Chapter 7

Risk Management

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Learning Objectives
1. Define project risk.
2. Recognize four key stages in project risk
management and the steps necessary to
manage risk.
3. Explain primary causes of project risk and
major approaches to risk identification.
4. Recognize primary risk mitigation
strategies.
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Risk Management
Risk management—the art and science of identifying,
analyzing, and responding to risk factors throughout the
life of a project and in the best interest of its objectives.

Project risk—an uncertain event

or condition that, if it occurs,
has a positive or negative effect
on one or more project
objectives such as scope,
schedule, cost, or quality.

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Risk
Risk management consists of anticipating, at the
beginning of the project, unexpected situations that may
arise that are beyond the project manager’s control.
A risk may have one or more causes and if it occurs, may
have one or more impacts.
Risk and opportunity are mirror opposites of the same
coin — opportunity emerges from favourable project
uncertainties and negative consequences from
unfavourable events.

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 6

POKA YOKE
avoid (yokeru) mistakes (poka).

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Questions to Consider in Risk Management

• What is likely to happen (the probability and impact)?

• What can be done to minimize the probability or impact of
these events?
• What cues will signal the need for such action (i.e., what
clues should I actively look for)?
• What are the likely outcomes of these problems and my
anticipated reaction?

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Risk and Project Life Span
• Early in the life of a project, both risk and opportunity are high, due to the basic
uncertainty early in a project’s life cycle.

• In development phases, many unanswered questions remain, adding to overall

project uncertainty.

• The severity of negative consequences (the “amount at stake”) is minimal

early in the project’s life.

• As the project progresses and more budget money is committed, the overall
potential for negative consequences ramps up dramatically.

• The project takes on a more concrete form and many previously unanswered
questions
– Will the technology work?
– Is the development time line feasible?

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Risk Versus Amount at Stake: The Challenge
in Risk Management
The goal of a
risk
management
strategy is to
minimize the
company’s
exposure to
this unpleasant
combination
of uncertainty
and potential
for negative
consequences.

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Four Stages of Risk Management

Analysis of Risk
Risk Control and
probability and mitigation
Identification documentation
consequences strategies

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#1 Risk Identification: Risk Cluster

1. Financial Risk: financial exposure a firm opens

itself to when developing a project.
2. Technical Risk: contain unique technical
elements or unproven technology
3. Commercial Risk: uncertainty that companies
may willingly accept, given that it is virtually
impossible to accurately predict customer
acceptance of a new product or service venture

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#1 Risk Identification: Risk Cluster

4. Execution Risk: assess any unique

circumstances or uncertainties that could have
a negative impact on execution of the plan.
5. Contractual / Legal Risk: Many forms of
contracted terms or change of legal
requirements result in a significant degree of
project risk.
6. Unpredictable Risk

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Common Types of Risks

•Absenteeism •Skills unavailable

•Resignation •Ineffective training
•Staff pulled away •Specs incomplete
•Time overruns •Change orders

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Factors affecting risk level

• Several factors can increase the level of risk in a

project:
– duration
– lapse time
– inexperience
– insufficient maturation
– unfamiliarity

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Risk Factor Identification
1. Expert opinion: individuals or groups with specialized
knowledge of similar projects or business areas.
– Experts’ bias should be taken into account in this
process.
2. Brainstorming: qualitative idea-creation technique, not
one focused on decision making.
– Must be free of judgments, criticism of others’
viewpoints, and pressure to conform.
– no one individual, regardless of her perceived degree
of expertise, can possibly discern all sources of
threat and project risk.

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Risk Factor Identification
3. Past history: Experience can be used to identify not only
risk factors but their leading indicators as well.
– All parties employ a reasonable degree of caution
when evaluating current projects through the portal of
past events (current condition might not be relevant)
– Checklists is an effective way to capture lessons
learned from similar completed projects, listing
specific individual project risks that have occurred
previously and that may be relevant to this project.

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Risk Breakdown Structure (RBS)
A source-oriented grouping of project risks that organizes and defines
the total risk exposure of the project
Hierarchical representation of the project’s risks, starting at the
higher, general level and breaking the risks down to more specific
risks at lower levels.
Provides the project team with a visual representation of the critical
risks for their project, as well as highlighting the specific components
of these risks.
Helps risk analysis associated with each risk.

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Risk Breakdown Structure (R B S)

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Risk Breakdown Structure

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#2 Risk Analysis
• All company cannot solve / prevent all risk that
they identified.

• Prioritization of risk is very important, as it allow

the project team focuses on the critical risks.
Risk is “the possibility of loss”

Risk = (Probability of Event) x (Consequences of Event)

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Risk Analysis
• Probability and impact are assessed for each identified
individual project risk.
• Risk probability assessment considers the likelihood that a specific
risk will occur.
• Risk impact assessment considers the potential effect on one or
more project objectives such as schedule, cost, quality, or
performance.
– Impacts will be negative for threats and positive for opportunities.
• Risks can be assessed in interviews or meetings with participants
selected for their familiarity with the types of risk recorded in the risk
register.
• Risks with low probability and impact may be included within the risk
register as part of a watch list for future monitoring.
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Risk Analysis (Software development)

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Risk Analysis (Software development)

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Risk Analysis

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Risk Impact Matrix

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Risk Analysis (negative / positive impact)

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Project Risk Scoring
1. Use project team’s consensus to determine the score
for each Probability of Failure category: Maturity (Pm),
Complexity (Pc), and Dependency (Pd).
2. Calculate overall probability.

