Copyright Course Technology 1999 1 Topic 8 : Project Risk Management Chapter 10.

Copyright Course Technology 1999

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Topic 8 :Project Risk Management

Chapter 10


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The Importance of Project Risk ManagementProject risk management is the art and

science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives

Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates


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What is Risk?

A dictionary definition of risk is “the possibility of loss or injury”

Project risk involves understanding potential problems that might occur on the project and how they might impede project success

Risk management is like a form of insurance; it is an investment


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Why Take Risks? Because of Opportunities!

OpportunitiesRisks

Try to balance risks and opportunities


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Risk Utility

Risk utility or risk tolerance is the amount of satisfaction or pleasure received from a potential payoff– Utility rises at a decreasing rate for a

person who is risk-averse– Those who are risk-seeking have a higher

tolerance for risk and their satisfaction increases when more payoff is at stake

– The risk neutral approach achieves a balance between risk and payoff


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What is Project Risk Management?The goal of project risk management is to

minimize potential risks while maximizing potential opportunities. Major processes include– Risk identification: determining which risks are likely

to affect a project– Risk quantification: evaluating risks to assess the

range of possible project outcomes– Risk response development: taking steps to enhance

opportunities and developing responses to threats– Risk response control: responding to risks over the

course of the project


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Table 10-1. Information Technology Success Potential Scoring Sheet

Success Criterion Points

User Involvement 19

Executive Management support 16

Clear Statement of Requirements 15

Proper Planning 11

Realistic Expectations 10

Smaller Project Milestones 9

Competent Staff 8

Ownership 6

Clear Visions and Objectives 3

Hard-Working, Focused Staff 3

Total 100


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Table 10-2. McFarlan’s Risk Questionnaire1. What is the project estimate in calendar (elapsed) time?

( ) 12 months or less Low = 1 point

( ) 13 months to 24 months Medium = 2 points

( ) Over 24 months High = 3 points

2. What is the estimated number of person days for the system?

( ) 12 to 375 Low = 1 point

( ) 375 to 1875 Medium = 2 points

( ) 1875 to 3750 Medium = 3 points

( ) Over 3750 High = 4 points

3. Number of departments involved (excluding IT)

( ) One Low = 1 point

( ) Two Medium = 2 points

( ) Three or more High = 3 points

4. Is additional hardware required for the project?

( ) None Low = 0 points

( ) Central processor type change Low = 1 point

( ) Peripheral/storage device changes Low = 1

( ) Terminals Med = 2

( ) Change of platform, for example High = 3

PCs replacing mainframes


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Market, Financial, and Technology RiskMarket risk: Will the new product be useful

to the organization or marketable to others? Will users accept and use the product or service?

Financial risk: Can the organization afford to undertake the project? Is this project the best way to use the company’s financial resources?

Technology risk: Is the project technically feasible? Could the technology be obsolete before a useful product can be produced?


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Risk Identification

Risk identification is the process of understanding what potential unsatisfactory outcomes are associated with a particular project

Several risk identification tools include checklists, flowcharts, and interviews


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Table 10-3. Potential Risk Conditions Associated With Each Knowledge AreaKnowledge Area Risk Conditions

Integration Inadequate planning; poor resource allocation; poor integrationmanagement; lack of post-project review

Scope Poor definition of scope or work packages; incomplete definitionof quality requirements; inadequate scope control

Time Errors in estimating time or resource availability; poor allocationand management of float; early release of competitive products

Cost Estimating errors; inadequate productivity, cost, change, orcontingency control; poor maintenance, security, purchasing, etc.

Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assuranceprogram

Human Resources Poor conflict management; poor project organization anddefinition of responsibilities; absence of leadership

Communications Carelessness in planning or communicating; lack of consultationwith key stakeholders

Risk Ignoring risk; unclear assignment of risk; poor insurancemanagement

Procurement Unenforceable conditions or contract clauses; adversarial relations


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Risk QuantificationRisk quantification or risk analysis is the

process of evaluating risks to assess the range of possible project outcomes

Determine the risk’s probability of occurrence and its impact to the project if the risk does occur

Risk quantification techniques include expected monetary value analysis, calculation of risk factors, PERT estimations, simulations, and expert judgment


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Risk Management Plans, Contingency Plans, and Contingency Reserves

A risk management plan documents the procedures for managing risk throughout the project

Contingency plans are predefined actions that the project team will take if an identified risk event occurs

Contingency reserves are provisions held by the project sponsor for possible changes in project scope or quality that can be used to mitigate cost and/or schedule risk


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Table 10-5. Questions Addressed in a Risk Management PlanWhy is it important to take/not take this risk in

relation to the project objectives?What specifically is the risk and what are the risk

mitigation deliverables?How is the risk going to be mitigated? (What risk

mitigation approach is to be used?)Who are the individuals responsible for

implementing the risk management plan?When will the milestones associated with the

mitigation approach occur?How much is required in terms of resources to

mitigate risk?


