Why does project risk matter?
In his book, Identifying and Managing Project Risk, Tom Kendrick mentions that “reviewing the records of technical projects, it is striking how many consecutive projects fall victim to the same problems.” He adds that “risks tend to occur in project after project unless you understand the root causes and do something differently to avoid the problem.” Clearly, any project comes with a number of risks.
Understanding Project Risks
While the science of understanding risk is well advanced in macroeconomics and financial theory, using these risks as frameworks to managing a project doesn’t cut it. In fact, project risk management is different from how institutions manage macro risks because they collect extensive data on various characteristics and build scenarios on how the future may evolve. But, in the case of a project manager, there is only one element making up his population, that is his own project.
Also, project risk management is different from how asset portfolio managers deal with risks. Analysts diversify their portfolio to minimize risk. But again, a project manager cannot diversify his projects to control risk. Rather, he must ensure that his project is completed in due time while respecting a number of budgetary and resource-related constraints.
The author defines risk as a product of the magnitude of loss multiplied by a factor representing the probability of the loss occurring. Risk management is closely akin to opportunity management. While risk management looks at ways to minimize our projects downside; opportunity management looks at ways to increase its upside.
The Panama Canal shows that planning is the best way to control and minimize project risks
The author writes extensively about the Panama Canal largely because building it required to different projects. The first one was undertaken by French engineering, known as quote “The Great Engineer” Ferdinand de Lesseps. He started out and 1879 and secured US Congress approval. But there were very few volunteers willing to join him which shows that many believe that risks were perhaps too great. Also, “The Great Engineer” did little planning and in the end, cost projections grew up to 200 million dollars rather than the 60 million initially required. In addition, the yellow fever hit hard and reduced resources. In 1899, the company went bankrupt with only 15% of the project completed.
In 1905, a railroad engineer, John Stevens took on the Panama Canal. He started identifying each risk and developed a plan to control, measure and supervise it. He ultimately succeeded where others had failed.
Risks Come in Many Forms
Generally speaking, risks come in many forms. They include:
Schedule risks, which, in turn, includes
- Risk of delay that is failing to meet a given deadline
- Risk of a dependency where one project can’t start before another is completed
- Risks of estimation. To control the risk of estimation, the author points to consulting with experts or looking to historical information such as post project analysis or even turning to a Delphi group and relying on their estimations by taking the midrange of estimates from a group of interested stakeholders.
Resource risks include:
- people-related risk such as staffing, people quitting;
- outsourcing risks
- monetary risks including budgetary constraints.
Activity risks have to do with everything that relates to moving the project forward and related to production itself. These fallen into three categories:
- those that are known and controllable
- those that are known and not controllable
- finally, those that remain unknown.
In any case, planning should include forecasting all known risks and developing a course of action for each scenario. For example, you may predict that a key project team member might, for some reason, leave. That may not happen but if it does, having planned for such an eventuality minimizes your risk.
In his book, Identifying and Managing Project Risk, Tom Kendrick mentions that “it is striking how many consecutive projects fall victim to the same problems.” Present in every project, the author defines risk as a product of the magnitude of loss multiplied by a factor representing the probability of the loss occurring. The first attempt at building the Panama Canal failed due to poor risk management; the second succeeded by anticipating risks and adequate planning. The author shows that risks come in several forms—schedule risks, resource risks and activity risks. Developing a plan for controlling each risk proves crucial in minimizing risks.
My idea: 75% of change management projects fail. And I’m surprised that there’s such deep understanding of risk in change management. There’s little risk management thinking in innovation. So this shows that risk management is all the more important.