Project Risk Management

PROJECT RISK MANAGEMENT 12

ProjectRisk Management

ProjectRisk Management

Thecompletion of any project depends on the execution of variousparameters mostly set at the beginning of the project. In order tocomplete the project to satisfactory levels, the project must becompleted within the stipulated timelines, fall within theapproximated budget and be of the required quality standards.However, most of the projects are affected by adverse changes andunforeseen events that occur during the execution period. Researchshows that the magnitude of change is dependent on the size of theproject, with large projects experiencing more uncertainties due toseveral factors including planning and design complexity, interestgroups having deferring opinions, resource availability, Economic andpolitical climate and statutory regulations, which may necessitatechange of plan. Most of the uncertainties are known to occur in theconcept phase and if not intervened, they may affect the entireproject. The burden falls on the management of such risk as somemanagers choose to ignore the uncertainties since they call foradditional costs. Other inherent risks may go unnoticed and thereforeremain unsolved, leading to significant and unnecessary losses infuture. As such, the importance of Risk and uncertainty managementcannot be underestimated. This paper will look into the Performanceuncertainty management processes (PUMP) designed to analyze theuncertainties, opportunities and risks in all types of projects.

PART1: PUMP approach

Whereasthere are many varying definition, is theprocess of identifying, assessing and responding to project risksthroughout the project life and in the best interests of itsobjective (Chapman, 2002). Risk is therefore defined as exposure tothe possibility of financial loss or gain, physical damage, injury ordelay as a result of uncertainty associated with pursuing a course ofaction (Chapman, 2002). There are four stages in a project lifecyclenamely the conceptualization stage, planning stage, execution anddelivery and the utilization stage. Uncertainties can occur at anystage in the project life cycle. For effective uncertaintymanagement, the managers should employ uncertainty managementprocesses that are only relevant to the affected stage. However,uncertainty management in each lifecycle stage necessitatesconsideration of seven basic questions referred to as ‘Seven Ws’.The question of who is involved, what is their main motive, what isthe deliverable of the motive, which way will each lifecycle stagedeliver what is required, when should the activities take place andwhere will the project take place is vital in uncertainty management(Wideman, 1992).

Unlikeother project risk approaches which focus on the management of riskalone, the pump approach focuses on the uncertainty management.Effective management of uncertainty involves the management of riskand opportunities together. Chapman and Ward came up with aperformance and uncertainty management process. The PUMP approachinvolves seven phases. The first phase is project definition. Projectdefinition involves engaging the strategic teams to come up with aproject description focusing on the goals and objectives of theproject and the methodology to be used to execute the project. Theproject description at this stage should be in a form that issuitable for the rest of the PUMP. It may also involve gaps andinconsistencies identification. Taking note of the nature of theproject, its lifecycle stages and the seven W’s in projectidentification process considers is vital especially in resolving thegaps and inconsistencies identified. The main objective of theproject identification is to come up with a very clear understandingof the project and the management processes at a strategic levelwhich is suitable for the rest of the pump (Chapman, 2002).

Thesecond phase involves focusing on the process. This stage involvesthe adoption of the basic process specific to a specific projectcontext and the life cycle stage of interest. There is no oneapproach that is best for every uncertainty scenario. The approachadopted will therefore depend on the application context. This focusconcentrates on the seven W’s of uncertainty management beforecoming up with a detailed planning. It also determines the degree ofcomplexity that should be adopted in the analysis. For the focusstage to be considered as comprehensive and complete, it must clarifythe key aspect of the chosen PUMP approach considered as a project onits own and in a manner that the approach is acceptable to all therelevant people. The main objective/ deliverable of this second phaseis a clear and shared objective of how the PUMP is going to operatein a given context and what it should deliver (Chapman, 2002).

