

·         Schedule management plan

·         Risk register

·         Enterprise environmental factors

·         Organizational process assets

5.   Plan risk responses: To enhance opportunities and to minimize threats to project objectives plan risk response is helpful. It addresses the risks by their priority, activities into the budget, schedule, and project management plan.

The inputs for plan risk responses are

·         Risk management plan

·         Risk register

6.   Control Risks: Control risk is the procedure of tracking identified risks, identifying new risks, monitoring residual risks and evaluating risk.

The inputs for this stage includes

·         Project management plan

·         Risk register

·         Work performance data

·         Work performance reports

7)  Qualitative analysis and Quantitative analysis

Qualitative Risk Analysis :A qualitative risk analysis prioritizes the identified project risks using a pre-defined rating scale. Risks will be scored based on their probability or likelihood of occurring and the impact on project objectives should they occur.

Probability/likelihood is commonly ranked on a zero to one scale (for example, .3 equating to a 30% probability of the risk event occurring).

The impact scale is organizationally defined (for example, a one to five scale, with five being the highest impact on project objectives - such as budget, schedule, or quality).

A qualitative risk analysis will also include the appropriate categorization of the risks, either source-based or effect-based.

Quantitative Risk Analysis

A quantitative risk analysis is a further analysis of the highest priority risks during a which a numerical or quantitative rating is assigned in order to develop a probabilistic analysis of the project.

A quantitative analysis:
- quantifies the possible outcomes for the project and assesses the probability of achieving specific project objectives
- provides a quantitative approach to making decisions when there is uncertainty
- creates realistic and achievable cost, schedule or scope targets

In order to conduct a quantitative risk analysis, you will need high-quality data, a well-developed project model, and a prioritized lists of project risks (usually from performing a qualitative risk analysis)

8)  Sensitivity Analysis

A sensitivity analysis determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that depend on one or more input variables, such as the effect that changes in interest rates (independent variable) has on bond prices (dependent variable).

Methods of Sensitivity Analysis

There are different methods to carry out the sensitivity analysis:

• Modeling and simulation techniques
• Scenario management tools through Microsoft excel

There are mainly two approaches to analyzing sensitivity:

• Local Sensitivity Analysis
• Global Sensitivity Analysis

1)  Local sensitivity analysis: is derivative based (numerical or analytical). The term local indicates that the derivatives are taken at a single point. This method is apt for simple cost functions, but not feasible for complex models, like models with discontinuities do not always have derivatives.

Mathematically, the sensitivity of the cost function with respect to certain parameters is equal to the partial derivative of the cost function with respect to those parameters.

Local sensitivity analysis is a one-at-a-time (OAT) technique that analyzes the impact of one parameter on the cost function at a time, keeping the other parameters fixed.

2)  Global sensitivity analysis: is the second approach to sensitivity analysis, often implemented using Monte Carlo techniques. This approach uses a global set of samples to explore the design space.

9)  Break-Even Analysis:

Another form of financial analysis is breakeven analysis. It is a technique for finding a point at which a project will cover its costs, or break even. It is often used to make an initial decision on whether to proceed with a project. Breakeven analysis is also a technique of financial control in the sense that further analyses may be necessary as conditions change.

For example, an initial breakeven analysis may have indicated that sales of 80,000 units would be needed for a division to breakeven. Midway through the project, however, material costs could rise, anticipated demand could change, or price for the product could drop.

Any or all of these changes would alter the breakeven point. This in turn would signal to the organisation that it might wish to cancel the project to minimise losses. Hence, breakeven analysis can be used initially for decision-making and later for control.

The break-even point (BEP) is the point on a chart at which total revenue ex­actly equals total costs (fixed and vari­able), Fig. illustrates how the BEP is computed.