Project Management Activities
Activities require resources to ensure
it can be completed. These can be both material and human resources.
(i.e. an electrician, a JCB, a plank of wood are all resources) an
estimate is made of the likely resources required to complete an
activity and the duration of time.
Finally costs can be attributed to each
resource on each activity in a project which should result in the total
cost for that project if all the activities have been defined.
Once established and agreed the plan
becomes what is known as the baseline. This is what the project will be
measured against throughout it's lifespan.
As the project progresses, the plan
should progress as well, monitoring the progress being made and ensuring
activities are taking place when they should be and resources (and
therefore costs) are in line with expectations. Analysing this
information is what is called Earned value management
This article is licensed under the GNU Free
Documentation License. It uses material from Project Management
Risk management
Generally, Risk Management is the
process of measuring, or assessing risk and then developing strategies
to manage the risk. In general, the strategies employed include
transferring the risk to another party, avoiding the risk, reducing the
negative effect of the risk, and accepting some or all of the
consequences of a particular risk. Traditional risk management, which is
discussed here, focuses on risks stemming from physical or legal causes
(e.g. natural disasters or fires, accidents, death, and lawsuits).
Financial risk management, on the other hand, focuses on risks that can
be managed using traded financial instruments. Regardless of the type of
risk management, all large corporations have risk management teams and
small groups and corporations practice informal, if not formal, risk
management.
In ideal risk management, a prioritization process is followed whereby
the risks with the greatest loss and the greatest probability of
occurring are handled first, and risks with lower probability of
occurrence and lower loss are handled later. In practice the process can
be very difficult, and balancing between risks with a high probability
of occurrence but lower loss vs. a risk with high loss but lower
probability of occurrence can often be mishandled.
Risk management also faces a difficulty in allocating resources
properly. This is the idea of opportunity cost. Resources spent on risk
management could be instead spent on more profitable activities. Again,
ideal risk management spends the least amount of resources in the
process while reducing the negative effects of risks as much as
possible.
In ideal risk management, a
prioritization process is followed whereby the risks with the greatest loss and the greatest probability of
occurring are handled first, and risks with lower probability of
occurrence and lower loss are handled later. In practice the process can
be very difficult, and balancing between risks with a high probability
of occurrence but lower loss vs. a risk with high loss but lower
probability of occurrence can often be mishandled.
Risk management also faces a difficulty
in allocating resources properly. This is the idea of opportunity cost.
Resources spent on risk management could be instead spent on more
profitable activities. Again, ideal risk management spends the least
amount of resources in the process while reducing the negative effects
of risks as much as possible.
Steps in the risk management process
A definitive generic description of
risk management that originated in Australia and New Zealand, now being
taken up in many other countries, is set out in the Australian & New
Zealand STandard 4360:2004. The core of the process is a series of five
steps:
- Establish the context - Identify
risks - Analyse risks - Evaluate risks - Treat risks
In parallel with the core process,
communication & consultation is required to ensure adequate information
is provided and conclusions are disemminated. Monitoring and review is
an intrinsic part of the process required to ensure that the process is
executed in a timely fashion and the identification, analysis,
evaluation and treatment are kept up to date.
The standard can be found at
www.standards.com.au and simple guidance on its application can be found
at www.broadleaf.com.au/tutorials/Default.htm
Establish the context
Establishing the context includes
planning the remainder of the process and mapping out the scope of the
exercise, the identity and objectives of stakeholders, the basis upon
which risks will be evaluated and defining a framework for the process,
and agenda for identification and analysis.
Identification
After establishing the context, the
next step in the process of managing
risk is to identify potential risks. Risks are about events that,
when triggered, will cause problems. Hence, risk identification can
start with the source of problems, or with the problem itself.
- Source analysis Risk sources
may be internal or external to the system that is the target of risk
management. Examples of risk sources are: stakeholders of a project,
employees of a company or the weather over an airport.
- Problem analysis Risks are
related to identified threats. For example: the threat of losing
money, the threat of abuse of privacy information or the threat of
accidents and casualties. The threats may exist with various
entities, most important with shareholder, customers and legislative
bodies such as the government.
When either source or problem is known,
the events that a source may trigger or the events that can lead to a
problem can be investigated. For example: stakeholders withdrawing
during a project may endanger funding of the project; privacy
information may be stolen by employees even within a closed network;
lightning striking a B747 during takeoff may make all people onboard
immediate casualties.
