project management risk management. outline 1.introduction 2.definition of risk 3.tolerance of risk...

Project ManagementProject Management

Risk ManagementRisk Management

OutlineOutline1. Introduction

2. Definition of Risk

3. Tolerance of Risk

4. Definition of Risk Management

5. Certainty, Risk, and Uncertainty

6. Risk Management Process

7. Risk Planning

8. Risk Assessment

9. Risk Identification

1. Introduction

2. Definition of Risk

3. Tolerance of Risk

4. Definition of Risk Management

5. Certainty, Risk, and Uncertainty

6. Risk Management Process

7. Risk Planning

8. Risk Assessment

9. Risk Identification

OutlineOutline10. Risk Analysis

11. The Monte Carlo Process

12. Risk Handling

13. Selecting the Appropriate Response Mechanism

14. Risk Monitoring

15. Some Implementation Considerations

16. The Use of Lessons Learned

17. Dependencies between Risks

18. The Impact of Risk Handling Measures

19. Risk and Concurrent Engineering

10. Risk Analysis

11. The Monte Carlo Process

12. Risk Handling

13. Selecting the Appropriate Response Mechanism

14. Risk Monitoring

15. Some Implementation Considerations

16. The Use of Lessons Learned

17. Dependencies between Risks

18. The Impact of Risk Handling Measures

19. Risk and Concurrent Engineering

Basic ConceptBasic Concept

Risk management focuses on:Known unknownsProactive management

Risk management focuses on:Known unknownsProactive management

The alternative to proactive management is reactive management, also called crisis management. This requires significantly more resources and takes longer for problems to surface.

The alternative to proactive management is reactive management, also called crisis management. This requires significantly more resources and takes longer for problems to surface.

Basic ConceptBasic Concept

Risk ManagementRisk Management

Risk management focuses on the future

Risk and information are inversely related

Risk management focuses on the future

Risk and information are inversely related

Risk Management (CONT.)Risk Management (CONT.)

Historically, we focused our attentions on schedule and cost risk management.

Today, our primary emphasis is on technological risk management:Can we design it and build it?What is the risk of obsolescence?

Historically, we focused our attentions on schedule and cost risk management.

Today, our primary emphasis is on technological risk management:Can we design it and build it?What is the risk of obsolescence?

Definition Of Risk(1/2)Definition Of Risk(1/2)

Risk = f(Likelihood, Impact)

•Likelihood is the probability of occurrence

•Impact is the amount at stake

event

Definition of Risk(2/2)Definition of Risk(2/2)

Risk = f(Hazard, Safeguard)

Risk is a Function of its Components

Risk is a Function of its Components

Tolerance For RiskTolerance For Risk

Risk avoiderRisk neutralRisk lover

Risk avoiderRisk neutralRisk lover

Risk TypesRisk Types

Definition of Risk ManagementDefinition of Risk ManagementRisk management is the act or practice of

dealing with risk.It includes:

planning for risk,assessing risk issues,developing risk handling strategies, andmonitoring risk to determine how they have changed.

Risk management is the act or practice of dealing with risk.

It includes:planning for risk,assessing risk issues,developing risk handling strategies, andmonitoring risk to determine how they have changed.

Decision-Making CategoriesDecision-Making Categories

Complete uncertaintyRelative uncertainty (partial information)Complete certainty

Complete uncertaintyRelative uncertainty (partial information)Complete certainty

Maximin ApproachMaximax ApproachMinimax regret ApproachInsufficient Reason Approach

Developing and Using Payoff Tables

Establishing the procedure to follow

Construct thePayoff table

Decision-makingunder certainty

Decision-making under completeuncertainty

Decision-makingunder risk

Expected Monetary Value (EMV) ApproachExpected Opportunity Loss (EOL) ApproachExpected Value of Perfect Information (EVPI) Approach

Five Steps To Develop Payoff Table

List all the alternatives.List the future consequences of

each alternative.Identify the payoffs associated with

each combination.Assess the degree of certainty that

these combinations will materializeDecide on a decision criterion.

