Risk Management

Vignesh Sivadass

2022MANG6143slidesWeek12.ppt

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MANG 6463
Project Risk Management

Mario Brito

Part four – some key concepts to take away and build on in your areas of interest

Start by considering the general role of the ‘universal process (UP)’ concept and its implications for project risk management, project management more generally, and the effective integration of project, operations and corporate management.
Look at some operations and corporate planning concerns which are directly relevant to project management, including safety and security planning concerns.
Then look at some key implementation issues from a change management perspective.
Conclude with a corporate capability-culture perspective using an influence diagram to portray key interdependencies.

The ‘universal process (UP)’ concept

select & focus the process

for appropriate clarity

create & enhance the plans

for all relevant concerns

shape the plans

using models of key issues

test the plans

to ensure robustness

interpret the plans

to exploit creativity

implement the plans

as and when appropriate

a trigger

in some

other

process

return

to an

appropriate

process

capability-culture

assets

capability-culture

liabilities

capture the context

with appropriate clarity

Some key chapter 2 issues to build on

All organisations have implicit multiple UP equivalents which are probably inconsistent and collectively less effective and efficient than one carefully considered an clearly communicated explicit UP. One explicit appropriate UP is a significant and important opportunity.
Choosing an effective and efficient way to demonstrate this is a very challenging and context specific task, but a demonstration project like those discussed in the tales in chapters 5 and 6 can be effective.
Planning the introduction of this idea is ‘a change project’ which is probably a relatively late component of the complex overall portfolio of programmes and component projects which need to be addressed. But it is an opportunity which can be usefully understood in outline by you and some of the other key players at the outset.
A brief discussion of some of the ideas which all key players should be aware of, usefully seen as clues about some of what to look for when reading chapters 1 to 6 and 8 to 11, might be built on the discussion of the next few slides.

Chapter 5 – an initial view of optimality

cost in £

joint cost Ct

Qo order quantity in controls

1000

2000

3000

100

holding cost Ch Qo / 2

order cost Co Rd / Qo

Chapter 5 – a massively different perception of optimality as a trigger for asking the ‘right questions’.

cost in £

joint cost Ct

Qo order quantity in controls

4000

8000

-50

100

holding cost component

order cost component

-100

Chapter 6 – the overview plan of Astro’s SP for bidding, building on the Transcon case study

Stage 1: Eliminate non-starters

Capture basic context information and key associated assumptions.

Eliminate all contracts that are not likely to be worthwhile for reasons other than the margin.

Stage 2: Minimise no-hopers

Preliminary quantification of expected margin and the probability of winning.

Eliminate most contracts that are unlikely to provide much margin.

Stage 3: Bid strategy and price

Analysis of opportunities which look worthwhile, developing a detailed bidding strategy in terms of both price and non-price advantages and disadvantages.

Cumulative Proposal Document (CPD)

Proposal Document 1 (PD1)

Basic context information and key associated assumptions

Proposal Document 2 (PD2)

Additions to the PD1

Proposal Document 3 (PD3)

Additions to the PD2

very early

no bid

early

no bid

late

no bid

bid

Chapter 6 – the preliminary probability of winning curve, building further on the Transcon case study in a different way

0.2

0.4

0.6

0.8

P(B)

probability

winning

key:

example discrete values

some discrete values of

particular interest

preliminary probability

of winning curve

assumed underlying curve

possible extrapolations

B bid in £m

Chapter 6 – the stage 3 plan of Astro’s SP for bidding, further building on the Transcon case study in key ways

phase 3.1: initiation of pass

phase 3.2: cost uncertainty analysis

phase 3.3: probability of winning analysis

phase 3.4: uncertainty synthesis

phase 3.5: bid evaluation & development

no bid

bid

Chapter 8 – four nominal planning horizons and five categories of formal corporate planning, building on the Samdo case study context

short-term

planning

futures planning

medium-term

planning

nominal planning horizons

now 1 year 10 years 20 years 50 years

long-term

planning

context – including all other planning which significantly influences the way participants

interpret formal corporate planning plus other relevant capability-culture concerns

goals planning

Further building on some key Chapter 8 issues

All organisations need clarity about all of the roles required of a corporate planning framework which has to serve purposes comparable to those addressed in the Canpower tale based on a Canadian electricity utility.
This framework is comparable to the project lifecycle used by project management in terms of an equivalent to the four Fs for project planning.
Within this framework corporate planning needs equivalents to the seven Ws, goals-plans relationships and a set of specific processes (SPs) for corporate planning.
The key concerns around risk efficiency at an overall corporate level, and the way they have to interface with interdependent operations and project management concerns.