The chosen method of identifying risks
may depend on culture, industry practice and compliance. The
identification methods are formed by templates or the development of
templates for identifying source, problem or event. Common risk
identification methods are:
- Objectives-based Risk
Identification Organizations and project teams have objectives.
Any event that may endanger achieving an objective partly or
completely is identified as risk. Objective-based risk
identification is at the basis of COSO's
Enterprise Risk Management - Integrated Framework
- Scenario-based Risk
Identification In
scenario analysis different scenarios are created. The scenarios
may be the alternative ways to achieve an objective, or an analysis
of the interaction of forces in, for example, a market or battle.
Any event that triggers an undesired scenario alternative is
identified as risk.
- Taxonomy-based Risk
Identification The taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the
taxonomy and knowledge of best practices, a questionnaire is
compiled. The answers to the questions reveal risks. Taxonomy-based
risk identification in software industry can be found in
CMU/SEI-93-TR-6.
- Common-risk Checking In
several industries lists with known risks are available. Each risk
in the list can be checked for application to a particular
situation. An example of known risks in the software industry is the
Common Vulnerability and Exposures list found at
http://cve.mitre.org.
Assessment
Once risks have been identified, they
must then be assessed as to their potential severity of loss and to the
probability of occurrence. These quantities can be either simple to
measure, in the case of the value of a lost building, or impossible to
know for sure in the case of the probability of an unlikely event
occurring. Therefore, in the assessment process it is critical to make
the best educated guesses possible in order to properly prioritize the
implementation of the risk management plan.
The fundamental difficulty in risk
assessment is determining the rate of occurrence since statistical
information is not available on all kinds of past incidents.
Furthermore, evaluating the severity of the consequences (impact) is
often quite difficult for immaterial assets. Asset valuation is another
question that needs to be addressed. Thus, best educated opinions and
available statistics are the primary sources of information.
Nevertheless, risk assessment should produce such information for the
management of the organisation that the primary risks are easy to
understand and that the risk management decisions may be prioritized.
Thus, there have been several theories and attempts to quantify risks.
Numerous different risk formulae exist, but perhaps the most widely
accepted formula for risk quantification is:
Rate of occurrence multiplied by
the impact of the event equals risk
Later research has shown that the
financial benefits of risk management are not so much dependent on the
formulae used. The most significant factor in risk management seems to
be that 1.) risk assessment
is performed frequently and 2.) it is done using as simple methods as
possible.
In business it is imperative to be able
to present the findings of risk assessments in financial terms. Robert
Courtney Jr. (IBM, 1970) proposed a formulae for presenting risks in
financial terms. The Courtney formulae was accepted as the official risk
analysis method for the US governmental agencies. The formulae proposes
calculation of ALE (Annualised Loss Expectancy) and compares the
expected loss value to the security control implementation costs
(cost-benefit analysis).
Potential Risk Treatments
Once risks have been identified and
assessed, all techniques to manage the risk fall into one or more of
these four major categories: (Dorfman, 1997)
- Transfer
- Avoidance
- Reduction (aka Mitigation)
- Acceptance (aka Retention)
Ideal use of these strategies may not be possible. Some of them may
involve trade offs that are not acceptable to the organization or person
making the risk management decisions.
Risk avoidance
Includes not performing an activity
that could carry risk. An example would be not buying a property or
business in order to not take on the liability that comes with it.
Another would be not flying in order to not take the risk that the
airplane were to be hijacked. Avoidance may seem the answer to all
risks, but avoiding risks also means losing out on the potential gain
that accepting (retaining) the risk may have allowed. Not entering a
business to avoid the risk of loss also avoids the possibility of
earning the profits.
Risk reduction
Involves methods that reduce the
severity of the loss. Examples include
sprinklers
designed to put out a
fire to reduce the risk of loss by fire. This method may cause a
greater loss by water damage and therefore may not be suitable.
Halon
fire suppression systems may mitigate that risk, but the cost may be
prohibitive as a strategy.
Modern software development
methodologies reduce risk by developing and delivering software
incrementally. Early methodologies suffered from the fact that they only
delivered software in the final phase of development; any problems
encountered in earlier phases meant costly rework and often jeopardized
the whole project. By developing in increments, software projects can
limit effort wasted to a single increment. A current trend in software
development, spearheaded by the
Extreme Programming community, is to reduce the size of increments
to the smallest size possible, sometimes as little as one week is
allocated to an increment.
