The Project Manager's Guide to Handling Risk

Alan Webb

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351218320
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Risk is a key issue for every project manager. How the various risks are handled can often define the final outcome of a project; it can determine its overall worth to both sponsors and contractors and its ultimate success or failure. Alan Webb's The Project Manager's Guide to Handling Risk is a concise, practical guide to the process for every project manager. Starting from an explanation of how our current ideas of risk have evolved, the author: introduces the nature of risk and the basis of risk analysis; explores how and where different patterns of risk emerge within the life of a project, and explains the variety of tools and techniques for risk analysis and management and shows how to use them. The book also provides a comprehensive assessment of the current range of software tools that deals with the various aspects of risk management. Included with The Project Manager's Guide to Handling Risk is a free CD-ROM containing samples of available software packages.

Chapter 1 Introduction

Ask anyone in the street if they understand what risk is and the answer will be that risk is something he or she understands very well. If you ask them to define it the sort of answer you will get is that a risk is the chance that whatever you are doing could all go wrong, and no one has any doubt what that implies. Unless you happen to be a thrill-seeker, risk has a distinctly negative aspect that perhaps we would rather not think about. As friends are apt to say when we dismally contemplate some unpleasant prospect, 'Cheer up, it might never happen!' 'But', you might say 'if I risk some money on the horses, it might all go right and I really could have a reason to be cheerful.' That is true as well, so perhaps we might feel more kindly disposed towards risks if we can see a bright side. Then, you might counter, 'But wouldn't life be even better if we had no risks at all?' That, unfortunately, is a matter of opinion and something that could be discussed forever without reaching a conclusion, except to say that most people, at some time in their lives, are forced to accept a risk they would rather not be exposed to.

Like it or not, risks surround us in our daily lives. In general, we accept these risks as part of life; we may choose to act in a way that minimizes some of them, particularly those we can clearly see, but for the majority we forget about them and get on with living. It would be a very restricted and unrewarding existence if we chose to assess all the risks that we encounter and sought to minimize them all.

Businesses face risks in the same way that we as individuals face them in that risks are accepted as a part of normal trading; to try to eliminate them all would be impractical and ultimately result in the demise of the organization. Risks cannot be avoided for the world is in a state of constant change; to survive, businesses must adapt to the changing world around them. There must always be a chance for every business that by choosing to make an adaptive change to something that is outside its control, that choice might turn out to be the wrong one.

The creation of a project is a visible expression of the desire for change; it is a response to a perceived need for something new and it creates an opportunity to be exploited. But meeting the challenge does not assure success; the need may disappear, unforeseen problems may dog the project or the opportunity may go to a competitor. A profitable outcome is the reward for taking risks in an uncertain world; it is not guaranteed and it may be negative. As businesses exist to make a satisfactory return for their investors, minimizing the risks to a satisfactory return must always be a business objective.

A project is a response to a stimulus to create something where nothing existed before. Some projects have little in them that is new; they may involve something that is well known and understood, only the unique nature of the undertaking makes it into a project. At the other extreme, a project may be an attempt to create something that has never been done before. The differences in the levels of uncertainty between the two extremes will be obvious and we all understand that the more uncertainty there is in the project the greater the chance it might all turn out badly. It is also true to say that with projects that are largely based on proven experience, the techniques soon become well known and the effect of competition drives down the profit potential. Risks and profits go hand in hand in a business situation and if we look for a risk-free world we are likely to be disappointed; either we are going to do nothing or ultimately we will become a sheltered servant to some more progressive organization. The potential for profit and the associated risk of failure with projects of all sizes has become the object of serious study over the last two decades. Industry has demanded it as both the pace of technological change and the associated costs have accelerated and it finds expression in the subject of 'project risk analysis and management'.

