Risk management (Denver PM))
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▪︎ The effectiveness of risk management depends on the people who set it up and operate the risk management process. ▪︎ On many program’s, risk management consists only of having a policy and oversight. ▪︎ If we treat red flags as false alarms rather than early warnings of danger, this incubates the threats to program success ▪︎ Group think of dominate leaders often inhibits good thinking about risks.
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Risk management (Denver PM))
- 1. MANAGING IN THE PRESENCE OF UNCERTAINTY Glen B. Alleman Niwot Ridge, LLC glen.alleman@niwotridge.com +1 303 241 9633 “It is moronic to predict without first establishing an error rate for the prediction and keeping track of one’s past record of accuracy” — Nassim Nicholas Taleb, Fooled By Randomness Glen B. Alleman, Copyright © 2019 PMI Rocky Mountain Project Management Symposium, 19 April 2019 1/30
- 2. 1. Hope is not a strategy 2. No single point estimate of cost or schedule can be correct 3. Cost, Schedule, and Technical Performance are inseparable 4. Risk management requires adherence to a well-defined process 5. Communication is the Number One success factor 2/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 3. Core Elements of Project Risk Management† ¨ The effectiveness of risk management depends on the people who set it up and operate the risk management process. ¨ On many program’s, risk management consists only of having a policy and oversight. ¨ If we treat red flags as false alarms rather than early warnings of danger, this incubates the threats to program success ¨ Group think of dominate leaders often inhibits good thinking about risks. † Towards a Contingency Theory of Enterprise Risk Management Anette Mikes Robert Kaplan, Working Paper 13‒063 January 13, 2014 PMI Rocky Mountain Project Management Symposium, 19 April 2019 3/30 Risk Management
- 4. Risk Management is Project Management for Adults ‒ Tim Lister AleatoryEpistemic 4/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 5. A Quick View of How to Manage in the Presence of Uncertainty and the Risk It Creates ¨ Uncertainty creates the appearance for risk ¨ Reducing uncertainty may reduce risk ¨ Two types of uncertainty† ¤ One that can be reduced ¤ One that cannot ¨ A risk informed PMB starts with the WBS † Distinguishing Two Dimensions of Uncertainty, Craig Fox and Gülden Ülkumen, in Perspectives of Thinking, Judging, and Decision Making 5/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 6. Sources of Uncertainty ¨ Lack of precision about the underlying uncertainty ¨ Lack of accuracy about the possible values in the uncertainty probability distributions ¨ Undiscovered Biases used in defining the range of possible outcomes of project processes ¨ Natural variability from uncontrolled processes ¨ Undefined probability distributions for project processes and technology ¨ Unknowability of the range of the probability distributions ¨ Absence of information about the probability distributions 6/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 7. Some words about Uncertainty ¨ When we say uncertainty, we speak about a future state of an external system that is not fixed or determined ¨ Uncertainty is related to three aspects of our program management domain: ¤ The external world – the activities of the program ¤ Our knowledge of this world – the planned and actual behaviors of the program ¤ Our perception of this world – the data and information we receive about these behaviors 7/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 8. Some words about Risk, Created by Uncertainty ¨ Risk has two dimensions ¤ The degree of possibility that an event will take place or occur sometime in the future ¤ The consequences of that event, once it has occurred ¨ The degree of possibility is qualified as the Probability of Occurrence (event based) or a Probability Distribution Function (a distribution of variabilities of a random number) ¨ The consequences are usually taken to be undesirable and qualified as the magnitude of harm and the remaining probability of a recurrence of the same risk. 8/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 9. All Project Work has Naturally Occurring Uncertainties ¨ Naturally occurring uncertainty and its resulting risk, impacts the probability of a successful outcome. What is the probability of making a desired completion date or cost target? ¨ The irreducible statistical behavior of these activities, their arrangement in a network of activities, and correlation between their behaviors creates risk. ¨ Adding margin protects the outcome from the impact of this naturally occurring uncertainty 9/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 10. Relationship Between Uncertainty and Risk ¨ Uncertainty is present when probabilities cannot be quantified in a rigorous or