Seminar paper

Risk management in a multi-project environment

An approach to manage portfolio risks

Rolf Olsson Bombardier Transportation, Vasteras, Sweden

Abstract

Purpose – The purpose of this paper is to identify differences in managing a single project compared with that of a project portfolio, where focus and requirements are expanded, and where clear links to organizational objectives exist. Further, the aim is to propose a methodology for the management of risk within the context of a project portfolio.

Design/methodology/approach – The concepts and framework described in this paper have emerged primarily from an in-depth action research study in a major provider of transport solutions. The work has been conducted within one division, with presence in most of mainland Europe, Scandinavia, and the UK.

Findings – The paper finds that the proposed methodology would manage portfolio risk in two ways. First, it provides a means for single projects to gain experiences from other projects within the portfolio. Second, portfolio common risks and trends of issues can be identified. Such risks can become risks for succeeding projects, or require action from outside the single project.

Research limitations/implications – The paper shows that the pilot study consisted of 16 projects within one project portfolio. Other project portfolios, with other prerequisites, might result in different findings, since some factors not included in this research such as cultural aspects or organizational factors could affect the findings.

Practical implications – In this paper the identification and analysis of commonalities and risk trends between projects provide the possibility to manage risks from a portfolio perspective.

Originality/value – The paper sees that existing risk management processes do not support projects in managing risk within a project portfolio. Instead, the proposed methodology provides the project portfolio manager with a consolidated view of the total risk exposure within the portfolio. Additionally, this methodology finds risks and trends not otherwise possible to identify.

Keywords Risk management, Project management, Portfolio investment

Paper type Research paper

Introduction The discipline of project risk management has developed over the recent decades as an important part of project management. Several researchers, see, e.g. Miles and Wilson (1998) and Mullins et al. (1999), argue risk as being an exposure or a probability of occurrence of a loss. Further, Miles and Wilson (1998) define risk as a barrier to success and Hertz and Thomas (1994) argue that risk is related to concepts of chance such as the probability of loss or the probability of ruin.

Risk can also be viewed as having a positive effect. Jaafari (2001) defines risk as exposure to loss/gain, or the probability of occurrence of loss/gain multiplied by its respective magnitude. The PMBOK (2004) defines risk as an uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives. When put into context, it seems that risk can have a two-dimensional meaning, namely

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Received 7 August 2006 Revised 30 January 2007 Accepted 22 April 2007

International Journal of Quality & Reliability Management Vol. 25 No. 1, 2008 pp. 60-71 q Emerald Group Publishing Limited 0265-671X DOI 10.1108/02656710810843586

a negative as well as a positive implication. The author considers risk a negative wording, proposing to separate the contradictory meanings of risk, and thereby allowing opportunity to be considered the positive wording of a positive implication.

Project management is now a well-established approach for affecting a wide range of changes, see, e.g. PMBOK (2004), Pellegrini (1997), and Turner (1993). How well one can plan, execute, and control the tasks and how well one can manage the relationships with all the stakeholders involved in the project constitutes the success or failure of the carrying out of a project (Sandhu, 2004). Project risk management is a natural part of project management. Regarding project risk, there are different risks when viewing different perspectives of different stakeholders. In today’s highly complex project environment, there is clearly a need for better understanding of how projects are related to each other and what the implications may be of their interrelations. Different process steps may have multiple interactions that are difficult to understand. This is interaction complexity which refers to the fact that the different process steps cannot be separated without affecting overall process performance (Sandhu, 2004).

This widespread use of projects, in some cases becoming the preferred or dominant business process, and their use in realizing strategic or complex change have also resulted in the need to marshal project-based activity in some coherent, beneficial way (Pellegrini, 1997). PMBOK (2004) defines a project as a temporary endeavor undertaken to create a unique product, service, or result.

Lycett et al. (2004) and Pellegrini (1997) describe portfolio risk management as focusing more on strategic issues for a portfolio of projects and the ability to achieve strategic objectives. Clearly there is a need for a shift in focus for risk management in a portfolio environment. Hillson (2004) and Ward and Chapman (2003) also highlight the importance of including the management of opportunities in any risk management process. It is suggested that two areas are of importance when describing the implications for today’s management of risk and opportunities in a project organization when handling several projects simultaneously. The first implication regards the existing risk management processes, and the second implication regards the wider scope of project portfolio management than that of single project management.

The aim of this paper is to extend the discussion of the project portfolio benefits derived from adopting a portfolio risk management approach building upon Olsson (2005).

