Stephen Ward: Performance uncertainty management is a more effective approach than risk management

apm risk SIG 24 October 2013

Uncertainty or risk - is there a difference?

Performance uncertainty management is a more effective approach than risk management

Stephen Ward Southampton Management School

University of Southampton

Cause(source)

Effect (on some aspect of performance)

Source ofRisk (threat)

Possible unwelcome

effect on performance

‘Risk’

Source ofopportunity

Possible welcome

effect on performance

Welcome

outcomes

Unwelcome

outcomes

Look for opportunities

Look out for threats

Aspiration level

Per

form

ance

leve

l

Threat or opportunity – what’s the difference?

-ve +veA -ve +veA

-ve +veA -ve +veA

The free lunch (take up)

A typical opportunity (weigh up)

A mixed bag (pass up)

A pure threat (avoid/reduce)

A = aspiration level

• Most opportunities involve some possibility of downside• Some important sources of uncertainty are not easily classified as threat or opportunity

True or False?

Threat management is about 1. decreasing the probability of downside effectsor 2. reducing downside effects

Opportunity management is about3. increasing the probability of upside effectsor 4. increasing upside effects

Threat and opportunity management

A A

A A

Threat management ?

Opportunity management ? Uncertainty management ?

A = aspiration level

(No change in probability of failure)

(No change in probability of success)

Observations

1. Opportunity and threat management may be separable, but it is inefficient to use separate processes.

2. A combined approach should increase the scope of improvements obtainable.

3. There is no need for separate processes focused on threats or opportunities. Management of uncertainty is the key issue - explore and understand the origins of performance related uncertainty, before seeking to manage it.

Some obvious implications about uncertainty, objectives, and risk

1. Setting objectives (aspiration levels) drives risk.

2. If performance is multi-dimensional, so is risk.

3. Uncertainty management (and risk management) shouldrecognise trade-offs between performance objectives

4. Different stakeholders may have different views of project uncertainty, objectives, associated risk, opportunities, and

their management.

Uncertainties

Threats Opportunities

Uncertainty management

Understand where and why uncertainty is important in a given performance context,

before seeking to manage it.

More than just threat or opportunity management

 Uncertainty about:

• Relevant aspects of performance

• Nature of causes (possible intended actions, conditions, events)

• The current and future state of causes

• The possible effects of causes on different aspects of performance

• The probability of a particular cause producing a particular effect

• Linkages between various causes and/or various effects

• Underlying (component) causes (and the decomposition problem)

Cause(source)

Effect (on some aspect of performance)

Cause Effect 1

Cause

Cause Effect 2

Cause Effect 3

Cause

Cause

A very simple cause – effect chain

Effect 1 = effect on performance attribute 1 etc.

Address roots of uncertainty

– What do we need to know – for what purpose?– When do we need to know it?– What knowledge have we got?– When is knowledge available?– Where is knowledge? – Who has it?– How do we get it? – What resources do we need to get it?– What is the value of different pieces of knowledge?

How does this change over time as the situation changes?

A knowledge perspective- Relevant to all management processes

Address roots of uncertainty– Who is involved?– Why are they involved?– What is the subject matter?– Which way is the work to be done?– What resources are required?– When does the work have to be done?

Project specific knowledge

1. Event uncertainty – possibilities due to specific events or conditions

2. Inherent variability – in factors that are always present

3. Systemic uncertainty – associated with relationships between sources of uncertainty

4. Ambiguity uncertainty – associated with lack of knowledge, understanding or agreed plans, and a residual of all uncertainty not included in 1-3 above.