valid manner, but can described as intervals within a probability distribution function (PDF) ¨ Risk is present when the uncertainty of the outcome can be quantified in terms of probabilities or a range of possible values ¨ This distinction is important for modeling the future performance of cost, schedule, and technical outcomes of a project 10/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 11. Only Aleatory and Epistemic Uncertainty Create Risk ¨ Aleatory Pertaining to stochastic (non‒deterministic) events, the outcome of which is described using probability. ¤ From the Latin alea ¤ For example in a game of chance stochastic variabilities are the natural randomness of the process and are characterized by a probability density function (PDF) for their range and frequency ¤ Since these variability's are natural, they are therefore irreducible. ¨ Epistemic (subjective or probabilistic) uncertainties are event-based probabilities, are knowledge‒based, and are reducible by further gathering of knowledge. ¤ Pertaining to the degree of knowledge about models and their parameters. ¤ From the Greek episteme (knowledge). Separating these classes helps in design of assessment calculations and in presentation of results for the integrated program risk assessment. 11/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 12. Taxonomy of Uncertainties that Create Irreducible and Reducible Risk Requiring Estimates of Direct and Residual Impacts of these risks on the Probability of Project Success Performance–Based Project Management®, Copyright © Glen B. Alleman, 2012 - 2018 Uncertainty Irreducible (Aleatory) Reducible (Epistemic) Natural Variability Ambiguity about behavior of process Ontological Uncertainty Probability of Event’s Occurrence Probabilistic Impact from Event Period of Exposure to Event Period of Exposure to Aleatory process 12/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 13. Measurement Uncertainty § Precision – how small is the variance of the estimates § Accuracy – how close is the estimate to the actual values § Bias – what impacts on precision and accuracy come from the human judgments (or misjudgments) Accuracy Precision Accuracy ¯ Precision ¯ Accuracy Precision ¯ Accuracy ¯ Precision 13/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 14. Naturally Occurring Uncertainty in the Schedule Creates Risk § Cost § Schedule § Capacity for Work § Productivity § Quality of results § Activity correlation With the naturally occurring uncertainty between ‒5% to 20% in our work effort durations, we have an 80% confidence of completing on or before our target date 14/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 15. Events have Uncertainty of Occurring and Create Risk ¨ Knowing the underlying statistics of the past, and a model of the behavior, we can forecast the probability of the future behavior. ¨ Improving our knowledge with better data can be used for better models, ¤ Improves the forecast of the probability of impact ¤ Reduces damage through better preparation at a lower cost 15/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 16. Looking for Event Based Uncertainties means … ¨ Starting with the WBS Dictionary ¤ What are we producing? ¤ What are the impediments to this effort? ¤ What can go wrong with the produced item? ¤ What are the responses to those impediments? ¨ Placing all these in the Risk Register ¤ What are their probabilities of occurrence? ¤ What are the impacts? ¤ What will it cost to handle the risk? ¤ What is the residual probability of occurrence after the handling efforts? 16/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 17. Looking for Externalities that Create Uncertainty that Drives Risk ¨ Staffing ¨ Funding ¨ Facilities ¨ Supply chain ¨ Regulatory and Government guidance ¨ Weather ¨ All the thing you don’t have direct control over 17/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 18. Examining the Naturally Occurring Uncertainties that drive Risk ¨ Variances in: ¤ Past performance ¤ Capacity for work ¤ Quality of the outcomes ¤ Performance variances ¤ Effectiveness variances ¨ Develop class of these variance for application to the IMS as Reference Classes and apply these to the current work processes 18/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 19. A Quick Process Check 19/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 20. Some Classes of Risk Risk Class The Risk Impact Performance The ability of a design to meet desired quality criteria and the consequences of this risk Schedule The ability of a project to develop an acceptable design within a span of time and the consequences of this risk Cost The ability of a project to develop an acceptable design within a given budget and the consequences of this risk Technology Capability of technology to provide performance benefits and the consequences of this risk Business Political, economic, labor, societal, or