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17 Risk Management

This document outlines the key aspects of risk management for projects. It discusses definitions of risk, risk tolerance, and risk management. The risk management process involves risk planning, assessment, identification, analysis, handling, and monitoring. Various risk types are identified, as well as techniques for risk quantification, prioritization, and handling strategies like assumption, avoidance, control, and transfer. Decision-making approaches under certainty, risk, and uncertainty are compared. The importance of interdependent risks and adjusting risk management based on risk tolerance is also covered at a high level.

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Yan Kim Leong
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176 views53 pages

17 Risk Management

This document outlines the key aspects of risk management for projects. It discusses definitions of risk, risk tolerance, and risk management. The risk management process involves risk planning, assessment, identification, analysis, handling, and monitoring. Various risk types are identified, as well as techniques for risk quantification, prioritization, and handling strategies like assumption, avoidance, control, and transfer. Decision-making approaches under certainty, risk, and uncertainty are compared. The importance of interdependent risks and adjusting risk management based on risk tolerance is also covered at a high level.

Uploaded by

Yan Kim Leong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Project Management

Risk Management

Outline
1.
2.
3.
4.
5.
6.
7.
8.
9.

Introduction
Definition of Risk
Tolerance of Risk
Definition of Risk Management
Certainty, Risk, and Uncertainty
Risk Management Process
Risk Planning
Risk Assessment
Risk Identification

Outline
10. Risk Analysis
11. The Monte Carlo Process
12. Risk Handling
13. Selecting the Appropriate Response
Mechanism
14. Risk Monitoring
15. Some Implementation Considerations
16. The Use of Lessons Learned
17. Dependencies between Risks
18. The Impact of Risk Handling Measures

Basic Concept
Risk management focuses on:
Known unknowns
Proactive management

Basic Concept
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

Risk Management (CONT.)


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(1/2)

Riskevent= f(Likelihood, Impact)


Likelihood is the probability of occurrence
Impact is the amount at stake

Definition of Risk(2/2)

Risk

= f(Hazard, Safeguard)

Risk is a Function of its


Components

Tolerance For Risk


Risk avoider
Risk neutral
Risk lover

Risk Types

Definition of Risk Management


Risk management is the act or practice of
dealing with risk.
It includes:
planning for risk,
assessing risk issues,
developing risk handling strategies, and
monitoring risk to determine how they
have changed.

Decision-Making Categories
Complete uncertainty
Relative uncertainty (partial information)
Complete certainty

Developing and Using Payoff Tables


Establishing the
procedure to follow
Construct the
Payoff table
Decision-making
under certainty

Decision-making
under complete
uncertainty

Decision-making
under risk

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.

Decision-Making under
Certainty(1/2)
A company wish to invest $50 M to
develop a new product
Three possible demand:
Strong, Even, and Low
Three ways or not to develop product
A, B, and C

Decision-Making under
Certainty(2/2)

Note: 1. Profit in Million


2. S3 is the best regarding how market is

Decision-Making under Risk (1/2)


A company wish to invest $50 M to
develop a new product
Three possible demand:
Strong, Even, and Low

Three ways or not to develop product


A, B, and C

Probabilities are assigned to each


possible state of nature

Decision-Making under Risk (2/2)

Note: 1. E1=56, E2=52, and E3=66


2. S3 is the best choice

Decision-Making under
Uncertainty (1/9)
Uncertainty:
Meaningful assignment of probabilities are not possible

No single dominant strategy


Maximax (Hurwicz)
Maximin (Wald)
Minimax (Savage)
Laplace
Decision Tree

Decision-Making under
Uncertainty (2/9)

Maximax (Hurwicz)

Optimistic
Choose the strategy with maximum profit
Suitable for large company
Choose S3 because maximum profit (100M) is S3

Decision-Making under
Uncertainty (3/9)

Maximin (Wald)

Concerns how much he can afford to lose


Pessimistic
Suitable for small company
Choose S2 because maximize the minimum payoff (50M)
from 40, 50, -50

Decision-Making under
Uncertainty (4/9)
Minimax (Savage)
Sore loser
Minimize maximum regret
Subtract all elements in each column from the
largest element
Maximum regret is the largest regret for each
strategy
Minimize the maximum regret
Choose S2 or S2because minimize the maximum
regret from 50, 50, 140

Decision-Making under
Uncertainty (5/9)

Decision-Making under
Uncertainty (6/9)
Laplace
Transform the decision making under uncertainty
into decision making under risk
Make priori assumption based on Bayesian
statistics
Assuming the probability for each strategy is 1/3
Choose S1 because maximize the expected value
from 60, 53.3, 43.3

Decision-Making under
Uncertainty (7/9)

1/3
1/3
1/3

Decision-Making under
Uncertainty (8/9)

Decision Tree

Decision-Making under
Uncertainty (9/9)

Decision Tree Example

Direction of computation

Risk Management Processes


Risk planning
Risk assessment
Risk identification
Risk analysis/quantification

Risk handling
Risk monitoring

Performance

Risk Planning

e
m
to
s
Cu

Ac

pe
x
rE

s
n
io
t
a
ct

e
c
n
a
m
for
r
e
P
l
t ua

Time

Poor Risk
Management
Technical
Inability

Risk Assessment
The problem definition stage of risk
management
Identify and analyze program issues in
terms of probability and consequences

Life Cycle Risk Analysis

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


Financial risks
Market risks
Technical risks
Production risks

Risk Quantification
STAGE I

STAGE II

GUID- WARHEAD
ANCE

PROGRAM
SUMMARY
DESIGN
TEST
MANU.
COST

LEGEND
HIGH
MEDIUM
LOW

Risk Handling
Assumption (retention)
Avoidance
Control (mitigation)
Transfer

Future Risks
Inexperienced

Customers
Knowledge
Experienced

S
K
S
I
R
G
N
I
S
A
E
R
C
IN
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

Degrees of Downstream Risk


Moderate Risk

R&D

Information
Exchange

Manufacturing

Marketing
Time

Degrees of Downstream Risk


High Risk

R&D
Manufacturing

Marketing
Time

The Risk-Reward Matrix

High

Risk Medium

Low

Medium

Reward

High

Re Q
so u
ur al
ce ity
s N of
ee
de
d

Low

gh
i
H

w
Lo

um
i
ed
M

Which Method to Use?


Project Procedural
Documentation

Rigid
Policies/
Procedures

Avoidance
Transfer
Reduction
Assumption

Guidelines
High

Low

Tolerance for Risk

Prioritization of Risks
Schedule
First

(Highest)

Priority
Second
Priority

Third
Priority

Cost

Technical
Performance
or Quality

Risk Interdependencies

Interacting Risks
Product Feature A

Desirable

Specification Limit
On Characteristic B

Undesirable
Undesirable

Product Feature B

Desirable

Risk Categories at Boeing

Tolerance for Risk

Risk Control Measures


Range of Controls

Intensity of Controls

Extreme

Standard
Controls

Low
Low

Risk Intensity

High

Investment in Risk Management

Risk Controls

Schedule Length

Too
Long

Appropriate

No
Risk Plan

Too Many
Risk Management
Filters and
Gates

Low

High

Risk Controls

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