Chapter 4 - Systematic Risk Management

CHAPTER FIVE
SYSTEMATIC RISK MANAGEMENT

STAKEHOLDER RISKS
 Project is surrounded by people who wish to influence or will be influenced by the project.
 Stakeholders are important influential resources and should be treated as
potential sources of risk and opportunity within the project.
 Risk management is informed by the objectives of the project and the objectives
of the participating stakeholder. Project risks are more correctly perceived as
the risks of the stakeholders involved in a project.
 People make decisions about the tasks, technologies, resources or organization

required for project. Thus, the risks associated with projects are more properly
involved with those project stakeholders.
RISK MANAGEMENT SYSTEMS (RMS)
Risk management system (RMS) identifies competing interests, and employ techniques
for weighing up inadequate information about the project.
The RMS is a cyclical loop, to indicate a learning process that should be ongoing from
one project to another.
RMS promotes internal transparency and common understanding of the bussiness and
facilitates the establishment and growth of an organizational culture of, and a commitment
to, managing risks.
Within a stakeholder organization, congruence between the organization's objectives and
the project objectives can be confirmed, or any conflict between them identified.
 Systematic approach to risk management increases the capacity of an
organization to handle risks at all levels- it comprise processes to:
 establish the appropriate risk context(s)
 identify the project risks
 analyze and evaluate the risks
 develop responses to those risks,
 monitor and control the risks during the project, and
 communicate and consult.
THE PROJECT RISK MANAGEMENT PROCESS
ESTABLISH THE APPROPRIATE RISK CONTEXT
 Establishing the context is concerned with developing a structure for the risk identification
and assessment tasks to follow. It requires
 to specify objectives and strategies in place to achieve objectives of the organizations.
 to establish the organizational and project environment in which the risk assessment is taking
place.
 to identify stakeholders objectives, perceptions and values.
 Establishing RMS boundaries to distinguish risks that are exogenous, i.e. are derived from
outside the system, from those that are endogenous, i.e. occurring within the system itself.
Objectives : Define the objectives of the activity, task or function. One approach might be to start
with the organization's objectives for the project.
Stakeholder Management
 Stakeholder analysis provides decision-makers with a documented profile of stakeholders so
as to better understand their needs and concerns. It involves considering the objectives of
each stakeholder in relation to the requirement .
 The requirements (needs and expectations) of the organization and the key stakeholders are
used to derive a set of criteria for the project. Some organizations adopt generic criteria for
project evaluation and risk assessment.
 These criteria will be used to determine the specific scales against which the consequences
of
risks will be assessed during risk analysis stage.
Example : Budget from Birr 10, 000 to Birr 15,000 plus 30 hours of management time
 Risk criteria involves deciding the acceptable level of risk for each activity and to determine
what is unacceptable. Which can further be refined later in the risk management process.
 Risk appetite refers to the degree of uncertainty an organization or individual is
willing
to accept in anticipation of a reward.
 Risk seeker – a willingness to take risks – and accept the outcome – in
anticipation of positive outcomes.
 Risk averse – a reluctance to take risks or to expose projects to the possible
adverse consequences of unplanned events or conditions
 Risk neutral – an indifference to risk whereby it does not play a role in
decision making
Risk tolerance is the degree, amount, or volume of risk that an organization or
individual will withstand.
Risk threshold is the level of risk exposure above which risks are addressed and below
which risks may be accepted. The maximum amount beyond which an organization does
not want to tolerate the risk.
RISK IDENTIFICATION
 Risk identification determines what might happen that could affect the objectives of the project,
and how those things might happen.
 Brainstorming is a useful approach of the many techniques available for identifying risks, and
this is best undertaken in a risk workshop environment.
 Brainstorming is usually a function of the project team, although a multidisciplinary group of
experts can also carry out this task. Under the leadership of a facilitator, these people generate
ideas about project risk.
 The aim of the brainstorming session is to cover all potential risks, without making judgements
about their importance in the initial stages.
 Use of checklists of standard risks from historical information and previous projects or that are
known to arise in a particular context are often advocated as a technique to stimulate
brainstorming in risk identification.
 Checklists are quick to use, and they provide useful guides for areas in which the organization
has a depth of experience, particularly for projects that are standard or routine in nature.
 However, checklist can provide a constraint on creative thought by blocking the identification
of risks that go beyond those in the list.
 Assumptions analysis is an important technique of identification. Number of project