Thethird phase involves identification of all relevant sources ofuncertainty, response options and conditions. Effectiveidentification requires a highly iterative process where allassumptions are treated as conditions so as not to overlook even theminor sources of uncertainty which may collectively add up to bigissues being overlooked. This phase uses the Seven W’s, projectobjectives and directly lined project plans to structure theUncertainty sources and responses of immediate interest. The keydeliverable is a clear understanding of the sources of Uncertaintyfacing the project and the required action points. The fourth Phaseinvolves the structuring of all uncertainties. This phase improvesthe understanding of the given sources of Uncertainty and theidentified response options as it involves a deep exploration intothe relevant interactions, testing all assumptions and addressingqualitative aspect of the analysis not yet considered. This phase isvery important as it seeks to generate a clear understanding of thecauses and effects of uncertainty identifying the vicious circlescenarios and it also transforms information generated earlier into aqualitative model of project related uncertainty (Chapman, 2002).

Thefifth phase is the ownership clarification stage. It involvesdeveloping a suitable plan for relationships and contracting strategythat will align the objectives for all the relevant parties. Thisphase also distinguishes the sources of uncertainty and theassociated response option and allocates responsibilities formanaging the sources of uncertainty. The deliverables of this stageinclude clear allocation of uncertainty management responsibilities,effectively and efficiently defined, legally enforceable andpracticable when appropriate. The Sixth Phase Involves quantifyingsome uncertainty. This stage is associated with identification of theopportunity efficiency by quantifying the cost, duration and othermeasurable aspects of the project performance criteria (Chapman,2002). Quantification takes into account what matters and how itmatters given the assumptions and the possible future conditions,prioritizing the areas that need more attention.

Thefinal phase focuses on evaluation of all the relevant implication..This phase mainly evaluates all the relevant decisions and judgments.It includes the synthesis of individual source of uncertaintyquantification, results presentation and interpretation recognizingall relevant sources that were not quantified but treated asassumptions or conditions. The Pump Approach is rich in utilizationof probabilities to concentrate focus to the most important aspectsthus leading to opportunity efficiency. It derives clarity of trade-offs between risk and expected performance in all relevantobjectives therefore, leading to more optimal choices (Chapman,2002).

Thepump approach is considered to be more comprehensive than otherapproaches that focus on the risk alone. The PM BOK approach mainlyfocuses on risk identification, risk quantification, risk responsedevelopment and risk response control, whereas the PUMP approachfocuses on both risk and uncertainty (Cooper et al, 2002). A focus ofuncertainty highlights the relative nature of risk and opportunitiesinvolved in project management, thereby managing both the risks andopportunities unlike the PM BOK approach that occurs on riskmanagement alone. Similarly, the management processes and risksconcepts blend in together in PM BOK approach making it morestrenuous and unfair for large projects. On the other hand, PUMPapproach analysis is progressively refined using successive passeswhere the deliverables of earlier passes are employed to evaluatewhere more effort is necessary and therefore, can be applied in allkinds of projects in an organization.

PARTII- Third phase in PUMP approach

Thethird phase of performance and uncertainty management approach (PUMP)involves identification of all relevant sources of uncertainty,response options and conditions. These concepts are well outlined inthe case of Transcon highlighted by Chris Chapman. The case is basedon the bid setting and other pricing decisions for Transcon in effortto purchase a computer system capable of taking over the existingwork and providing extra capacity to cope with the new schedulingsystem. Bidding is a common practice in many organizations. However,it involves two sources of uncertainty which include the cost ofcarrying out the work and the price to offer to the customer. A highbid may seem to be profitable, but has an increased chance of losingthe bid. On the other hand, a low bid has an increased chance ofwinning the bid, but is not profitable. Transcon’s case therefore,involves the development of an efficient and effective process forformulating competitive bids by major players in the computing andinformation systems field.