Risk retention
Involves accepting the loss when it
occurs. True
self insurance
falls in this category. Risk retention is a viable strategy for small
risks where the cost of insuring against the risk would be greater over
time than the total losses sustained. All risks that are not avoided or
transferred are retained by default. This includes risks that are so
large or catastrophic that they either cannot be insured against or the
premiums would be infeasible.
War
is an example since most property and risks are not insured against war,
so the loss attributed by war is retained by the insured. Also any
amounts of potential loss (risk) over the amount insured is retained
risk. This may also be acceptable if the chance of a very large loss is
small or if the cost to insure for greater coverage amounts is so great
it would hinder the goals of the organization too much.
Risk transfer
Means causing another party to accept
the risk, typically by contract or by hedging. Insurance is one type of
risk transfer that uses contracts. Other times it may involve contract
language that transfers a risk to another party without the payment of
an insurance premium. Liability among construction or other contractors
is very often transferred this way. On the other hand, taking offsetting
positions in derivatives is typically how firms use hedging to
financially manage risk.
Some ways of managing risk fall into
multiple categories. Risk retention pools are technically retaining the
risk for the group, but spreading it over the whole group involves
transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members
of the group up front, but instead losses are assessed to all members of
the group.
Create the plan
Decide on the combination of methods to
be used for each risk. Each risk management decision should be recorded
and approved by the appropriate level of management. For example, a risk
concerning the imago of the organisation should have top management
decision behind it whereas IT management would have the authority to
decide on computer virus risks.
The risk management plan should propose
applicable and effective security controls for managing the risks. For
example, an observed high risk of computer viruses could be mitigated by
acquiring and implementing anti virus software. A good risk management
plan should contain a schedule for control implementation and
responsibile persons for those actions.
Implementation
Follow all of the planned methods for
mitigating the effect of the risks. Purchase insurance policies for the
risks that have been decided to be transferred to an insurer, avoid all
risks that can be avoided without sacrificing the entity's goals, reduce
others, and retain the rest.
Review and evaluation of the plan
Initial risk management plans will
never be perfect. Practice, experience, and actual loss results, will
necessitate changes in the plan and contribute information to allow
possible different decisions to be made in dealing with the risks being
faced.
Risk analysis results and management
plans should be updated periodically. There are two primary reasons for
this: 1.) to evaluate whether the previously selected security controls
are still applicable and effective and 2.) to evaluate the possible risk
level changes in the business environment. For example, information
risks are a good example of rapidly changing business environment.
Limitations
If risks are improperly assessed and
prioritized, time can be wasted in dealing with risk of losses that are
not likely to occur. Spending too much time assessing and managing
unlikely risks can divert resources that could be used more profitably.
Unlikely events do occur, but if the risk is unlikely enough to occur,
it may be better to simply retain the risk, and deal with the result if
the loss does in fact occur.
Prioritizing too highly the Risk
management processes itself could potentially keep an organization
from ever completing a project or even getting started. This is
especially true if other work is suspended until the risk management
process is considered complete.
Areas of risk management
As applied to corporate finance, risk
management is a technique for measuring, monitoring and controlling the
financial or operational risk on a firm's balance sheet. See value at
risk.
Enterprise Risk Management
In
Enterprise Risk Management, a
risk is defined as a possible event or circumstance that can have
negative influences on the Enterprise in question. Its impact can be on
the very existance, the resources (human and capital), the products and
services, or the customers of the Enterprise, as well as external
impacts on Society, Markets or the Environment.
Project management
In project
management, a risk is more
narrowly defined as a possible event or circumstance that can have
negative influences on a project. Its influence can be on the schedule,
the resources, the scope and/or the quality.
In project management parlance, when a
risk escalates, it becomes a liability. A liability is a negative
event or circumstance that is hindering the project.
Some of the processes for assessing
risk include the following (the parentheses contain some of the jargon
used to refer to them).
- Choosing unique identifiers for
referring to the same risk in company or project documents (identification).
- Describing the risk and how it could
become a liability (description).
- Assessing the consequences of that (effect).
