Chapter 10 - Managing Risks and opportunities Flashcards
Why is risk evaluation important before a project begins?
We need to understand whether a project is worth pursuing or not. Therefore, we need a measure of how risky the project is.
What can we do to eliminate risk?
We dont want to eliminate risk.
Risk is a part of uncertainty that will always be present in projects.
We want to be aware of risks, and know how to treat them.
In fact, many state that risk is proportional to return. Eliminating risk would eliminate returns.
What is risk?
Un uncertain event that, if it occurs, has a positive or negative effect on one or more project objectives.
we can also view risk as a tradeoff. Specifically a trade off between potential performance and potential loss. We might accept a higher degree of risk if it means cheaper raw materials etc.
anyways, the PM needs to make decisions regarding how much risk that should be taken.
Risk management can be divided into parts. What parts?
3 parts:
1) Identification
2) Quantification
3) Response
Identification is about predicting key risk outcomes and indicators. we need to understand symptoms of risk, sources to risk, assumptions, TCQ.
Generally, a productive way of identifying risks is to brainstorm “How can this project be made to go wrong?”. Taking this approach, we can focus on what people might do that can cause the failures. This force us to consider specific actions leading to events, rather than just specifying events that could or could not occur.
The KEY Is to not stop with the identifiction. We need to quantify and find a response as well. What good is 150 differnet risk elements going to do us if thats all we got?
What is key when identifying a risk?
Risks are different from issues. Issues are problems we have now. The definition of risk focus on the uncertainty fact, and that this uncertainty might lead to positive or negative effects on the project. Therefore, if the situation is more like an issue than a risk, then we have no uncertainty. Then, we actually only have to deal with the problem, rather than treating it as an uncertain situation.
We use this rule of thumb for identifying risks, as opposed to issues:
[As a result of a fact] [a risk event might/may/could occur] [which will have the following effect on the project].
Ex:
As a result of the price of steel being variable, we may have to pay more for the steel we buy, which will increase the cost of the project.
What is the traditional approach in evaluating just how risky an event is?
They have a similar approach to:
1) Assess likelihood
2) Determine extent of the effect of event taking place
1 use words like imporbable to highly likely
2 use words like minor, major, critical.
Critical would cause axtual failure.
Major is highly unwanted.
The traditional approach is a qualitative approach that use people’s perceptions. We use the risk matrix, and categorize risks according to impact and probability. Then we multiple the numbers together, and get a relative ordering of the different risks.
Say we use low, medium, high, critical on both axes.
This create a matrix.
Criticalcritical = 44 = 16
Risks identified that has a “risk value” of 16 would require immediate attention.
NB: It is often the case that we finish this analysis of quantifying risks that we have identified, but then we stop. If we dont find some corrective action(s) then we might as well not spend resources on the quantification and identification process.
What is “failure mode, effective analysis”?
FMEA.
Failure mode, effective analysis is based on the traditional matrix of IMPACT vs PROBABILITY. However, it use another measure as well: Hideability.
Hideability refers to how easy it would be to cover up the fact that there is indeed a problem. This especially refers to situations that occur DURING the project. The people responsible might try to avoid it to not create a shitstorm. However, postponing/trying to cover it up could lead to an even more severe case. Therefore, FMEA includes this fact to treat it with an even larger degree of respect.
RiskValue = likelihood * severity * hideability
What is important to remember when using both qualitative and quantitative risk assessment approaches?
They are not exact sciences. Especially the qualitative ones. However, it is of course better than to not use it. But I suppose you have to remember than risk assessment methods are not always trustable.
Name and explainthe quantitative risk analysis approaches we consider
(dont consider the most tedious one)
1) Expected value
2) Sensitivity analysis
3) Monte Carlo
4) PERT
Expected value is great for an overall assessment, especially if we are considering many projects. We also need to know the probabilities. for instance, with financial tools, we can sometimes use probabilties to great accuracy. If not, we can use monte carlo simulations to find the probabilties.
Sensitivity analysis is a method where we place the expected costs, optimistic cost and pessimistic cost levels into calculations in order to figure out where we would be located given certain increases in costs, or given certain decreases in costs.
Therefore, sensitivity analysis tells us what happens in worst case scenarios. This is good, as it allows us to consider responses to it in advance.
Monte Carlo simulation is about running simulations on a range of values that use distributions. For instance, we would enter a revenue function, a material cost function, a labor cost function and then run simulations, which would give us the profit distribution. Then we have probabilities of certain profits.
Explain PERT
Programme Evaluation and review technique.
PERT is a time measure tool. We enter a time value, as well as many other things, and the tool will give us the likelihood that the time to completion will have a degree of error in it.
We actually use 3 time values: optimistic, probable, pessimistic.
If we consider time values:
o = 3
m = 5
p = 7
And then we beleive that m is 4 times as likely as the others:
ExpectedTime = (o+4m+p)/6 = 5
Then we do this for each activity, and then we can use all the expected time to completion for individual tasks to find out how much time the project would need.
We could also use the standard deviation. Since 99.7 percent falls within +-3std of the mean, we can use this as a guarantee of time to completion.
PERT can then be used on individual paths in the project network.
What parts do we consider in risk management+
1) Risk identification
2) Quantification (qualitiative vs quantitative)
3) Response