Building on some key Chapter 9 issues

Some organisations need a safety and security planning framework which has to serve roles comparable to those addressed in the NER tale based on a European railway system.
The importance of trade-offs involving avoided fatalities and injuries, the ethical issues and perspective differences that have to be confronted, and the scope for generalisation.
The importance of very low probability but very high impact scenarios.
The nature of the risk efficiency concerns in this context.
The need for high clarity about all of the questions which really matter, including the nature and implications of Arrow’s ‘impossibility theorem’ for board level decisions about the trade-offs which everybody involved should really care about.

Key enlightened planning implementation issues

Selling the basic concept to key parties and then to all concerned.
Choosing an effective and efficient demonstration project.
Addressing context as a key process design issue.
Planning the introduction as a ‘project’ which is a complex portfolio of programmes and component projects with a lot of uncertainty, associated opportunity, and important sources of risk.
Starting by being clear about initial and long term objectives in ‘fit for purpose’ terms, and the evolution planned, explicitly exploring what ‘fit for purpose’ should imply.
Fully integrating uncertainty, opportunity and risk management across the organization in the long term, with low risk early commitments.
Being clear about the skills needed, skills and knowledge development, the role of consultants, and key governance concerns.

Selling a ‘best practice’ perspective

Choosing the best ‘brand’ label – it may not be ‘enlightened planning’, but it probably is not ‘project risk management’, or any other kind of ‘risk management’, because of the baggage these terms carry. Some variant of ‘systematic simplicity’ is the mindset which needs to be sought and sold, with a brand label that best suits the context.
Benefits as objectives is a good starting point for discussing what ought to be achieved by a long term planning horizon, and then short and medium term goals.
A clear understanding of the possibilities is obviously a good idea.
Change processes tailored to deliver what is required obviously has to follow on from understanding agreed goals.

Objectives which may be relevant

Opportunity management as an operational definition of what ‘best practice’ should be.
Corporate wide understanding of the risk efficiency and clarity efficiency concepts which underlie opportunity efficiency, as well as the difficult nature of some of the trade-offs which opportunity efficiency requires.
Culture change in terms of both enhanced assets and diminished liabilities, with simple initial objective examples like all relevant targets and expectations clearly distinguished, more demanding later objective examples like project management, operations management and corporate management fully integrated in enlightened planning terms.
Bottom up communication encouraged, with a shared ‘big picture’ perspective.
Creativity and satisfaction (fun) used as effective objectives.

Three or four very different target values plus a different expected value may be important, with implications for associated provisions and contingencies

an aspirational (stretch?) target value

a still higher commitment target value?

a balanced target value equal to the expected value?

Duration, cost, etc.

Probability

a density portrayal is convenient

for understanding what is involved

a higher contractual trigger target value?

provision

contingency

Aspirational (stretch?) targets as goals are crucial

Aspirational targets should always facilitate capturing good luck, and they should also stretch people whenever ‘stretching’ is appropriate.
Aspirational targets may have little chance of achievement, but they must be plausible in a sense which everyone involved understands clearly.
Ambiguity about aspirational targets and other targets is a very serious risk, and it involves a corporate capability liability which senior managers need to address and be held accountable for.

Properly defined commitment targets, balanced targets and expected outcomes are also crucial

Separating contingencies and provisions is often very useful.
Understanding asymmetric penalties is often crucial.
If ‘target contracts’ are used they need to be understood in relation to all other targets and expected outcomes.
Being clear about the ownership of risk as well as balancing incentives are the general underlying issues.
The need for contractual flexibility and trust needs to understood.
Some of the ideas underlying the need for Balanced Incentive And Risk Sharing (BIARS) contracts.