InTranscon’s case, the executing team needed to establish a startingpoint. This was done in the first stage which they referred as theidentification of non- starters. The team identified the potentialbidders that did not meet basic criteria such as credit worthinessand lack of synergy between the client needs and Astro objectives.Following the recommendations of the third phase, some sources ofuncertainty demanded a reactive behavior, others a preventivebehavior, while others required both. In the case of not meetingbasic requirements, the team was justified to employ a reactivebehavior and remove them from the list. This established a goodstarting point for analysis of the remaining bidders. The team alsohad to ensure that minor issues which collectively amount to bigissue are not overlooked. At the first stage, they ignored profitrelated concerned which at this point were minor issues. Expensechecks were also left out until a decision to proceed into a bid wasmade. Strong synergies were also noted so that they can be utilizedin the second and third pass. The first pass concentrated onidentifying the non-starters thus, it was qualitative in nature andwas able to get rid of 60% of the potential clients.

Thesecond pass involved the identification of no-hopers. It was based onprofitability of the contract.Martha used the term no- hoper tomean all the potential contracts which would have resulted to toolittle potential profit and hoped to reject 40% of the remainingclientele. The team executed the second pass by setting up five maincomponents to be considered in identifying no-hopers. The teamdecided that the sales personnel’s should visit the client and makenotes of the initiation to produce. These notes were to be sent tosystems personnel for cost input. The team will then be able toexecute the second component which involved cost uncertainty analysisto produce. The third component involved the probability of winninganalysis to produce. Earlier on, Trevor had given Barney estimates ofmaximum and minimum bid estimates and their chances of winning.(Maximum value was estimated at £20 Million with a 20% chance ofwinning the bid and the minimum value at £15 Million with 80% chanceof winning. These estimates were used to produce a correspondingestimate of the probability of winning curve. The form component wasdetermining the uncertainty synthesis to produce. The team came to anagreement that the uncertainties based on the probability of winningthe bid were much more important to consider at this stage that theuncertainties based on the direct cost. The team thereforeestablished a criteria of assessing whether Trascon as a no- hoper.The team then proceeded to the fourth component which was setting thebid based on the information collected in the prior phases.

Thethird pass was the project initiation. At initiation, the teamincorporated the five components discussed in the second pass andprepared a draft for presentation. Phase three initiation was mainlythe enhancement of the second phase. The team did a final uncertaintyanalysis on the direct costs, client preferences such as thepossibility of the client preferring training be done in theiroffices, analyzing their strengths and weaknesses including the Zorohostile takeover risk, that may hinder Astro from winning the bid andthey devised measures to counter act their weaknesses so as not tolose the bid to their competitors. They also maximized on theirstrengths and opportunities that were giving them a competitiveadvantage. After everything was laid out, they presented their bid toTranscon. The identification of responses and conditions is also keyto the third phase of the approach.

PMBOKapproach involves risk identification and development of strategiesto minimize the risk or avoid the risk all together (Cooper e al,2004). The risk identification phase in PMBOK approach requires oneto obtain the background of the project in terms of scope, objectivesand deliverables in order to identify the risks involved. Theidentified risks are then ranked in order of their relativecontrollability. Conceptually, the risks may range from high impactto low impact with high impact risks requiring more attention thanlow impact risks. In order to identify all the potential risk in aproject one may require soliciting the considered opinions of peoplewith good knowledge of similar projects. For risk identification tobe effective, it must be done early enough at the start of theproject and should be conducted regularly throughout the lifespan ofthe project. PMBOK allocates the responsibility of risk management tothe project manager, thereby limiting the objectivity of such processand inviting bias. It is also not recommended for large projects.

PARTIII- Evaluation phase in PUMP approach

Theevaluation phase entails combining all the results of the quantifyingphase in the context of the previous PUMP phases and evaluating thedecision and judgments. By the time the uncertainty management isentering this phase, the team had identified many possibleuncertainties and the approach that should be taken to manage them.In previous phases, the team had also identified the parties toinclude in the bid, role played by each party, setting timelines andcost estimation of the whole process. For example, one of theuncertainties identified in Transcon case is the consumer’sresponse. The Astro team had to consider responses from Transcon tovarious tender approaches and discuss its implication on the wholeproject and whether it will necessitate change of variables. This ismainly because Transcon may give a conditional response to the bidthus requiring the team to analyze the possible conditions andwhether they were in a position to meet them. For example, Transconmay accept the bid on the condition that Datapol was used but at theprice quoted by Sysdoc. This may require the team to negotiate for apossibility of discount from Datapol. Another aspect was to analyzethe responses and situation of the people they had subcontracted. For example, the Zoro staff may be completely busy at the time ofproject execution thereby slowing down the process. Zoro were toprovide training to Transcon staff the initial operation of thesystem.