The history of major projects over the last half century is one of very mixed fortunes: there have been some significant successes such as the Jaguar and Tornado collaborative fighter-bomber projects and the Apollo moon shots, but there seem to have been an equal if not much greater number of projects that have either failed completely for example the Nimrod AEW 3, or ended with an unsatisfactory outcome such as the Channel Tunnel. Even Concorde, which succeeded magnificently on the technical and national prestige fronts, was a failure in terms of sales. Some of these failures undoubtedly stemmed from inherent risks that were either not recognized at the outset or not managed properly during the course of the project. That is not to imply that in all cases the physical outcome would have been significantly different if the risks had been better managed, but some projects might never have been started while others would have progressed in an environment of more realistic expectations. Expectations matter; they embody what we hope to achieve from the project and are fundamental to the case for starting and continuing with it. But expectations can spread much farther afield than those who are directly involved in it for all of society has a stake, even if it is a very small one, in the outcome of every project. Risks stem directly from the prospect that ours and society's expectations of the project will not be fulfilled. If we cannot say with certainty that all we expect from the project will be achieved then we have a risk situation. Whether those expectations are reasonable is another matter but where projects have failed, a clash of expectations or unrealistic expectations have often been at the root of the failure.

It would be easy to continue with a discussion of the reasons for project failure but this book is not about that; the process of risk analysis and management is all about project success. By a series of logical steps and some special techniques risks can be identified and managed in a way that should not allow them to harm the project to a significant degree if they should materialize. That does not imply that the process will create a generally risk-free project or that issues will not arise at any point that can seriously threaten it. Risks are placed firmly in the future and once a risk has materialized it is history; unfortunately perfect knowledge of the future is something we might wish for but can never have. Nevertheless, a proper process of risk analysis and management throughout the life of the project can significantly influence its chances of success.

The subject of risk is perhaps the most difficult of all in the field of project management as it deals with those two most intangible of elements: the future and uncertainty. Furthermore, risk contains an emotional aspect which can never really be divorced from both our perception of it and the way in which we deal with it. We now have some of the most sophisticated methods for recognizing and handling risk and it has perhaps come to influence our business and our daily lives to a greater extent than ever before. It has not always been like that; our understanding of the concept of risk has evolved over 3000 years of human history; the way in which we view it today is quite different from our forefathers. Developments in mathematics in the last 500 years have shaped our view of uncertainty as well as handing us some tools to make sense of it when we are forced to confront the risks in an uncertain world. The whole process of risk analysis is underpinned by these mathematical and logical techniques but they do need to be fully understood if they are to be used properly The concepts involved with some of these methods are quite sophisticated but, luckily they do not involve any particularly advanced mathematics in order to understand them. The very nature of some of the methods does, however, mean that computer systems are needed in order to use them; where the mathematics does get more complex it can be happily left to the software.

The early chapters in this book deal with the development of our understanding of risk and give an explanation of the mathematical techniques for analysing them. The later chapters deal with the process of risk management within the project framework; this order of presentation is quite deliberate as the management process is underpinned by the analytical techniques. Without understanding them and seeing what their inputs and outputs are, it will not be so easy to see how the management of risks uses these tools and where they fit into the overall cycle. Finally there is a chapter on contemporary project risk analysis software; examples are given of some current products with brief explanations of how a few of them work. Software has become essential for some analytical techniques so anyone wishing to understand the subject as it is actually practised must eventually look at the tools. For some in positions of responsibility on projects, the issue of implementing risk analysis and management techniques will arise and the question of what software to choose will demand an answer. Whereas Chapter 11 'Software for risk analysis and management' is, in no sense, a definitive coverage of this constantly changing subject, it provides an analysis and grouping of the current tools that should act as a guide to any manager who might be required to decide on a software policy.

Projects cover an enormous spread of industrial activity and there are huge differences in scale, character and risks between individual projects. Some processes adopted by project managers, for example Earned Value management, can be described with precision because they are founded on a specific planning or accounting principle; the requirements and methods for implementing them can be set out in a reasonably prescribed manner. The same is not true for risk analysis and management; too much depends on the fundamental nature of the project, its inherent complexity and its aims and objectives for a prescribed implementation process to be appropriate. The reader will find the management processes are described in general terms in a way that should make it appropriate to industrial projects of any kind. Where examples of processes are given, they are inevitably industry specific and some might not find them appropriate to their situation; that has to be accepted and the reader is asked to try to see these examples as typical of a broader and generally applicable process.