The process of project risk management Most of the existing project processes are not developed to handle a portfolio of projects when considering risks and opportunities. This is due to the fact that the process structure does not assist in handling a portfolio of projects. When using these single project processes, it is up to the experience of the organization and foremost project managers to find links between projects. In addition, existing risk management processes do not usually include functional risk management. Functional risk is defined as risk that affects the project or portfolio but where a functional department is the origin of the risk and has the responsibility for mitigation of that risk. Recent development in the field has enabled better understanding of the overall risk management concept by introducing risk management processes of, e.g. nine (Chapman, 1997), or five (Tummala and Burchett, 1999) phases instead of the three phases: identification, analysis, and mitigation, introduced some ten to 15 years ago.

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Moreover, the development has also gone into a more detailed level in identifying, estimating, and responding phases (Artto et al., 2000).

Risk management discussions in project contexts have mostly focused on managing risks in single projects. Managing projects in a multi-project environment refers to the management of project portfolios and not just the management of single projects separately (Artto et al., 2000). Several researchers, see, e.g. Shen (1997), March and Shapira (1987), Uher and Toakley (1999), Pender (2001) and Williams (1999), argue that today’s methodologies of risk management are not sufficient for industrial use. Therefore, risk management philosophy and framework must be capable of quickly re-evaluating the project’s options against surprise developments and provide a systematic basis for its re-structuring (Jaafari, 2001).

Experienced project managers, directors and executives intuitively balance project risks and opportunities. Therefore it is considered very important that practical models and methods for risk management comply with this natural way of reasoning and decision-making (Kähkönen and Artto, 2000). Olsson (2001) has shown that having a project view of uncertainties is not sufficient when managing them in a large, complex project-oriented organization. Instead, a wider perspective must be adopted. This can be described in two dimensions where an extension of existing theories is necessary, both horizontally, including preceding and succeeding phases of the project, and vertically, integrating the functional organization in project risk management. Since a project is usually initiated, financed and manned internally within the functional organization, this perspective needs to be included when handling risks and opportunities. Antoni (2003) found that learning in a project context is not a typical activity and needs to be organized for. Also, it was found that the interaction between project and line organization is a major prerequisite in facilitating learning between projects.

The scope of a single project perspective seems insufficient, and a more holistic and business oriented perspective should prevail. Therefore, existing risk management processes are considered insufficient due to the focus on a single project. Artto et al. (2000) has found that risk management discussions in project contexts have mostly focused on managing risks in single projects. Managing projects in a multi-project environment automatically refers to the management of project portfolios – and not simply the management of single projects separately. Therefore, in project-oriented organizations, risk and opportunity management must be considered an organizational issue and not an isolated project responsibility. Ward and Chapman (1995) bolster this. They suggest that when considering the risks associated with a project, attention is often focused on risks specific to the physical nature of the project. However, many key project risks are associated with the project management process itself. Adopting a wide business-oriented perspective on the project process is essential in any project company (Artto et al., 2000). One major incentive for managing projects in a multi-project environment is the possibility to gain experience on successes and failures within the environment. However, this is not done automatically, it needs to be organized.

Portfolio versus program management Definitions of portfolio management are wide and diverse. Several names for the same understanding of portfolio management exist, and terms such as program management and multi-project management are frequently used. Portfolio management is a discipline in which combined projects, to a certain extent, utilize

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the same management, where issues stretch beyond the scope of the project, and where interdependencies not manageable by a single project are to be managed by a portfolio head or “boss of projects”. For a further description on the conceptual differences, see Olsson (2005). Finally, the author acknowledges the broad view of Elonen and Artto (2003) that portfolio management includes aspects of both portfolio and program management. This broad view includes the management of interfaces between projects, the co-ordination of the collection of projects, the management of resources and other constraints, and the link to strategic objectives.

Research methodology The situation in the case company Having managed risks and opportunities in a structured manner for several years, the experience of project managers, directors and senior management is substantial. In general, the process is applied throughout every project within the company and managed according to internal procedures based on PMBOK (2004). Naturally, the maturity of application and experience differs between projects. This research pertains to a particular corporate setting consisting of complex high cost products, low series production and international project teams. The typical project duration is three to four years, involves 100 people, and has an order value of approximately 200 million US dollars. A typical project core team could consist of ten to 20 persons. These persons, except project management personnel, belong to the functional organization.