Four types of uncertainty

• Lack of clear specification of what is required

• Novelty or lack of experience

• Complexity – number of influencing factors and associated interdependencies

• Limited analysis of the processes involved

• Possible events or conditions which might affect the activity

• Bias

Sources of uncertainty associated with estimates

Effective project governance needs effective uncertainty management

to ensure appropriate:

• levels of planning and decision making

• assessment and management of uncertainty and risk

• evaluation of projects at various stages of the life cycle

• implementation of plans

Life cycle stage Governance focus

Concept shaping Business case from a corporate strategy perspective

Design, operations Operations planning from an operations and termination management perspectivestrategy shaping

Execution & delivery Execution and delivery planning from a project strategy shaping management perspective

Tactics shaping Provision of detail necessary to implement strategy

Execution & Implementation of plans, monitoring and control Delivery

Operations & Implementation of plans, monitoring and control Support

Termination Implementation of plans, monitoring and control

Performance uncertainty management in the project life cycle needs to consider:

• ongoing evaluation of uncertainty about future performance

• modifications to design and base plans

• development of contingency plans

• monitoring and managing uncertainty

• remaining life cycle stages

One step- revise common practice risk management terminology– Replace the term ‘risk’ with ‘uncertainty’– Replace

• Problem• Weakness• Impact• Mitigate• avoid risk

issueissueconsequenc

emodify

resolve uncertainty

Moving from Risk Management to Performance Uncertainty Management

Expose and investigate pertinent uncertainty transparent analysis clarify the quality of estimates variability assessment

Clarity efficient effort in analysis and planning

Address uncertainty about priorities and tradeoffs

clarify priorities and tradeoffs motivate efficient tradeoffs

Opportunity efficient planning and plans

Moving from Risk Management to Performance Uncertainty Management

Recommended reading!

Chris Chapman and Stephen Ward (2011) How to manage project opportunity and risk – why uncertainty management can be a much better approach than risk management. Wiley

David Cleden (2009) Managing project uncertainty. Gower Publishing

Douglas Hubbard (2009) The failure of risk management - why its

broken and how to fix it. Wiley

Professor Stephen Ward

Southampton Management School,

University of Southampton, Highfield, Southampton, SO17 1BJ

[email protected]

www.management.soton.ac.uk

Appendices

 Some definitions of ‘risk’

Something happening that may have an impact on the achievement of objectives….

(National Audit Office , 2000)

An uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective.

(Project Management Institute, A guide to the project management body of knowledge, 2000 edition. USA: project management institute, 2000, p127)

 The implications of significant uncertainty about the level of project performance achievable.

(C Chapman and S Ward , Project risk management: processes, techniques and insights. Wiley, 2003)

Threats - unwelcome things that might happen to us (bad luck?).

- mostly don’t need to do anything, or omit to do something, to create a threat

Threat management – avoid or reduce circumstances that could generate losses relative to aspirations.

A key question: Are aspirations too ambitious?

Some initial thoughts about threats

Opportunities - favourable combinations of circumstances that might happen (good luck ?) or that can be created.

- mostly need to do something (proactively), to create and exploit an opportunity.

Opportunity management – proactive action to increase potential for gains relative to aspirations.

A key question: Are aspirations too modest?

Some initial thoughts about opportunities

Implications of a focus on threats

• Impaired ability/incentive to pursue upside

• Unintended consequences of budgetary controls

(exception based control, seeking to just meet performance targets)

• Diverts attention from upside possibilities

(avoidance/reduction, neutralisation)

• Risk attitude is influenced by the way choices are framed

• Concern to set challenging targets (threshold levels) for performance

don’t think about the effect on other performance criteria

Identifying opportunities

• Adopt same perspectives as for threats:

• a corporate strategy perspective

• an asset management perspective

• a people perspective

• a project perspective

• a systems perspective

• Potential synergy – make wider use of existing resources

• Sources of good luck

• Consider good general strategies for coping with uncertainty

(flexibility, resilience, robustness, incrementalism)

Identifying opportunities via threats

• Understand the full implications of

a threat management action

• Consider the scope of responses to threats

• Consider interdependencies between threats

and general responses that address a range of threats

• Absence or inverse of threats (or neutral descriptions)

• Scrutinise constraints

A traditional four stage asset lifecycle example

Basic lifecycle stages

Dominant management aspect

Conceptualisation

Operations or corporate management initially,

then corporate management

Planning Corporate management initially, then project management

Execution and delivery

Project management

Utilisation Operations management

Management responses

• Information systems• Infrastructure to manage project portfolio• Asset Management• Value management • Whole Life Cycle Costing• Project management• Procurement arrangements • Risk management• Performance uncertainty management