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    Risk Management PDF

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    Khushnood
    Risk is defined as the effect of uncertainty on objectives. It can be positive or negative and relates to all aspects of a business. Risk is typically expressed in terms of likelihood and consequences. Project risk management aims to minimize risks while maximizing opportunities through processes like risk identification, analysis, response planning, and monitoring. An important output is a risk management plan that addresses risks throughout the project life cycle.

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    Risk Management PDF

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    Khushnood
    81 views34 pages
    Risk is defined as the effect of uncertainty on objectives. It can be positive or negative and relates to all aspects of a business. Risk is typically expressed in terms of likelihood and consequences. Project risk management aims to minimize risks while maximizing opportunities through processes like risk identification, analysis, response planning, and monitoring. An important output is a risk management plan that addresses risks throughout the project life cycle.

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    Risk is defined as the effect of uncertainty on objectives. It can be positive or negative and relates to all aspects of a business. Risk is typically expressed in terms of likelihood and consequences. Project risk management aims to minimize risks while maximizing opportunities through processes like risk identification, analysis, response planning, and monitoring. An important output is a risk management plan that addresses risks throughout the project life cycle.

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    81 views34 pages

    Risk Management PDF

    Uploaded by

    Khushnood
    Risk is defined as the effect of uncertainty on objectives. It can be positive or negative and relates to all aspects of a business. Risk is typically expressed in terms of likelihood and consequences. Project risk management aims to minimize risks while maximizing opportunities through processes like risk identification, analysis, response planning, and monitoring. An important output is a risk management plan that addresses risks throughout the project life cycle.

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    of 34

    What is Risk?

     The Effect of Uncertainty on Objectives (ISO 31000)


     May be a positive or negative “deviation” from expectation
     Objectives may exist for a range of aspects of a business (financial, operational,
    technological, reputational) and at multiple levels (strategic, enterprise-wide, project
    ...)
     Typically expressed in terms of likelihood and consequences of an event
     Likelihood: “chance of something happening”
     Objective or subjective, quantitative or qualitative.
     Consequence: “the outcome of an event affecting objectives”
    Threats vs. Risks:

     Threats: Immediate, well-defined challenges to survival (“clear & present


    dangers”). Treating a threat is not a price-sensitive activity – worry about the bill
    later.
     Risks: Less completely defined - essentially a categorisation scheme for all
    potential threats.
    The Importance of Project Risk Management

     Project risk management is the art and science of identifying, assigning, and
    responding to risk throughout the life of a project and in the best interests of
    meeting project objectives
     Risk management is often overlooked on projects, but it can help improve project
    success by helping select good projects, determining project scope, and
    developing realistic estimates
    What is Project Risk Management?

     The goal of project risk management is to minimize potential risks while maximizing
    potential opportunities. Major processes include
     Risk management planning: deciding how to approach and plan the risk management
    activities for the project
     Risk identification: determining which risks are likely to affect a project and documenting
    their characteristics
     Qualitative risk analysis: characterizing and analyzing risks and prioritizing their effects on
    project objectives
     Quantitative risk analysis: measuring the probability and consequences of risks
     Risk response planning: taking steps to enhance opportunities and reduce threats to
    meeting project objectives
     Risk monitoring and control: monitoring known risks, identifying new risks, reducing
    risks, and evaluating the effectiveness of risk reduction
    Risk Management Planning

     The main output of risk management planning is a risk management plan


     The project team should review project documents and understand the
    organization’s and the sponsor’s approach to risk
     The level of detail will vary with the needs of the project
    Questions Addressed in a Risk Management Plan
    Contingency and Fallback Plans, Contingency Reserves

     Contingency plans are predefined actions that the project team will take if an
    identified risk event occurs
     Fallback plans are developed for risks that have a high impact on meeting project
    objectives
     Contingency reserve or allowances are provisions held by the project sponsor
    that can be used to mitigate cost or schedule risk if changes in scope or quality
    occur
    Risk Identification