- Considering what precautions could
be taken to prevent it (precaution).
- Drawing up contingency plans or
procedures for handling it (contingency).
- Categorizing the risk as new,
ongoing or closed (risk status)
- Estimating the probability of
the risk becoming a liability (Risk escalation probability,
P)
- Estimating the consequences in terms
of time for the project (Schedule impact, S)
In addition, every probable risk can
have a pre-formulated plan to deal with it to deal with its possible
consequences (to ensure contingency
if the risk becomes a liability).
From the information above and the
average cost per employee over time, or Cost Accrual
Ratio, a project manager can estimate
- the cost associated with the risk if
it arises, estimated by multiplying employee costs per unit time by
the estimated time lost (cost impact,
C where C = Cost Accrual
Ratio * S)
- the probable increase in time
associated with a risk (schedule variance due to risk, Rs
where Rs = P * S):
- Sorting on this value puts the
highest risks to the schedule first. This is intended to cause
the greatest risks to the project to be attempted first so that
risk is minimized as quickly as possible.
- This is slightly misleading as
schedule variances
with a large P and small S and vice versa are not equivalent.
(The risk of the
RMS Titanic
sinking vs. the passengers' meals being served at slightly the
wrong time).
- the probable increase in cost
associated with a risk (cost variance due to risk, Rc
where Rc = P*C = P*CAR*S = P*S*CAR)
- sorting on this value puts the
highest risks to the budget first.
- see concerns about schedule
variance as this is a function of it, as illustrated in the
equation above.
Risk in a project or process can be due
either to special causes of deviation or common causes of deviation and
requires appropriate treatment. That is to re-iterate the concern about
extremal cases not being equivalent in the list immediately above.
Risk management activities as applied
to project management
In project management, risk management
includes the following activities:
- Planning how risk management will be
held in the particular project. Plan should include risk management
tasks, responsibilities, activities and budget.
- Assigning risk officer - a team
member other than a project manager who is responsible for
foreseeing potential project problems. Typical characteristic of
risk officer is a healthy skepticism.
- Maintaining live project risk
database. Each risk should have the following attributes: opening
date, title, short description, probability and importance.
Optionally risk can have assigned person responsible for its
resolution and date till then risk still can be resolved.
- Creating anonymous risk reporting
channel. Each team member should have possibility to report risk
that he foresees in the project.
- Preparing mitigation plans for risks
that are chosen to be mitigated. The purpose of the mitigation plan
is to describe how this particular risk will be handled ¡§C what,
when, by who and how will be done to avoid it or minimize
consequences if it becomes a liability.
- Summarizing planned and faced risks,
effectiveness of mitigation activities and effort spend for the risk
management.
Risk Management and Business
Continuity
Risk management is simply a practice of
systematically selecting cost effective approaches for minimising the
effect of threat realisation to the organisation. All risks can never be
fully avoided or mitigated simply because of financial and practical
limitations of the real world. Therefore all organisations have to
accept some level of residual risks which still may realise despite
their efforts.
Whereas risk management tends to be
pre-emptive, Business Continuity Planning (BCP) was invented to deal
with the consequences of realised residual risks. The necessity to have
BCP in place raises because even very unlikely events will occur if a
necessarily long time is available. Risk managment and BCP are often
mistakenly seen as rivals or overlapping practices. In fact these
processes are so tightly tied together that such separation seems
artificial. For example, the risk management process creates important
inputs for the BCP (assets, impact assessments, cost estimates etc).
Risk management also proposes applicable controls for the observed
risks. Therefore, risk management covers several areas that are vital
for the BCP process. However, the BCP process goes beyond risk
management's pre-emptive approach and moves on from the assumption that
the disaster will realise at some point.
References
-
Dorfman, Mark S. (1997). Introduction to Risk Management and
Insurance (6th ed.), Prentice Hall.
ISBN 0137521065.
-
Stulz, Ren¨¦ M. (2003). Risk Management & Derivatives (1st ed.),
Mason, Ohio: Thomson South-Western.
ISBN 0-538-86101-0.
-
Alijoyo, Antonius (2004).
Focused Enterprise Risk Management (1st ed.), PT Ray
Indonesia, Jakarta.
ISBN 979-9891818-1-7.
This article is licensed under the GNU Free Documentation
License. It uses material from
Project Management
and
Risk_management
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