Pm  Pc  Pd
Pf 
3
3. Use project team’s consensus to determine the score
for each Consequence of Failure category: Cost (Cc),
Schedule (Cs), Reliability (Cr), and Performance (Cp).

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Project Risk Scoring
4. Calculate Cf by adding the four categories and dividing
by 4:
Cc  Cs  Cr  Cp
Cf 
4
5. Calculate Overall Risk Factor for the project by using
the formula:
RF  Pf  Cf   Pf Cf 

Rule of Thumb:
Low Risk RF < 0.30
Medium Risk RF = 0.30 to 0.70
High Risk RF > 0.70
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#3 Risk Mitigation

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3.1 Accept Risk
The risk sufficiently strong that any action is warranted?
Any number of risks of a relatively minor nature may be
present in a project as a matter of course.
If the likelihood of their occurrence is so small or the
consequences of their impact are so minor, they may be
judged acceptable and ignored.
In this case, the decision
 to “do nothing” is a
 reasoned calculation,
 not the result of inattention or incompetence.
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3.2 Reduce (Minimize) Risk
Implement actions to minimize the impact or
likelihood of the risk.
1. Buy information about the risk
2. Get more support (e.g. more supplier)
3. Publicize the risk
4. Induce the failure
5. Prepare for the failure prior it happen

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3.3 Transfer (share) Risk
Transfer (Share) Risk
Risk transference is the involvement of handing
risk off to a willing third party, when it is
impossible to change the nature of the risk.
1. Collaborate for sharing
2. Supplier / vendor to responsible
3. Insurance

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3.4 Avoid Risk
By stepping away from the business activities involved or
designing out the causes of the risk you can successfully
avoid the occurrence of the undesired events.
– One way to avoid risk is to exit the business, cancel the
project, close the factory, etc  it is an option
– Establish policies and procedures that assist the
organization to foresee and avoid high-risk situations.
By not starting a project that includes a high unwanted
risk successfully avoids that risk.
A product design change (design out) to a more robust
material avoids unwanted failures due to unacceptable
wear of a less robust material.
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Other Risk Mitigation Strategies
1. Mentoring program, junior or inexperienced project personnel are
paired with senior managers in order to help them learn best
practices.
– The goal of mentoring is to help ease new project personnel into
their duties by giving them a formal contact who can help clarify
problems, suggest solutions, and monitor them as they develop
project skills.
2. Cross-training project team personnel so that they are capable of
filling in for each other in the case of unforeseen circumstances.
– Members of the project team learn not only their own duties but
also the roles that other team members are expected to perform
 Job rotation

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Ford Pinto – an example of ethically
justifiable behaviour?

http://www.engineering.com/Library/ArticlesPage/tabid/85/ArticleID/166/Ford
-Pinto.aspx

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• In the late 1960s ford designed a subcompact, the Pinto, weighing less
than 2,000 pounds and selling for less than $2,000. Anxious to compete
with foreign-made subcompacts, Ford brought the car into production in
a little more than two years (compared with the usual three and on-half
years).
• Given this shorter time frame, styling preceded much of the engineering,
thus restricting engineering design more than usual.
• As a result, it was decided that the best place for the gas tank was
between the rear axle and the bumper. The differential housing had
exposed bolt heads that could puncture the gas tank if the tank were
driven forward against them upon rear impact.
• Although the federal government was pressing to stiffen regulations on
gas tank designs, Ford contented that the Pinto met all applicable federal
safety standards at the time.
• J.C. Echold, director of automotive safety for ford, issued a study entitled
"Fatalities Associated with Crash Induced Fuel Leakage and Fires." This
study claimed that the costs of improving the design ($11 per vehicle)
outweighed its social benefits.
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 37

• Taking an approach heralded as rational in most business school curricula,

they conducted a formal cost-benefit analysis—putting dollar amounts on a
redesign, potential lawsuits, and even lives—and determined that it would be
cheaper to pay off lawsuits than to make the repair. That methodical process
colored how they viewed and made their choice. The moral dimension was
not part of the equation. Such “ethical fading,” a phenomenon first described
by Ann Tenbrunsel and her colleague David Messick, takes ethics out of
consideration and may even increase unconscious unethical behavior.

• What about Lee Iacocca, then a Ford executive VP who was closely involved
in the Pinto launch? When the potentially dangerous design flaw was first
discovered, did anyone tell him? “Hell no,” said one high company official
who worked on the Pinto, according to a 1977 article in Mother Jones. “That
person would have been fired. Safety wasn’t a popular subject around Ford
in those days. With Lee it was taboo. Whenever a problem was raised that
meant a delay on the Pinto, Lee would chomp on his cigar, look out the
window and say ‘Read the product objectives and get back to work.’”

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Financial Analysis
Modification could prevent 180 burn
• Cost for modifying gas •

deaths
tank: $11 • In 1970’s:

• Human Life (gov): $200,000

• Serious burn (Insurance) $67,000

• Total Cost • Residual value $700

• 11 x 12.5 million unis

• = $137 million

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Control and Documentation
Control and documentation methods help managers classify and
codify the various risks the firm faces, its responses to these
risks, and the outcome of its response strategies

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Project Risk Analysis and Management
(PRAM)
PRAM presents a generic methodology that can be
applied to multiple project environments, and encompasses
the key components of project risk management.
Key Features of PRAM
• Risk management follows a life cycle.
• Risk management strategy changes over the project life
cycle.
• Synthesized, coherent approach.

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Nine Phases of Risk Assessment

1. Define 6. Estimate
2. Focus 7. Evaluate
3. Identify 8. Plan
4. Structure 9. Manage
5. Clarify ownership
of risks

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