Decision-Making under Certainty(1/2)

Decision-Making under Certainty(1/2)

A company wish to invest $50 M to develop a new product

Three possible demand:Strong, Even, and Low

Three ways or not to develop product A, B, and C

A company wish to invest $50 M to develop a new product

Three possible demand:Strong, Even, and Low

Three ways or not to develop product A, B, and C

Decision-Making under Certainty(2/2)

Decision-Making under Certainty(2/2)

Note: 1. Profit in MillionNote: 1. Profit in Million

2. 2. SS33 is the best regarding how market is is the best regarding how market is

Decision-Making under Risk (1/2)Decision-Making under Risk (1/2)

A company wish to invest $50 M to develop a new product

Three possible demand:Strong, Even, and Low

Three ways or not to develop product A, B, and C

Probabilities are assigned to each possible state of nature

A company wish to invest $50 M to develop a new product

Three possible demand:Strong, Even, and Low

Three ways or not to develop product A, B, and C

Probabilities are assigned to each possible state of nature

Decision-Making under Risk (2/2)Decision-Making under Risk (2/2)

Note: 1. Note: 1. EE11=56, =56, EE22=52, and =52, and EE33=66 =66

2. 2. SS33 is the best choice is the best choice

Decision-Making under Uncertainty (1/9)

Decision-Making under Uncertainty (1/9)

Uncertainty:Meaningful assignment of probabilities are not

possible

No single dominant strategyMaximax (Hurwicz)Maximin (Wald)Minimax (Savage)LaplaceDecision Tree

Uncertainty:Meaningful assignment of probabilities are not

possible

No single dominant strategyMaximax (Hurwicz)Maximin (Wald)Minimax (Savage)LaplaceDecision Tree

Decision-Making under Uncertainty (2/9)

Decision-Making under Uncertainty (2/9)

Maximax (Hurwicz)OptimisticChoose the strategy with maximum profitSuitable for large companyChoose S3 because maximum profit (100M) is S3

Maximax (Hurwicz)OptimisticChoose the strategy with maximum profitSuitable for large companyChoose S3 because maximum profit (100M) is S3

Decision-Making under Uncertainty (3/9)

Decision-Making under Uncertainty (3/9)

Maximin (Wald)Concerns how much he can afford to losePessimisticSuitable for small companyChoose S2 because maximize the minimum payoff

(50M) from 40, 50, -50

Maximin (Wald)Concerns how much he can afford to losePessimisticSuitable for small companyChoose S2 because maximize the minimum payoff

(50M) from 40, 50, -50

Decision-Making under Uncertainty (4/9)

Decision-Making under Uncertainty (4/9)

Minimax (Savage)Sore loserMinimize maximum regretSubtract all elements in each column from the

largest elementMaximum regret is the largest regret for each

strategyMinimize the maximum regretChoose S2 or S2because minimize the maximum

regret from 50, 50, 140

Minimax (Savage)Sore loserMinimize maximum regretSubtract all elements in each column from the

largest elementMaximum regret is the largest regret for each

strategyMinimize the maximum regretChoose S2 or S2because minimize the maximum

regret from 50, 50, 140

Decision-Making under Uncertainty (5/9)

Decision-Making under Uncertainty (5/9)

Decision-Making under Uncertainty (6/9)

Decision-Making under Uncertainty (6/9)

LaplaceTransform the decision making under uncertainty

into decision making under riskMake priori assumption based on Bayesian

statisticsAssuming the probability for each strategy is 1/3Choose S1 because maximize the expected value

from 60, 53.3, 43.3

LaplaceTransform the decision making under uncertainty

into decision making under riskMake priori assumption based on Bayesian

statisticsAssuming the probability for each strategy is 1/3Choose S1 because maximize the expected value

from 60, 53.3, 43.3

Decision-Making under Uncertainty (7/9)

Decision-Making under Uncertainty (7/9)

1/31/31/3

Decision-Making under Uncertainty (8/9)

Decision-Making under Uncertainty (8/9)

Decision TreeDecision Tree

Decision-Making under Uncertainty (9/9)

Decision-Making under Uncertainty (9/9)

Decision Tree ExampleDecision Tree Example

Direction of computation

Risk Management ProcessesRisk Management Processes

Risk planningRisk assessment

Risk identificationRisk analysis/quantification

Risk handlingRisk monitoring

Risk planningRisk assessment

Risk identificationRisk analysis/quantification

Risk handlingRisk monitoring

Poor Risk ManagementPoor Risk Management

Risk PlanningRisk Planning

TechnicalInabilityTechnicalInability

Customer

Expectati

ons

Customer

Expectati

ons

Actual Performance

Actual PerformancePer

form

ance

Per

form

ance

TimeTime

Risk AssessmentRisk Assessment

The problem definition stage of risk management

Identify and analyze program issues in terms of probability and consequences

The problem definition stage of risk management

Identify and analyze program issues in terms of probability and consequences

Life Cycle Risk AnalysisLife Cycle Risk Analysis

Types Of Risks (General)Types Of Risks (General)

