Topic 6

Risk Management
Topic 6
Risk Management
Paulo Faroleiro
Project Management
Part VII
Risk Management Risk Management
Parts Copyright 2014 Wiley

BASIC CONCEPT
Risk management focuses on:

• Known unknowns
• Proactive 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.
RISK MANAGEMENT
Risk Management Focuses On The Future
Risk And Information Are Inversely Related
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
Riskevent= f(Likelihood, Impact)
Likelihood is the probability of occurrence

Impact is the amount at stake
TOLERANCE FOR RISK
From a PM point of view:

• Risk avoider
• Risk neutral
• Risk lover
DECISION-MAKING CATEGORIES
From a PM point of view:

• Complete uncertainty
• Relative uncertainty (partial

information)
• Complete certainty
DEVELOPING AND USING PAYOFF
TABLES
Establishing the
procedure to follow
Construct the
Payoff table
Decision-making
Decision-making Decision-making
under complete
under certainty under risk
uncertainty
Maximin Approach
Maximax Approach
Minimax regret Approach
Insufficient Reason Approach
Expected Monetary Value (EMV) Approach

Expected Opportunity Loss (EOL) Approach
Expected 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 materialize
• Decide on a decision criterion.

RISK MANAGEMENT PROCESSES
Risk planning
Risk assessment
• Risk identification
• Risk analysis/quantification
Risk handling
Risk monitoring
DEVELOPING
CONTINGENCY
PLANS
TYPES OF RISKS (GENERAL)
Business risks
Insurable (pure) risk
• Direct property damage
• Indirect consequential loss
• Legal liability
• Personnel
TYPES OF RISK (PMI METHOD)
External – unpredictable
External – predictable
Internal – non-technical
Internal – technical
Legal
RISK TYPES AT BOEING
(PROJECT ROCKET
DEVELOPMENT)
Financial risks
Market risks
Technical risks
Production risks
RISK QUANTIFICATION
STAGE I STAGE II GUID- WARHEAD

ANCE
PROGRAM
SUMMARY
DESIGN LEGEND
TEST HIGH
MANU. MEDIUM
COST LOW
RISK HANDLING
Assumption (retention)
Avoidance
Control (mitigation)
Transfer
RISK PROBLEM-
SOLVING
IDEA
GENERATION:
BRAINSTORMING
SPECIAL
TOPICS IN RISK
MANAGEMENT
FUTURE RISKS
Inexperienced
Customer’s
Knowledge
Experienced
Simple Complex
Contract Type
FUTURE RISKS
Inexperienced
Customer’s
Knowledge
Experienced
Simple Complex
Contract Type
HOW MUCH RISK IS
ACCEPTABLE?
High tolerance for risk
Medium tolerance for risk
Low tolerance for risk

DEGREES OF DOWNSTREAM RISK
Low Risk
R&D
Manufacturing
Marketing
Time
Moderate Risk
Information
R&D Exchange
Manufacturing
Marketing
Time
High Risk
R&D
Manufacturing
Marketing
Time
PRIORITIZATION OF RISKS
Technical
Schedule Cost Performance
or Quality
First
(Highest)
Priority
Second
Priority
Third
Priority
RISK CONTROLS
Too
Long
Schedule Length
Appropriate
Too Many
No Risk Management
Risk Plan Filters and
Gates
Low High
Risk Controls
RISK CONTROL MEASURES
Extreme Range of Controls

Intensity of Controls
Standard
Controls
Low
Low High
Risk Intensity
WHICH METHOD TO USE?
Rigid
Policies/ Avoidance
Procedures
Project Procedural
Transfer
Documentation
Reduction
Assumption
Guidelines
High Low
Tolerance for Risk
THE RISK-REWARD MATRIX
High
Risk
Medium
Low
Low Medium High

Reward
INTERACTING RISKS
Desirable
Specification Limit
On Characteristic B
Product Feature A
Undesirable
Undesirable Desirable
Product Feature B
RISK PLANNING
Poor Risk
Management
Performance
Technical
Inability
Time
SUMMARY
1. There are six steps in risk management:

• Identify sources of risk
• Asses impact of individual risks
• Prioritize risks for further analysis
• Assess overall impact of risks
• Develop risk-reduction plans
• Control the identified risks
2. Techniques for identifying risk include

• Brainstorming
• A mechanistic process based on plan decomposition and
expert judgment
SUMMARY
3. There are two types of risk:

• Business risk
• Insurable risk
4. There are five sources of risk

• External—unpredictable
• External—predictable
• Internal—technical
• Internal—nontechnical
• Legal
SUMMARY
5. The impact of individual risks is a product of the likelihood

they will occur, the consequence if they do occur, and the
public perception of that consequence.
6. In assessing the combined effect of several risks, you can use

• A top-down approach, based on plan decomposition
• A bottom-up approach and Monte Carlo analysis
• Influence diagrams
7. There are three ways of reducing risk:

• Avoidance
• Deflection, either by insurance or through the contract
• Contingency
SUMMARY
8. Risks passed from client to contractor should be high

likelihood, low consequence risks. An alliance should be
formed to control coupled risks.
9. There are three types of contingency:

• Pure contingency
• Contingency with essential prior action
• Contingency with mitigating prior action
10. The strategy adopted depends on the type of risk.

SUMMARY
11. There are four steps in controlling risk:

• Draw up a risk management plan consisting of risk item–
tracking forms.
• Monitor progress of the significant few using the risk
register.
• Reassess risks at regular intervals, and at key milestones
or stage transition.
• Take action to overcome any divergence from plan.
Part VI
Risk Management
1. Prepare for exam

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Risk Management

Parts Copyright 2014 Wiley

Risk management focuses on:

THE ALTERNATIVE TO PROACTIVE

Risk Management Focuses On The Future

Risk And Information Are Inversely Related

Historically, We Focused Our Attentions On Schedule And

Today, Our Primary Emphasis Is On Technological Risk

Riskevent= f(Likelihood, Impact)

Likelihood is the probability of occurrence

From a PM point of view:

From a PM point of view:

• Relative uncertainty (partial

Expected Monetary Value (EMV) Approach

• 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

• Decide on a decision criterion.

STAGE I STAGE II GUID- WARHEAD

High tolerance for risk

Medium tolerance for risk

Low tolerance for risk

Extreme Range of Controls

Low Medium High

1. There are six steps in risk management:

2. Techniques for identifying risk include

3. There are two types of risk:

4. There are five sources of risk

5. The impact of individual risks is a product of the likelihood

6. In assessing the combined effect of several risks, you can use

7. There are three ways of reducing risk:

8. Risks passed from client to contractor should be high

9. There are three types of contingency:

10. The strategy adopted depends on the type of risk.

11. There are four steps in controlling risk:

1. Prepare for exam

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