Following Evaristo and van Fenema (1999), the project typology would correspond to multiple distributed projects with both shared and discrete locations. They are multiple in the sense that a portfolio manager usually manages around 20 projects simultaneously. The projects are distributed in the sense that some projects are managed from different locations, parts of teams are located elsewhere, or both distributions exist in another country. The risk management situation within the case company could be described as including:

. risks and opportunities within a project that can be managed by project management or by other functions such as, for example, supply management, engineering, and quality;

. risks and opportunities within a project that cannot be managed by project management or other functions;

. risks and opportunities originating from outside of the project scope that affect the project and that can or cannot be managed by project management or other functions;

. similar risks and opportunities, or issues, between projects; and

. uncertainties that cannot be managed, i.e. surprises.

Case study design Based on an in-depth action research methodology, the research involved the review of project risk and opportunity performance within the company. This was done by investigating company specific empirical data such as the developed Risk Management Maturity Index (RMMI), risk and opportunity database and financial project reporting. Finally, a review of existing risk management literature was conducted. Further, a case study was designed which involved interviews in two

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parts. In the first part, eight project managers, all of whom has personal responsibility for a realization project, and the director for the project management office, were interviewed. In the second part, all five portfolio managers within the division were interviewed individually. The aim of the interviews was to gain knowledge in problem areas with the existing risk management process when faced with new requirements in portfolio management. Based on the findings from interviews, empirical studies and first-hand experiences from implementing and supporting projects, a methodology for risk analysis within a project portfolio was developed. The methodology was then verified in a case study of 16 projects within one project portfolio.

The data generated from the interviews and reviews was analyzed inductively, building on the concepts used by managers within the organization and on experience from the author’s action research role gained from numerous previous interventions. The concepts and methodology were developed iteratively. The ideas were discussed and challenged by peers and at regular meetings with senior managers and subsequently modified. This process of continuous review honed the research process and informed the case study.

Results Problem today – the case company The case company is an international provider of transportation solutions and a global leader within its segment, with a wide range of products (including vehicles) and total transport solutions (including design and manufacturing). The segment of the company studied in this case employs 28,600 people. The segment has 42 production sites in 21 countries. Its European presence constitutes 28 production sites in 14 countries. There were some major implications within the company environment described above that influenced the effectiveness of risk and opportunity management both from a project and an organizational perspective. The ability to manage the methodology of risk and opportunity management is considered sufficient by senior management. Project management and the project core team both have the expected knowledge in understanding and using the process. However, there is a clear view that if other functions involved in project management, manage risks within their own function, project risk management will benefit. This is because there is no incentive for functions to manage project risks, as their results are not inquired other than in the project. Thus, cross-functional risk and opportunity management must be improved. The process cannot be seen as only a project management process, but rather as an organizational process as well. Further, the existing risk management process does not foster learning other than within a project. This is especially visible when trying to find commonalities and trends between projects. Risks, and opportunities, should also be managed in the senior management team. It is crucial that a consolidated view is enabled so that a balance between risks, opportunities and issues is established.

Finally, risk identification is sometimes considered too weak. There must be a possibility to identify risks and opportunities for focus areas (for example, system-by-system, or supplier-by-supplier) in order to rely on the effectiveness of risk identification.

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Gap between existing process and organizational requirements Existing theories on risk and opportunity management processes have been developed over many years and are, in general, considered sufficient for any project organization. Quite naturally, the focus has been on the single project perspective and its relation to the organization. According to Pellegrini (1997), there are six major advantages with adopting a portfolio management strategy. A comparison of the risk and opportunity management process within the case-company and the portfolio management benefits is shown in Table I.

As there is a potential to further support portfolio management beyond the capability of the existing risk management process, it is argued that there are three major areas, which need further improvement. The current risk management process at the case company:

(1) Does not foster learning.

(2) Supports no interaction between projects.

(3) Cannot measure effectiveness (i.e. what are the benefits of risk and opportunity management, and in which project do we need to improve our performance?).

When analyzing the organizational requirements with the existing risk management process, there are three particular areas upon which any process improvement should be based. They are, namely, the ability to: show the influence of poor effectiveness on the portfolio margin, learn from previous mistakes, and provide senior management with unbiased information on performance and improvement areas.

