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Managing Risk
CHAPTER SEVEN
Copyright 2011 by The McGraw-Hill Companies, Inc. llrights reser!e".
McGraw-Hill#Irwin
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Where We Are NowWhere We Are Now
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Risk Management ProcessRisk Management Process
RiskUncertain or chance events that planning can not
overcome or control.
Risk Management
A proactive attempt to recognize and manage internalevents and external threats that aect the likelihood o apro!ect"s s#ccess.
What can go wrong (risk event).
How to minimize the risk events impact (consequences).What can be done before an event occurs (anticipation).
What to do when an event occurs (contingency pans).
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$he Risk %vent &raph$he Risk %vent &raph
FIGURE 7.1
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Risk Management"s 'eneitsRisk Management"s 'eneits
A proactive rather than reactive approach.
Red#ces s#rprises and negative conse(#ences.
Prepares the pro!ect manager to take advantage
o appropriate risks.
Provides )etter control over the #t#re.
*mproves chances o reaching pro!ect perormanceo)!ectives within )#dget and on time.
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$he Risk$he Risk
ManagementManagementProcessProcess
FIGURE 7.2
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Managing RiskManaging Risk
+tep ,- Risk *dentiication&enerate a list o possi)le risks thro#gh )rainstorming
pro)lem identiication and risk proiling.!acro risks "rst# then speci"c events
+tep /- Risk Assessment+cenario anal0sis or event pro)a)ilit0 and impact
Risk assessment matrix
1ail#re Mode and %ects Anal0sis 21M%A3
Pro)a)ilit0 anal0sis$ecision trees# %&'# and &*
+emi(#antitative scenario anal0sis
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$he Risk 'reakdown +tr#ct#re 2R'+3$he Risk 'reakdown +tr#ct#re 2R'+3
FIGURE 7.3
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Partial Risk Proile or Prod#ct 4evelopment Pro!ectPartial Risk Proile or Prod#ct 4evelopment Pro!ect
FIGURE 7.4
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4eined 5onditions or *mpact +cales o a Risk on Ma!or4eined 5onditions or *mpact +cales o a Risk on Ma!or
Pro!ect 6)!ectives 2%xamples or negative impacts onl03Pro!ect 6)!ectives 2%xamples or negative impacts onl03
FIGURE 7.5
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Risk Assessment 1ormRisk Assessment 1orm
FIGURE 7.6
Failure Moe a! E""e#$% A!al&%i% 'FMEA(
*mpact 7 Pro)a)ilit0 7 4etection 8 Risk 9al#e
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Risk +everit0 MatrixRisk +everit0 Matrix
FIGURE 7.7
Failure Moe a! E""e#$% A!al&%i% 'FMEA(
*mpact 7 Pro)a)ilit0 7 4etection 8 Risk 9al#e
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Managing Risk 2cont"d3Managing Risk 2cont"d3
+tep :- Risk Response 4evelopmentMitigating Riskeducing the ikeihood an adverse event wi occur.
educing impact of adverse event.
Avoiding Risk+hanging the pro,ect pan to eiminate the risk or
condition.
$ranserring Risk&aying a premium to pass the risk to another party.
equiring -uid/wn/perate*ransfer (-//*) provisions.
Retaining Risk!aking a conscious decision to accept the risk.
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5ontingenc0 Planning5ontingenc0 Planning
5ontingenc0 PlanAn alternative plan that will )e #sed i a possi)le
oreseen risk event act#all0 occ#rs.
A plan o actions that will red#ce or mitigate thenegative impact 2conse(#ences3 o a risk event.
Risks o Not ;aving a 5ontingenc0 Plan
;aving no plan ma0 slow managerial response.
4ecisions made #nder press#re can )e potentiall0dangero#s and costl0.
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Risk and 5ontingenc0 PlanningRisk and 5ontingenc0 Planning
$echnical Risks'ack#p strategies i chosen technolog0 ails.Assessing whether technical #ncertainties
can )e resolved.
+ched#le RisksUse o slack increases the risk o a late pro!ect inish.
*mposed d#ration dates 2a)sol#te pro!ect inish date3
5ompression o pro!ect sched#les d#e to a shortenedpro!ect d#ration date.
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Risk Response MatrixRisk Response Matrix
FIGURE 7.)
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Risk and 5ontingenc0 Planning 2cont"d3Risk and 5ontingenc0 Planning 2cont"d3
5osts Risks$ime
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6pport#nit0 Management $actics6pport#nit0 Management $actics
%xploit +eeking to eliminate the #ncertaint0 associated with an
opport#nit0 to ens#re that it deinitel0 happens.
+hareAllocating some or all o the ownership o an opport#nit0 to
another part0 who is )est a)le to capt#re the opport#nit0 or the)eneit o the pro!ect.
%nhance $aking action to increase the pro)a)ilit0 and
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5ontingenc0 1#nding and $ime '#ers5ontingenc0 1#nding and $ime '#ers
5ontingenc0 1#nds1#nds to cover pro!ect risks=identiied and #nknown.0ize of funds re1ects overa risk of a pro,ect
'#dget reserves2re inked to the identi"ed risks of speci"c work packages.
Management reserves2re arge funds to be used to cover ma,or unforeseen risks
(e.g.# change in pro,ect scope) of the tota pro,ect.
$ime '#ers
Amo#nts o time #sed to compensate or #nplanned dela0sin the pro!ect sched#le.