We all understand that risks embody the concept of an adverse outcome and risk management might be assumed to deal only with the darker aspects. On the basis of the generally understood meaning of risk this should be the case but there is a current move to widen the meaning of risk analysis and management to include the management of 'opportunities'. Although this is understandable it is dangerous for two reasons. First, it creates a new meaning for the word risk that is different from the generally accepted view and thus has the potential to drive a wedge between the specialists in risk management and the wider community. Second, opportunities are actually quite different in character from risks; the community of risk analysts has spent the last twenty years developing a methodology for dealing with the negative aspects but has spent comparatively little time considering the management of opportunities and very little in the accepted methodology actually deals with it. So, if you really do want to know about creating, handling and exploiting opportunities, studying risk analysis and management is perhaps not the best approach as it could lead to a very distorted view.

The generally understood meaning of risk is taken throughout this text and it deals exclusively with the management of the darker aspects. Some might argue that such an approach is rather negative and does not cover the full spectrum of the tasks that risk analysts actually perform. This is a fair criticism as an important aspect of practical risk management is to recognize, capture and exploit the good luck when it comes along. Unfortunately this is rather less of a science than risk management as Lady Luck is far too fickle in her attentions. It must, however, be recognized that too much attention to the risks at the expense of seeing the wider view that encompasses potential benefits that might be obtained can certainly lead to missed opportunities. It could even do worse as it could lead to an atmosphere of foreboding in which everything is viewed from the downside, which is clearly something to be avoided.

The book describes the generally used and accepted methods for identifying and analysing risk situations, making decisions under uncertain conditions, creating a management framework for the process and handling risk situations. It does not recommend any particular approach as being superior to others but it provides an explanation and guidance so that people engaged on projects can choose for themselves which aspects of the process are most suitable to their circumstances. For those who are actively engaged in project work it will, hopefully, provide enough information for a basic understanding of the various methods that will lead to actual application and further study. Risk analysis and management is ultimately a practical subject and it is left to the reader to take what is presented and put it into effect for the benefit of the projects in which he or she is engaged, without forgetting the personal benefits that can spring from understanding and knowing how to deal with some of the most difficult issues in the whole of project management.

Chapter 2 Origins and History

Unlike many other aspects of management it is not possible to consider the origins and evolution of risk analysis and management without considering the development of our understanding of risk. Risk, as we have come to use and understand the term, is a comparatively modern development even though risks have existed throughout history Everyone knows that in all the many activities we undertake in our daily lives there is always the chance that things might go wrong and if they go badly wrong we could be seriously harmed, either physically, in our reputation or our pocket. How we view this state of affairs is conditioned by our belief in our ability to control events when we make decisions about the activities we pursue. We might choose to believe that the events in the future are part of some grand plan in which we are merely players or we may see the future as something over which we can exert a measure of influence through our own direct actions.

In the lap of the gods

There is no doubt that among older civilizations, such as those of ancient Greece and Rome, it was accepted that the future was in the hands of the gods. In these societies, life was much harder than anything we can imagine today, death and injury were much more a part of everyday life and accepted as such; they were certainly not feared in the way that our contemporary society has come to fear them. That does not mean that everyone was inherently brave but if you were destined for an early grave then that was the will of the gods; nevertheless, it was just as well to have the gods on your side. The ancient Romans may not have perceived risk in the way that we do but they knew there was always an element of chance in what the future held and they certainly believed in luck. If one wanted to be a winner in some risky activity like chariot racing then it was necessary to invoke luck by making the appropriate offering to the gods and carrying the right charms and amulets. This was an important part of the pre-race ritual and woe betide any charioteer who did not do it properly: the gods might not be pleased.