Portfolio risk analysis methodology This paper suggests a methodology to analyze portfolio risks in which the analysis is based on the case company’s past experiences. This methodology considers the adverse effects of uncertainty. However, it is argued that this methodology also includes opportunities in two aspects. First, a risk in one project could mean an opportunity for other projects that are in an earlier stage of the project life cycle. If the result shows a common risk or a trend, for a particular risk, actions and experiences can be focused towards projects, which could face the same risk. Second, analysis results that, from a single project perspective, might be seen as a one-time event or

Potential benefits of portfolio management

Supported by single project perspective risk and opportunity process?

Possibility for portfolio risk and opportunity process to support?

Greater visibility to senior management No Yes Better prioritization of projects No Yes More efficient and appropriate use of resources No Yes Projects driven by business needs No No Better planning and coordination No Yes Explicit recognition and understanding of dependencies

No Yes

Source: Pellegrini (1997)

Table I. Comparison of portfolio

management benefits and the ability of the case

study company’s risk and opportunity management process to support them

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state could from a portfolio perspective be seen as a trend or a portfolio common risk. Hence, a consolidated action would be possible to reduce the portfolio exposure, turning risk into opportunity. The possibility of analyzing the risk exposure within the portfolio and proactively managing uncertainties is mainly determined by the maturity of handling risks and opportunities in the projects and within the organization. Analyzing risks with a portfolio perspective:

. reveals uncertainties in the close proximity of the project environment as well as between projects;

. visualizes risks common to a number of projects within a portfolio; and

. identifies risk trends towards a specific area.

Analysis of the portfolio risk exposure requires the following three prerequisites:

(1) Availability of data. The following data are needed to perform the suggested portfolio analysis: project data: . list of past problems, i.e. consolidated list of the portfolio’s top issues; . predicted/actual cost per issue; and . assigned finance representative.

Risk data for the project:

. risks (3Cs – condition, cause, and consequence);

. description of mitigation action;

. mitigation action cost; and

. mitigation action success probability.

Project data for the identification of similar and comparable projects:

. product vehicle type (e.g. single deck, double deck, locomotives, coaches);

. propulsion system (e.g. electric, diesel electric, diesel hydraulic/mechanic);

. other relevant technical systems;

. production site at which the product is manufactured; and

. other relevant project and product specific characteristics required for the analysis.

(2) Ability to search and manage data. In the pilot analysis, MS Excel has been used for the analysis in combination with the risk register. Past and present project data is available for all projects within the company. However, this approach requires a substantial amount of manual work in analyzing the massive amount of data; therefore, it is imperative that the analyst be quite experienced.

(3) Possibility to analyze the data. This analysis methodology advocates the use of a single expert rather than the collective assessment usually conducted within a project risk and opportunity assessment session. The amount of information gathered cannot easily be shared between people in the analysis stage. However, a review with project managers and project controllers is always conducted on the results as quality assurance of the analysis.

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Portfolio risk analysis Analysis preparation needs to be based on reliable and unbiased data. As illustrated in Figure 1, finding commonalities and trends in the available data requires analyzing factors within three steps:

. Step 1. Analyzing project issues between projects. Analyze all issues for the selected projects. This step is often the least time consuming because of the small amount of data to be analyzed. It is essential to understand the issues here since issue by issue the portfolio is analyzed. This analysis step will reveal whether there are any common issues within the portfolio and if such common issues affect parts of or the whole portfolio, and any potential improvements within or outside of the portfolio that have an effect on the projects within.

. Step 2. Analyzing one project’s issues with all the projects’ risk data (repeat for all projects). Comparing issues with extracts from the project’s risk register increases the level of complexity. The amount of data increases and sometimes the entered risks do not completely accurately describe the occurred issue, thus the importance of an experienced analyst. Firstly, the issues of projects in the portfolio are selected one by one. They are then compared with the risk register of the other projects. This will reveal if one project has any issues that, for other projects, are identified as risks. If such projects are separated in the project life cycle stage, the result could be used to avoid risks and/ or identify opportunities.

. Step 3. Including risk data from all projects into the analysis. The last step in the analysis methodology is to compare risk data from different projects. This analysis is the most time consuming analysis, mainly because of the large amount of data. This analysis requires a common starting point of the analysis. Here, the product/project configuration would come into use since this stage is based on stated hypotheses. For example, there is always a problem with

Figure 1. Process flow on portfolio

risk analysis with its three steps: (1) analyzing issues

between projects, (2) analyzing one project’s

issues with the risk register of other projects in

the portfolio and (3) the analysis of hypotheses

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supplier Alfa, and the level of quality at production site Bravo is always lower than the other sites. Input and suggestions on hypothesis selection would be: . internal product and project specific; . external customer, supplier and country specific; . general concerns from projects and organization; and . from analysis step 1.