Theevaluation phase include the synthesis of individual source of uncertainty quantification, presentation of results andinterpretation of the results bearing in mind all the relevantsources of uncertainty that were not quantified but treated asconditions or assumptions(Wideman, 1992). It also includes makingdecision between the options available and identifying an exitstrategy. The team seems to have analyzed almost everythingpertaining to bid preparation and they were left with two options.Option A, the hostile takeover bid of Zoro, emanated from Astro’skey competitors. If the takeover took place, Zoro will be no longeravailable to Astro. This implied an opportunity cost involved withall-Astro approach (Option B). The team therefore made an allowanceof £5 million to allow for opportunity cost of using option B.

Theevaluation stage main feature is the utilization of the probabilitydistributions provided by the previous phase to build up a picture ofcombined uncertainties with built in sensitivity analysis. Using theprobabilities and the sensitive analysis, the Astro team was able toidentify the best approaches to all uncertainties that had majorimpacts on the project. Martha and the team were able to make keydecisions such as the probability of winning the bid if they quote aspecific price using probability distributions. The team alsoemployed cumulative probability curves to represent the alternativecourse of action in decision diagram. This is especially the case indeciding the course of action between Sysdoc and Datapol who wereinvolved in converting the existing programs. Joint use ofprobability curves and sensitivity diagrams provided the basis of aformal process of prioritizing what matters thereby moving towardsoverall opportunity efficiency. The approach provided clarity abouttradeoffs and expected performance in terms of all relevantobjectives. The decision on optimal choices depends on the nature ofthe context. For example, in making an optimal decision betweenDatapol and Sysdoc’s price offer, there was a possibility ofgetting a lower quote from Datapol, if Datapol was going broke. Theapproach also separated low cost iterations from unplanned high costiterations.

InPMBOK approach, risk evaluation phase also known as risk responsecontrol is the execution stage. The risk management plan is executedat this stage paying more attention to high priority areas. In thisstage actual risks events identified earlier are mitigated. Thismitigation ranges from accepting the risk if small, to deploying acomprehensive plan to control a risk event should it occur. UnlikePUMP, PMBOK is more theoretical therefore, its application is notpractical. It promotes a culture of downward communication whereinformation flows from those in top positions to the subordinates.The approach may frustrate the top level managers especially wherespecific skills are required to handle the project, or there arestrict deadlines. It may also be time consuming as the wholeorganizations rely on decisions made by one person mostly the projectmanager. Similarly, subordinates input may not be appreciated inPMBOK, leading to lack of trust between superiors and thesubordinates. Lack of knowledge by the subordinates may causemisunderstandings and create conflicts more so where suchsubordinates are not involved in decision making, it will be hard forthem to adopt the processes.

References:

Chapman,C. B., Ward, S., &amp Chapman, C. B. (2002).&nbspHowto manage project opportunity and risk: Why uncertainty managementcan be a much better approach than risk management : the updated andre-titled 3rd ed of Project risk management, processes, insights andtechnoiques.Chichester, West Sussex: Wiley.

Wideman,R. M. (1992).&nbspRiskmanagement for project and program management: A guide to managingproject risks and opportunities.Drexel Hill, Pa.: Project Management Institute.

Cooper,D., Grey, S., Raymond, G., &amp Walker, P. (2004).&nbspProjectRisk Management Guidelines: Managing Risk in Large Projects andComplex Procurements.Chichester: John Wiley &amp Sons.