other factors in the business environment and the consequences thereof 20/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 21. Top N Risks Assigned Responsibility Required Indicators Status / Forecast Status / Trends Risks Project Manager Connecting the Continuous Risk Management Processes Technical Leads Team Members Performance–Based Project Management®, Copyright © Glen B. Alleman, 2012 - 2018 21/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 22. A B C D E E D C B A Performance–Based Project Management®, Copyright © Glen B. Alleman, 2012 - 2018 Level Likelihood E Near Certainty D Highly Likely C Likely B Low Likelihood A Not Likely Level Technical Performance Schedule Cost A Minimal or no consequence to technical performance Minimal or no impact Minimal or no impact B Minor reduction in technical performance or supportability Able to meet key dates Budget increase or unit production cost increase < 1% C Moderate reduction in technical performance or supportability with limited impact on program objectives Minor schedule slip. Able to meet key dates with no float Budget increase or unit cost increase < 5% D Significant degradation in technical performance or major shortfall in supportability Program critical path affected Budget increase of unit cost increase < 10% E Severe degradation in technical performance Cannot meet key program dates Exceed budget increase threshold This matrix must be built for each category of risk. The decision for each dimension comes from past performance or subject matter experts and the Risk Management team 22/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 While the 5 by 5 chart is popular and used by PMI ‒ DO NOT do math with the numbers. This is why we use letters. Each letter is a probability distribution function, defined by an integral equation. Multiplication or Addition cannot take place between integral equations Risk Management
- 23. Three Mandatory Steps to Successful Risk Management† ¨ A high‒quality project schedule ¤ Represents all work ¤ Logically linked ¤ No constraints ¤ Resource loaded ¤ Unbiased duration estimates ¨ A contingency‒free cost estimate ¤ Items do not have padding built in to accommodate risk ¤ No below‒the‒line contingency included. ¨ Good quality risk data ¤ Qualitatively identified risks ¤ Probability and impact data † Integrated Cost and Schedule Risk Analysis using Monte Carlo Simulation of a CPM Model, AACEI No. 57R‒09 23/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 24. Outputs of a Successful Risk Management Process ¨ Knowledge of the Likelihood the project’s cost and schedule targets can be met ¨ Time and cost margin needed to meet the risk threshold ¨ Risk priorities to be handled to planned and funded work needed to achieve schedule and cost estimates ¨ Joint time and schedule analysis showing the probability of meeting time and cost targets jointly – the Joint Confidence Level (JCL) 24/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 25. Sobering Facts about Naïve use of Three Point Estimates ¨ In 1979, Tversky and Kahneman proposed an alternative to Utility theory. Prospect theory asserts that people make predictably irrational decisions. ¨ The way that a choice of decisions is presented can sway a person to choose the less rational decision from a set of options. ¨ Once a problem is clearly and reasonably presented, rarely does a person think outside the bounds of the frame. ¨ Source: ¤ “The Causes of Risk Taking By Project Managers,” Proceedings of the Project Management Institute Annual Seminars & Symposium November 1–10, 2001, Nashville, Tennessee ¤ Tversky, Amos, and Daniel Kahneman. 1981. The Framing of Decisions and the Psychology of Choice. Science 211 (January 30): 453–458 25/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 26. Risk Chains Across the WBS 26/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risks are never Standalone Elements Risk propagation takes place both vertically and horizontally across the WBS Risk Management
- 27. Risk Management Starts with Root Cause Analysis ¨ Why is this Risk present? ¤ What Condition creates the Risk? ¤ What Activities create the Risk? ¨ What corrective or preventive actions will remove the Condition or Activity that creates the risk? ¨ Only risks, whose conditions or activities cannot be corrected or prevented are placed in the risk register ¨ Those risks that can be corrected or prevented are placed in baseline and work performed to remove them. 27/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 28. A Final Notion of Risk and It’s Management 28/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 And of course that is simply not possible Risk Management
- 29. Beware the Black Swan 29/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management
- 30. Glen B. Alleman, Copyright © 2019 30/30 PMI Rocky Mountain Project Management Symposium, 19 April 2019 Risk Management