Business risksInsurable (pure) risk

Direct property damageIndirect consequential lossLegal liabilityPersonnel

Business risksInsurable (pure) risk

Direct property damageIndirect consequential lossLegal liabilityPersonnel

Types Of Risk (PMI Method)Types Of Risk (PMI Method)

External – unpredictableExternal – predictableInternal – non-technicalInternal – technicalLegal

External – unpredictableExternal – predictableInternal – non-technicalInternal – technicalLegal

Risk Types at BoeingRisk Types at Boeing

Financial risks

Market risks

Technical risks

Production risks

Financial risks

Market risks

Technical risks

Production risks

Risk QuantificationRisk Quantification

STAGE I STAGE II GUID-ANCE

WARHEAD

COST

MANU.

TEST

DESIGN

HIGH

MEDIUM

LOW

LEGEND

PROGRAMSUMMARY

Risk HandlingRisk Handling

Assumption (retention)AvoidanceControl (mitigation)Transfer

Assumption (retention)AvoidanceControl (mitigation)Transfer

Future RisksFuture Risks

Customer’sKnowledgeCustomer’sKnowledge

ExperiencedExperienced

InexperiencedInexperienced

SimpleSimple ComplexComplex

Contract TypeContract Type

INCREASING RISKS

How Much Risk Is Acceptable?How Much Risk Is Acceptable?

High tolerance for risk

Medium tolerance for risk

Low tolerance for risk

High tolerance for risk

Medium tolerance for risk

Low tolerance for risk

Degrees of Downstream RiskDegrees of Downstream Risk

R&DR&D

ManufacturingManufacturing

MarketingMarketing

TimeTime

Low Risk

Degrees of Downstream RiskDegrees of Downstream Risk

R&DR&D

ManufacturingManufacturing

MarketingMarketing

Information Exchange

Information Exchange

TimeTime

Moderate Risk

Degrees of Downstream RiskDegrees of Downstream Risk

R&DR&D

ManufacturingManufacturing

MarketingMarketing

TimeTime

High Risk

The Risk-Reward MatrixThe Risk-Reward Matrix

LowLow HighHigh

RewardRewardMediumMedium

RiskRisk

HighHigh

LowLow

MediumMedium

Quality

of

Resou

rces

Nee

ded

Quality

of

Resou

rces

Nee

ded

LowLowM

edium

Med

iumHighHigh

Pro

ject

Pro

cedu

ral

Doc

um

enta

tion

Pro

ject

Pro

cedu

ral

Doc

um

enta

tion

GuidelinesGuidelinesHighHigh LowLow

Tolerance for RiskTolerance for Risk

RigidPolicies/

RigidPolicies/

Procedures Procedures

AssumptionAssumption

ReductionReduction

TransferTransfer

AvoidanceAvoidance

Which Method to Use?Which Method to Use?

Prioritization of RisksPrioritization of Risks

ScheduleSchedule CostCostTechnical

Performanceor Quality

TechnicalPerformance

or Quality

First (Highest)Priority

First (Highest)Priority

Second PrioritySecond Priority

ThirdPriorityThirdPriority

Risk InterdependenciesRisk Interdependencies

Specification LimitOn Characteristic BSpecification LimitOn Characteristic B

Interacting RisksInteracting RisksP

rodu

ct F

eatu

re A

Pro

duct

Fea

ture

A

Product Feature BProduct Feature B

DesirableDesirable

UndesirableUndesirable

UndesirableUndesirable DesirableDesirable

Risk Categories at Boeing Risk Categories at Boeing

Tolerance for Risk Tolerance for Risk

Risk Control MeasuresRisk Control MeasuresIn

ten

sity

of

Con

trol

sIn

ten

sity

of

Con

trol

s

Risk IntensityRisk Intensity

StandardControlsStandardControls

HighHigh

Range of ControlsRange of Controls

LowLowLowLow

ExtremeExtreme

Investment in Risk ManagementInvestment in Risk Management

Risk ControlsRisk ControlsS

ched

ule

Len

gth

Sch

edu

le L

engt

h

Risk ControlsRisk Controls

AppropriateAppropriate

TooLongTooLong

LowLow HighHigh

Too ManyRisk Management

Filters andGates

Too ManyRisk Management

Filters andGates

NoRisk Plan

NoRisk Plan