decisions are based on (conscious or unconscious) assumptions. Since each assumption could
be wrong, each is a potential risk.
 Risk source categories are alternative form of list that can provide a more structured
basis for brainstorming.
Example: Broad Categories of risk
 Market risk: Unable to promote the product to buyers as estimated
 Financial risk: Development and ownership cost is higher than estimated
 Technology risk: New technology brings unexpected compatibility problems
 People risk: Leading developers resign from the company

 Structure/process risk: New processes required to utilize the product are not
successful .
 A Risk Breakdown Structure (RBS) is a hierarchy of potential risk categories for a project.
EXAMPLE: RBS OF IT PROJECTS
 Other identification techniques include :
 Hazard and Operability Study- a HAZOP is a structured approach that

systematically analyses every part of a process to identify how hazards, operability
problems and deviations from design intent may arise.
 Fault Tree Analyses (FTA) – fault tree analysis is a systems engineering method for
representing the logical combinations of the system states and possible causes that
can contribute to a specified event (called the top event).
 Event Tree Analyses (ETA) – an event tree describes the possible range and
sequence of outcomes that may arise from the initiating event.
 Scenarios based on a particular historical or contemporary world view or event

which has been the catalyst for significant change.
Very often, the best sources of information for assessing risks and their consequences are the
members of the project team. However, as a general rule, all available data sources should be
used. Information sources may include:
 historical records, often for similar or related projects.

 industry best practice and user experience, including relevant benchmarks and standards.
 relevant published literature and research reports including theoretical analysis, empirical data
and analysis.
 expert commercial and technical judgement, including that of the project team and appropriate
external advisers where necessary.
 project experience, either specific to the kind of project being assessed or more general
experience with large or complex activities or with similar kinds of contractors or suppliers.
 experiments and prototypes, where there may be technical risks or areas in which more
empirical rather than theoretical information may be useful
Documenting Risks
Each risk should be numbered, to facilitate storage and retrieval of , and should be recorded as
formal, precise statements of likelihood, event, consequence and time.
Example
If the project goes beyond the current fiscal year, funding for the project may decrease or dry up
for the next fiscal year.
Exercise : write a risk identification statement for a road construction project.
Hint: There is a P chance that W event will occur during X period, with consequences Y1 to Yn
Over the Z period.
 Or it can be described using three-part statements in the form: “As a result of cause, risk
may occur, which would lead to effect.
Example: Technical defects may take long time to correct, leading to delays in the development
process, delaying the delivery of the product.
Example: Risk identification statement for a construction project (page 101)

 The primary output of the risk identification process is Risk Register which is used to
list identified risks and following information
 Identification number for each risk event

 Rank for each risk event
 Name of each risk event
 Description of each risk event
 Category under which each risk event falls
 Root cause of each risk
 Triggers for each risk; indicators or symptoms of actual risk events
 Potential responses to each risk
 Risk owner or person who will own or take responsibility for dealing with the risk.
 Probability: likelihood that the risk event will happen
 Impact of each risk occurring on cost time, scope , quality
 Status of each risk ( Active or Retired)

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CHAPTER FIVE

SYSTEMATIC RISK MANAGEMENT

 People make decisions about the tasks, technologies, resources or organization

 Assumptions analysis is an important technique of identification. Number of project

 Market risk: Unable to promote the product to buyers as estimated

 Financial risk: Development and ownership cost is higher than estimated

 Technology risk: New technology brings unexpected compatibility problems

 People risk: Leading developers resign from the company

 Hazard and Operability Study- a HAZOP is a structured approach that

 Scenarios based on a particular historical or contemporary world view or event

 historical records, often for similar or related projects.

Exercise : write a risk identification statement for a road construction project.

Example: Risk identification statement for a construction project (page 101)

 Identification number for each risk event

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