0evere risk# merge# noncritica# and scarce resourceactivities
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5ontingenc0 1#nd %stimate 2>???s35ontingenc0 1#nd %stimate 2>???s3
TA*+E 7.1
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Managing Risk 2cont"d3Managing Risk 2cont"d3
+tep @- Risk Response 5ontrolRisk control
3ecution of the risk response strategy
!onitoring of triggering events
4nitiating contingency pansWatching for new risks
%sta)lishing a 5hange Management +0stem
!onitoring# tracking# and reporting risk
5ostering an open organization environmentepeating risk identi"cation6assessment e3ercises
2ssigning and documenting responsibiity for managingrisk
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5hange Management 5ontrol5hange Management 5ontrol
+o#rces o 5hangePro!ect scope changes
*mplementation o contingenc0 plans
*mprovement changes
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5hange 5ontrol +0stem Process5hange 5ontrol +0stem Process
,. *denti0 proposed changes./. ist expected eects o proposed changes
on sched#le and )#dget.
:. Review eval#ate and approve or disapprove
o changes ormall0.@. Negotiate and resolve conlicts o change
condition and cost.
B. 5omm#nicate changes to parties aected.
C. Assign responsi)ilit0 or implementing change.D. Ad!#st master sched#le and )#dget.
E. $rack all changes that are to )e implemented
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$he 5hange 5ontrol$he 5hange 5ontrol
ProcessProcess
FIGURE 7.,
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'eneits o a 5hange 5ontrol +0stem'eneits o a 5hange 5ontrol +0stem
,. *nconse(#ential changes are disco#raged)0 the ormal process.
/. 5osts o changes are maintained in a log.
:. *ntegrit0 o the W'+ and perormance meas#res
is maintained.@. Allocation and #se o )#dget and managementreserve #nds are tracked.
B. Responsi)ilit0 or implementation is clariied.
C. %ect o changes is visi)le to all parties involved.D. *mplementation o change is monitored.
E. +cope changes will )e (#ickl0 relected in )aselineand perormance meas#res.
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+ample 5hange+ample 5hangeRe(#est 1ormRe(#est 1orm
FIGURE 7.1-
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5hange5hange
Re(#est ogRe(#est og
FIGURE 7.11
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Fe0 $ermsFe0 $erms
Aoii!/ ri%0
*u/e$ re%ere
Ca!/e a!a/ee!$ %&%$e
Co!$i!/e!#& la!Ma!a/ee!$ re%ere
Mi$i/a$i!/ ri%0
or$u!i$&
Ri%0
Ri%0 rea0o! %$ru#$ure 'R*S(
Ri%0 re/i%$er
Ri%0 ro"ile
Ri%0 %eeri$& a$riS#e!ario a!al&%i%
Sari!/ ri%0
Tie u""er
Tra!%"erri!/ ri%0
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Ae!i 7.1
P%R$ and
P%R$+im#lation
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P%R$=Program %val#ation Review $echni(#eP%R$=Program %val#ation Review $echni(#e
Ass#mes each activit0 d#ration has a range thatstatisticall0 ollows a )eta distri)#tion.
Uses three time estimates or each activit0-optimistic pessimistic and a weighted average
to represent activit0 d#rations.
Fnowing the weighted average and variances or eachactivit0 allows the pro!ect planner to comp#te thepro)a)ilit0 o meeting dierent pro!ect d#rations.
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Activit0 and Pro!ect 1re(#enc0 4istri)#tionsActivit0 and Pro!ect 1re(#enc0 4istri)#tions
FIGURE A7.1
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Activit0 $ime 5alc#lationsActivit0 $ime 5alc#lations
Te ei/$e aera/e a#$ii$& $ie i% #ou$e &$e "olloi!/ "orula8
'7.1(
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Activit0 $ime 5alc#lations 2cont"d3Activit0 $ime 5alc#lations 2cont"d3
Te ariaili$& i! $e a#$ii$& $ie e%$ia$e% i%aroia$e & $e "olloi!/ e9ua$io!%8
Te %$a!ar eia$io! "or $e a#$ii$&8
Te %$a!ar eia$io! "or $e ro:e#$8
No$e $e %$a!ar eia$io! o" $e a#$ii$& i% %9uare i! $i% e9ua$io!; $i%
i% al%o #alle aria!#e. Ti% %u i!#lue% o!l& a#$ii$ie% o! $e #ri$i#al
a$'%( or a$ ei!/ reiee.
'7.2(
'7.3(
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Activit0 $imes and 9ariancesActivit0 $imes and 9ariances
TA*+E A7.1
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Pro)a)ilit0 o 5ompleting the Pro!ectPro)a)ilit0 o 5ompleting the Pro!ect
Te e9ua$io! elo i% u%e $o #ou$e $e
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;0pothetical Network;0pothetical Network
FIGURE A7.2
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;0pothetical Network 2cont"d3;0pothetical Network 2cont"d3
FIGURE A7.2 '#o!$@(
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Possi)le Pro!ect 4#rationPossi)le Pro!ect 4#ration
Proaili$& ro:e#$ i% #ole$e e"ore
%#eule $ie 'T$( o" 67 u!i$%
Proaili$& ro:e#$ i% #ole$e
& $e 6-$u!i$ $ie erio 'T$(
FIGURE A7.3
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ZZ9al#es and Pro)a)ilities9al#es and Pro)a)ilities
TA*+E A7.2