     Risk identification is the process of understanding what potential unsatisfactory


    outcomes are associated with a particular project
     Several risk identification tools and techniques include
     Brainstorming

     The Delphi technique


     Interviewing

     SWOT analysis
    Potential Risk Conditions Associated With Each
    Knowledge Area
    Knowledge Area Risk Conditions
    Integration Inadequate planning; poor resource allocation; poor integration
    management; lack of post-project review
    Scope Poor definition of scope or work packages; incomplete definition
    of quality requirements; inadequate scope control
    Time Errors in estimating time or resource availability; poor allocation
    and management of float; early release of competitive products
    Cost Estimating errors; inadequate productivity, cost, change, or
    contingency control; poor maintenance, security, purchasing, etc.
    Quality Poor attitude toward quality; substandard
    design/materials/workmanship; inadequate quality assurance
    program
    Human Resources Poor conflict management; poor project organization and
    definition of responsibilities; absence of leadership
    Communications Carelessness in planning or communicating; lack of consultation
    with key stakeholders
    Risk Ignoring risk; unclear assignment of risk; poor insurance
    management
    Procurement Unenforceable conditions or contract clauses; adversarial relations
    Some key related PM outcomes

     Project Management Plan


     Risk Management Plan that incorporates detailed risk registers, solutions, scenarios
    and options for improvement and/or closing out of risks
     Stakeholder Management Plan
     Communication and Engagement Strategy
     Governance Arrangements
    Typical project execution plan

     Project definition and brief;


     Roles, responsibilities and authorities;
     Project cost plan and cost management procedures;
     Risk and sensitivity analysis;
     Program management;
     Contracting and procurement;
     Administrative systems and procedures;
     Safety and environmental issues, such as the construction design and management regulations;
     Quality assurance;
     Commissioning; and
     Post project evaluation
    Risk Profile

     The risk profile is a description of the set of risks faced by an organization, business
    unit, project, process, or task of interest
     The risk profile is documented in a “risk register” or similar which specifies:
     The nature of the risk
     The likelihood
     The consequence
     The mitigation or controls in place (or to be put in place)
     The risk owner
    Risk: Taxonomy & Tools

     A Risk Taxonomy:
     Reputational Risk
     Credit Risk
     Operational Risk
     Market Risks
     Technology Risk

     Tools & Perspectives:


     Enterprise Risk Management
     The Psychology of Risk
     Risk Scenario Planning
     Risk Measurement/Models
    What is risk management

     Coordinated activities to direct and control an organization with regard to risk.


    (ISO 31000)
     The culture, processes and structures that are directed towards realizing potential
    opportunities whilst managing adverse effects (AZ/NZS 4360:2004)
     “Companies must take risks if they are to survive and prosper. The risk
    management function’s primary responsibility is to understand the portfolio of
    risks that the company is currently taking and the risks it plans to take in the
    future. It must decide whether the risks are acceptable and, if they are not
    acceptable, what action should be taken.” (Hull 2012, “Risk Management and
    Financial Institutions”, p.1).
    Managing Risk: Risk v Return

     The unavoidable trade-off: Expected returns vs Risk


     Evaluated in the context of a firm’s risk appetite (attitude)
     Accepting higher risk must be compensated with higher expected return.
     Expected return = Σ probability x outcomes
     But Actual Return ≠ Expected Return
     Can win or lose bigger than expected!
     Where do the probabilities come from?
     (Risk Modeling? Judgment?)
    Risk vs. Return: A Simple Numerical
    Example

     You have $100,000 to invest for 1 year in either (a) or (b):


     a)Treasury bills = Yielding 5% per annum, no risk
     b)Stock = probability based return, risk
     Probabilistically the expected return is:
     0.05 x 0.50 + 0.25 x 0.30 + 0.40 x 0.10 +
     0.25 x (-0.10) + 0.05 x (-0.30) = 0.10 or 10%
    continuation

     By taking greater risk:


     Your expected return increases from 5% to 10%.
     At best you may make 50%, at worst you could lose 30%.
     But how do we come up with accurate probabilities?
     What about risks that can’t be quantified?
    How Much Risk is Acceptable?

