© Risk Decisions, 2009

Getting a Return On Investment from

Risk Management

Val Jonas

CEO, Risk Decisions Group

© Risk Decisions, 2009

Agenda

· Understanding uncertainty and risk· Impact on ROI· A recent example & conclusion

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Part 1

Understanding uncertainty and risk

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Uncertainty & Risk

• Risk analysis & Tornado results

{ • 3 point estimates (Max, Min, Most likely)

• Identified risks(probability & Impact)

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Budget Uncertainty Analysis

Cost (£k)

Like

lihoo

d

0

20%

49%

60%

80%

100%£4

5,00

0

£50,

000

£55,

000

£60,

000

£65,

000

£70,

000

£75,

000

£80,

000

£85,

000

£90,

000

50% confidence

(Excluding Risk Events)

© Risk Decisions, 2009

Cost (£k)

£45,

000

£50,

000

£55,

000

£60,

000

£65,

000

£70,

000

£75,

000

£80,

000

£85,

000

£90,

000

Baseline (incl. Estimating Error) Exposure

Budget Uncertainty Analysis

RiskAppetite

(Excluding Risk Events)

‘Long’ right hand tail may indicate risk events (which should be

managed in risk register)

T

arge

t

M

axim

um

Aggressivetarget

Non-Aggressivetarget

M

inim

um

Li

kely

© Risk Decisions, 2009

0

2,00

0

4,00

0

6,00

0

8,00

0

10,0

00

12,0

00

14,0

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16,0

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18,0

00

20,0

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22,0

00

24,0

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26,0

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00

30,0

00

32,0

00

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Provision for known risks

Provision for Known Risks

Exposure

B

udge

t

RiskAppetite

M

axim

um

M

inim

umPay attention to ‘Long’ right hand tail (must identify mitigation

actions)

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Managing uncertainty and risk

¾ Manage cost and schedule over-runs• Estimating accuracy• Resource management• Project & change control

¾ Manage known threats• Proactive risk mitigation actions• Treat, transfer, tolerate, terminate• Budget and authority in place

¾ Exploit opportunities

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Focus on ‘Left Shift’

Baseline

Ta

rget

Reserve

C

ontr

act

ed

Exposure

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How to convince senior management?

¾ Limited ability to interpret risk analysis results¾ Confusion over meaning of Risk Appetite¾ Consider risk budget spent as ‘wasted’¾ Focussed on business objectives

(and the bottom line)… We need to find new ways of getting information

across to managers

© Risk Decisions, 2009

Part 2

Impact on Return on Investment

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Achieving return

· Contracting routes¾ Fixed price (vs. cost plus)¾ Fixed base + performance payments¾ Bonuses & penalties for on-time or late delivery¾ Pain / gain-share

· Business case¾ Need to understand sensitivity to uncertainty and risk

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Modelling performance

Outcomes

Inputs

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What-if scenarios on schedule

· Analyse the schedule· Impacts of schedule uncertainty on:

¾ 1a. Performance payments¾ 1b. Penalty and bonus payments¾ 1c. Costs of the ‘Marching Army’

· Contain the impact of schedule slippage

© Risk Decisions, 2009

19 O

ct 2

008

8 N

ov 2

008

28 N

ov 2

008

18 D

ec 2

008

7 Ja

n 20

09

27 J

an 2

009

16 F

eb 2

009

8 M

ar 2

009

28 M

ar 2

009

17 A

pr 2

009

7 M

ay 2

009

27 M

ay 2

009

16 J

un 2

009

6 Ju

l 200

9

26 J

ul 2

009

15 A

ug 2

009

4 S

ep 2

009

24 S

ep 2

009

Analysing the schedule

Baseline Schedule Reserve Exposure

M

axim

um

M

inim

um

Ta

rget

RiskAppetite

C

ontr

acte

dAggressive

targetNon-Aggressive

target

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1a. Impact on performance payments

Expected Reduction of 15% ROI

Zeroperformancepaymentfor latemilestones

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1b. Added impact of penalties/bonuses

NegativeexpectedROI(down 21%)

Dailypenalties/ bonusesfor late / earlydelivery

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1c. Added impact of the ‘marching army’

No chanceof positiveROI(down 23%)

Assumes noopportunityfor savings iffinished early

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Focus on ‘Left Shift’

Contain schedule slip

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Managing the uncertainty

What-if’s based on containing the schedule slip:

(Do we really want this contract?)

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What-if scenarios on risk

· 2a. The cost of risks materialising· 2b. The post mitigation position· 2b. Pain/Gain-share contracting

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Back to base case model

Outcomes

Inputs

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2a. Impact of risks materialising

Risks impact(down 12%)

Assumesno risk mitigation

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Focus on ‘Left Shift’

Manage the risks

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2b. Impact of risks (post mitigation)

Mitigatonsaves2% ROI

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Risk sharing scenario15%

confidence 65% confidence

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2c. Pain/Gainshare contracting

Back to15% ROI

Customershareof the risk payment

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More what-ifs …

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Part 3

Conclusion

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but… …can we afford not to manage risk?

Not so much a question of… what is the value of risk management?

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‘Getting a Return on Investment from Risk Management’ White paper:www.riskdecisions.com

Val Jonas, CEO Risk Decisions Group