To gain higher reliability of the results, additional portfolios could be included in the analysis.

Analysis review This methodology acknowledges the importance of reviewing the results of the analysis with the respective project manager and project controller having the detailed knowledge. In addition to validating the results, this review would reduce the “not-invented-here” syndrome. Therefore, it would also increase the acceptance of the analysis, its results, and responses necessary. The review should include assessment of the relevancy and accuracy of the analysis in terms of: cost exposure, risk trends and commonalities within the project, and the effectiveness of the risk response action.

Portfolio risk analysis benefit The benefits of the analysis can be viewed in three levels:

(1) Improvement of project risk and opportunity effectiveness: The comparison of risks between projects allows reflection and analysis of the situation and the adoption of risk mitigations actions. Thus, it is also possible to find common focus areas (e.g. for a production site, a product, or a function). Finally, this level will provide feedback and experience from other projects and their risk response actions.

(2) Portfolio analysis benefits: This level of analysis will reveal portfolio common risks, and identify portfolio risk trends. Since projects usually are separated with regards to degree of completion within the portfolio, a risk in one project could be avoided in others. Finally, this level will assist with the identification of focus areas for performance optimization improvement projects where opportunities could be realized.

(3) Organizational benefits: If several portfolios within a company are compared, this level of analysis will identify risks that are common within all portfolios. These risks can either be related to a portfolio or to other, non-project specific, activities. Examples include the procurement process, the company IT infrastructure, or the HR process.

Conclusions Clearly there is a gap between the risk management process of today and the requirements of a portfolio management of risks and opportunities. This research is an attempt to bridge the gap and to bring value to the management of a project portfolio. This paper has suggested a methodology to analyze project portfolio risks. The

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analysis is based on portfolio top issues and compares them with previously identified risks. Although this methodology only analyses the adverse outcome of uncertainty, i.e. risk, it is implied that this methodology also considers opportunities. The benefits could be seen in two ways: First, a risk in one project could mean an opportunity for other projects in earlier stages of the project life cycles if the results show a common risk or a trend, actions can be focused towards projects that could face the same risk. Second, analysis results that from a single project perspective might be seen as a one-time event or state could from a portfolio perspective be seen as a trend of a common portfolio risk. Consequently, based on the portfolio management benefits in Table I, the proposed methodology for risk analysis on a portfolio level provides:

. greater visibility to senior management through the visualization of commonalities and trends between projects and products within one portfolio (e.g. for production sites and for different customers);

. better prioritization between projects since the portfolio is the phenomena of study and the analysis provides knowledge on the risk status of the projects and their relation and effect on portfolio objectives. Hence, the proposed methodology is a vehicle for facilitating learning between projects;

. more efficient and appropriate use of resources would be achieved by the relation of risk exposure of the portfolio and projects in most need of appropriate resources;

. better planning and coordination would be obtained by the recognition of common risks and trends within the portfolio. Such knowledge would enhance project and portfolio planning and coordination as projects would not pursue common risks in parallel. Furthermore, the situation of common risks and trends within the portfolio could be planned and coordinated as improvement projects. such projects might be beneficial for the entire portfolio;

. explicit recognition and understanding of dependencies is obtained by adopting a portfolio perspective on risk. Furthermore, since this methodology identifies common risks and trends within the portfolio, dependencies between projects time-wise separated in the project life-cycle, would be understood and managed; and

. improvement of risk and opportunity management effectiveness within the organization.

However, this methodology does not provide means for projects being driven by business needs since this approach is more of a bottom-up approach. By analyzing risks in the single project, in the view of the portfolio, and risks between projects within the portfolio, this approach would not support the organization in defining product realization projects based on business needs. This methodology does however support improvement projects driven by business needs within the portfolio.

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About the author Rolf Olsson is an experienced risk manager and a professional project manager within a vehicle delivery division of Bombardier Transportation. He has had his work published in several scientific journals and in conferences and received a special tribute on the topic of project risk management at the PMI Risk SIG 2005 Conference in Washington. Rolf specialises in the management of risks and opportunities between projects within a portfolio or within a project based organisation. He has also developed a method for measuring the effectiveness of risk management within a project or a portfolio. Rolf Olsson can be contacted at: rolf.olsson@se. transport.bombardier.com

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