     Determined by the firm’s risk attitude or appetite


     Issue: an individual may not have the same attitude to risk as the firm!
     Where does a firm aim to be in terms of the risk/return trade-off?
    The Role of Risk Management

     Risk management is the area that assists the business to determining whether the
    risk/return proposition meets the business requirements
     Risk management is an oversight role to help ensure that appropriate risk
    frameworks, including policies, procedures and governance, are in place for
    business decisions to occur
     Who “owns” the risk in a business?
     Who is accountable for the risks taken?
    Establish the Context

     What is the business about?


     Strategy/Objectives
     External:
     PESTEL (Political, Social, Economic, Technological, Environmental, Legal)
     Stakeholders and what they want
     Exogenous influences on objectives
    Continuation

     Internal:
     Governance, Policies, Capabilities, Internal stakeholders
     Defining the Risk Framework:
     Broadly how do we define & measure risk (likelihood, consequence, timeframes
    etc.)
     What is acceptable/tolerable
     Taxonomy of what risks we consider.
    Risk Identification and Analysis

     Identification of Risks
     What can happen, where and when?
     Why and how it can happen?
     Is it under our control?
     Think of the risk without any controls in place.
     Must be comprehensive:
     e.g. risks of missed opportunity
    continuation

     Analysis of Risks
     Evaluate existing controls
     Control: “measure that is modifying risk” (ISO31000)
     “process, policy, device, practice, or other actions which modify risk”
     They don’t always work!
     Consequences and likelihood
     Types of analysis: Qualitative vs. Quantitative
    Analysing Risks:

    Qualitative Analysis: Uses words to describe the magnitude of and likelihood of


    potential consequences. Used for:
     Initial screening activity to identify risks requiring more analysis
     Where the nature of the risk is such that it cannot be quantified.
     Where the numerical data or resources are inadequate for a quantitative
    analysis.
    Continuation

    Quantitative Analysis: Uses numerical values using data from a historical, internal
    and external sources
     Depends on the accuracy and comprehensiveness of the historical data and
    the validity of the models
     Consequences can be determined by modelling the outcomes of event(s), or
    by extrapolating from simulations or past data.
     Consequences may be expressed in terms of monetary, technical or human
    impact criteria
    Analyse Risks – Consequence Scale
    Example Only
    Analyse Risks – Likelihood Scale
    Analyse Risks – Level of Risk
    Hierarchy for Risk Treatment
    Residual Risk

     The “risk remaining after risk treatment” is known as residual risk. Why can’t we
    get rid of residual risk?
     Some aspects of risk can’t (feasibly) be controlled. Controls may fail.
     The decision to invest in a “treatment”/control is a challenging cost/benefit
    decision. Controls do not come for free. Rationally:
     Control Costs < Expected Consequence of Risk.
     But how much less?
     To make this assessment requires:
     1.Understanding the risk and it potential consequences
     2.Understanding controls: costs and effectiveness.
     3.Strategic choices in attitude to risk
     4.Ongoing monitoring to help ensure the judgments in (1) to (3) above are
    appropriate, or in need of revision.
    Risk Response Planning

     After identifying and quantifying risk, you must decide how to respond to them
     Four main strategies:
     Risk avoidance: eliminating a specific threat or risk, usually by eliminating
    its causes
     Risk acceptance: accepting the consequences should a risk occur
     Risk transference: shifting the consequence of a risk and responsibility for its
    management to a third party
     Risk mitigation: reducing the impact of a risk event by reducing the
    probability of its occurrence
    General Risk Mitigation Strategies for Technical,
    Cost, and Schedule Risks

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