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Risk Response ControlRisk response control involves executing the

risk management processes and the risk management plan to respond to risk events

Risks must be monitored based on defined milestones and decisions made regarding risks and mitigation strategies

Sometimes workarounds or unplanned responses to risk events are needed when there are no contingency plans


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Top 10 Risk Item TrackingTop 10 risk item tracking is a tool for

maintaining an awareness of risk throughout the life of a project

Establish a periodic review of the top 10 project risk items

List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item


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Table 10-6. Example of Top 10 Risk Item Tracking

Monthly Ranking

Risk Item This

Month

Last

Month

Numberof Months

Risk ResolutionProgress

Inadequateplanning

1 2 4 Working on revising theentire project plan

Poor definitionof scope

2 3 3 Holding meetings withproject customer andsponsor to clarify scope

Absence ofleadership

3 1 2 Just assigned a newproject manager to leadthe project after old onequit

Poor costestimates

4 4 3 Revising cost estimates

Poor timeestimates

5 5 3 Revising scheduleestimates


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Topic 8 : (Continued) Project Procurement Management

Chapter 11


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Importance of Project Procurement ManagementProcurement means acquiring goods

and/or services from an outside sourceOther terms include purchasing and

outsourcingExperts predict that by the year 2000

the worldwide information technology outsourcing market will grow to over $100 billion


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Why Outsource?

To reduce both fixed and recurrent costs

To allow the client organization to focus on its core business

To access skills and technologiesTo provide flexibilityTo increase accountability


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Project Procurement Management ProcessesProcurement planning: determining what to procure

and whenSolicitation planning: documenting product

requirements and identifying potential sourcesSolicitation: obtaining quotations, bids, offers, or

proposals as appropriateSource selection: choosing from among potential

vendorsContract administration: managing the relationship

with the vendorContract close-out: completion and settlement of

the contract


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Figure 11-1. Project Procurement Management Processes and Key Outputs


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Procurement PlanningProcurement planning involves

identifying which project needs can be best met by using products or services outside the organization. It includes deciding– whether to procure– how to procure– what to procure– how much to procure– when to procure


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Collaborative Procurement

Several organizations, even competitors, have found that it makes sense to collaborate on procurement for some projects

Kodak worked with several competitors to develop the Advantix Advanced Photo System (see What Went Right? on pg. 303)


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Procurement Planning Tools and TechniquesMake-or-buy analysis: determining

whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis

Experts, both internal and external, can provide valuable inputs in procurement decisions


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Types of Contracts

Fixed price or lump sum: involve a fixed total price for a well-defined product or service

Cost reimbursable: involve payment to the seller for direct and indirect costs

Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service


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Cost Reimbursable ContractsCost plus incentive fee (CPIF): the buyer

pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus

Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs

Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs


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Figure 11-2. Contract Types Versus Risk


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Statement of Work (SOW)

A statement of work is a description of the work required for the procurement

Many contracts, or other mutually binding agreements, include SOWs

A good SOW gives bidders a better understanding of the buyer’s expectations


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Figure 11-3. Statement of Work (SOW) Template

I. Scope of Work: Describe the work to be done in detail. Specify the hardware andsoftware involved and the exact nature of the work.

II. Location of Work: Describe where the work must be performed. Specify thelocation of hardware and software and where the people must perform the work

III. Period of Performance: Specify when the work is expected to start and end,working hours, number of hours that can be billed per week, where the work mustbe performed, and related schedule information.

IV. Deliverables Schedule: List specific deliverables, describe them in detail, andspecify when they are due.

V. Applicable Standards: Specify any company or industry-specific standards thatare relevant to performing the work.

VI. Acceptance Criteria: Describe how the buyer organization will determine if thework is acceptable.

VII. Special Requirements: Specify any special requirements such as hardware orsoftware certifications, minimum degree or experience level of personnel, travelrequirements, and so on.


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Solicitation PlanningSolicitation planning involves

preparing several documents:– Request for Proposals: used to solicit

proposals from prospective sellers where there are several ways to meet the sellers’ needs

– Requests for Quotes: used to solicit quotes for well-defined procurements

– Invitations for bid or negotiation, and initial contractor responses are also part of solicitation planning


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Figure 11-4. Outline for a Request for Proposal (RFP)I. Purpose of RFP

II. Organization’s Background

III. Basic Requirements

IV. Hardware and Software Environment

V. Description of RFP Process

VI. Statement of Work and Schedule Information

VII. Possible Appendices

A. Current System Overview

B. System Requirements

C. Volume and Size Data

D. Required Contents of Vendor’s Response to RFP

E. Sample Contract


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SolicitationSolicitation involves obtaining

proposals or bids from prospective sellers

Organizations can advertise to procure goods and services in several ways– approaching the preferred vendor– approaching several potential vendors– advertising to anyone interested

A bidders’ conference can help clarify the buyer’s expectations


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Source Selection

Source selection involves– evaluating bidders’ proposals– choosing the best one– negotiating the contract– awarding the contract

It is helpful to prepare formal evaluation procedures for selecting vendors

Buyers often create a “short list”


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Figure 11-5. Sample Proposal Evaluation Sheet


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Figure 11-6. Detailed Criteria for Selecting Vendors


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Contract AdministrationContract administration ensures that the

seller’s performance meets contractual requirements

Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts

Many project managers ignore contractual issues, which can result in serious problems (see What Went Wrong? on pg. 315)


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Suggestions on Change Control for ContractsChanges to any part of the project need to be

reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved

Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided?

Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls

Copyright Course Technology 1999 1 Topic 8 : Project Risk Management Chapter 10.

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