Gambling was a highly popular activity in the ancient world and games of chance evolved as an entertainment with the potential for a cash reward. Ancient gamblers knew all about luck and some undoubtedly developed skills at playing some of the games which made them winners in the long term. What they did not understand was our modern concept of 'probability' and the fact that with games such as dice, the probabilities of particular outcomes are fixed. The ancient Egyptians, Greeks and Romans had a popular game called 'astragali', that used a type of die - astragalus - made from a sheep's ankle bone. The die was not a regular cube, like a modern die, so the chances of landing on a narrow or a wide face were different, but the scores attached to the numbers did not reflect this. The game was played by throwing four astragali at a time and computing a score; some combinations were worth more than others but they were not based on their likelihood of occurring. We would find it hard to make sense of this game today but as far as the ancients were concerned it was great fun and proof, if it was necessary, that luck governed everything.

Despite the highly sophisticated geometry and philosophy developed by renowned figures such as Archemides and Aristotle, neither the ancient Greeks nor the Romans developed any concept of probability as we would understand it, for three distinct reasons. First, the lack of a convenient system of numeration and computation made calculation difficult. Second, understanding was considered to be the preserve of the intellect; abstract thought brought enlightenment which in turn discouraged the idea of measurement through experimentation and observation. Finally, order and certainty were the preserve of the gods. In the heavens the ancients saw a familiar pattern of perfect order that repeated faultlessly with the passage of the seasons, it brought them rain and sun that made their crops grow and sustained life; this was something that was in complete contrast to the chaos and uncertainty of their own earthy lives. To attempt to put a degree of certainty where the gods had surely created uncertainty was to defy the gods - and everyone knew where that led.

If gambling was seen as essentially a recreation in which Lady Luck might choose to smile on some and frown on others, there was another group in the ancient world who were beginning to take risks a little more seriously These were traders whose interest in the future might well involve sums of money greater than individual gambling stakes. Wise men began to see that even if the gods were angry and sent some misfortune their way there were things they could do to lessen the harmful effects that were rather more effective than simply making offerings. The first evidence of an understanding of risk as we would now recognize it came during the Babylonian Empire, established by Hammurabi (1792-50 bc) through a practical application in the area of merchant shipping. Shipwreck was a constant hazard that clearly spelt a significant loss for both the shipowner and the merchant that owned the cargo. The Hammurabi Code contains clauses that allowed a shipowner or merchant to obtain a loan to finance the voyage and the freight; however if the ship was wrecked the loan did not have to be repaid. It was the first form of risk-sharing insurance between financiers and traders.

The Greek and Roman Empires eventually fell (Rome in 476 ad), to be followed by one of the bleakest periods in human history when the invasion of warrior tribes from central and northern Europe brought about the 'Dark Ages'. Through the medieval period that began around 1000 ad a gradual enlightenment started that finally came to fruition in the Renaissance beginning in Italy in the mid-1300s. Throughout the Middle Ages, scholars had continued to translate the mathematical texts of the ancient world, but by the mid-1400s mathematics had become a subject of serious study, as it clearly showed the potential to solve problems that were increasingly exercising mens' minds in all manner of activities. The practical aspects of an expanding world demanded solutions to problems in navigation, construction and the arts of warfare. But there was another group who also saw an application for mathematics: gamblers. However, it was a Franciscan monk, Luca Paccioli, who first proposed in 1494 the idea of the analysis of probability, in a work called Summa de arithmetica, geometria et proporcionalita (All about arithmetic, geometry and proportionality).

The measure of chance

A more analytical approach followed when Geronimo Cardano (1501-76), (also known as Jerome Cardan) wrote Liber de ludo alaea (Book on games of chance). Cardano was a philosopher, writing texts on many subjects including religion; he was also an original thinker in the field ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Examples
• List of Figures
• List of Tables
• Foreword
• Preface
• 1. Introduction
• 2. Origins and History
• 3. Understanding the Nature of Risk
• 4. Risks in Projects
• 5. Project Selection
• 6. Making Decisions in Uncertain Situations
• 7. Changing Conditions
• 8. The Risk Management Process
• 9. Organizational Issues
• 10. Managing with Risk Analysis Methods
• 11. Software for Risk Analysis and Management
• Appendix I Terms used in the discussion and description of risk analysis and management
• Appendix II Software products and vendors
• Appendix III Software produrts on the CD-ROM
• Index