Using the concept of risk efficiency is crucial

Risk efficiency involves a maximum level of expected performance for an appropriate level of downside risk.
Ensuring choices are risk efficient should be seen as one of the core purposes of all management in project, operations and corporate planning contexts at all management levels – it is not just a ‘risk management’ concern.
Along with clarity efficiency, risk efficiency provides a foundation for opportunity efficiency at all levels of management.
Decision diagrams are a key tool when uncertainty about key measurable objectives is important.

Decision diagrams: the one risk efficient choice example
showing how complex choice comparisons can become reasonably straightforward illustrates an important idea

Using decision diagrams to evaluate risk-reward tradeoffs:
the example involving two risk efficient choices used earlier
illustrates taking more risk may be worth while sometimes

Using simpler decision diagrams can be useful, especially if secondary criteria may need attention, as illustrated by the photocopier example

Understanding risk efficiency plus opportunity efficiency plus clarity efficiency at a corporate
level as well as at a project level is crucial

Understanding all of the basic implications.
Using the systematic simplicity aspects to make decisions simpler.
Using enlightened gambles aspect as the as a engine of culture change to concerned with replacing a ‘blame culture’ with an ‘opportunity culture’.

Returning to our list of enlightened planning implementation issues

Choosing an effective and efficient demonstration project.
Addressing context as a key process design issue.
Planning the introduction as a ‘project’ which is a complex portfolio of programmes and component projects with a lot of uncertainty, associated opportunity, and important sources of risk.
Starting by being clear about initial and long term objectives in terms of a ‘fit-for-purpose’ assessment at this stage, and the evolution planned, explicitly exploring what ‘fit-for-purpose’ should imply.
Fully integrating uncertainty, opportunity and risk management across the organization in the long term, with low risk early commitments.
Being clear about the skills needed, skills and knowledge development, the role of consultants, and key governance concerns.

Contracts and governance processes as crucial frameworks for many aspects of
enlightened relationship management.

Two influence diagram examples to capture some of the interdependences this course has addressed, the first specific to the kind of approach to bidding developed in Enlightened Planning (Chapman, 2019) chapter 6, taken from Chapman and Ward (2011), the second taken from Enlightened Planning (Chapman, 2019) chapter 11.

Corporate benefits of an enlightened
approach to bidding for contracts

more profit

win more

contracts

competitive

advantage

keener pricing

lower costs

ability to

manage issues

more realistic

quantification

of uncertainty

corporate knowledge base

documentation of

sources and responses

appreciation

of uncertainty

better quality opportunity

and risk management

improved design

of projects

reduce cost

of tendering

avoid ‘disaster’

contracts

Corporate benefits of an
enlightened planning approach

using an enlightened planning approach

more ‘pleasure’ +

more trust

more openness

more ‘halos’

better communication

more congruent objectives

more lateral thinking

more creativity

better ‘bonding’

better teamwork and partnering

more ‘empowerment’

more training, less directing

better ‘management of expectations’

better use of diverse experiences

good management recognised

less ‘pain’

less wasted effort

less frustration

fewer ‘red faces’

fewer ‘frowns’

fewer crises

less confrontation

fewer witch-hunts

bad luck recognised

more ‘smiles’ =

more reward

higher quality staff

fewer ‘disasters’

more opportunities

more ‘smiles’

less wasted effort

uncertainty as opportunities

enlightened gambles

enlightened planning horizons, estimates and controls

enlightened caution and

enlightened prudence

opportunity efficiency

fewer ‘red faces’

and ‘frowns’ plus

more ‘halos’

The way forward

The effectiveness and efficiency of all current risk management activity is limited for reasons which need to be widely understood – not just project risk management.
The enormous potential for improving project management plus broader organisational performance needs to be seen as an opportunity which all organisations cannot afford to miss.
Corporate recognition of the scope for development is the obvious starting point, based on demonstration change projects.
Major obstacles to development in the organisations of interest to you clearly need identification, along with the opportunities.
It might be useful to see getting started in terms of developing a strategy for an uncertainty management capability which addresses opportunity first, risk second, bearing in mind underlying complexity.

Part four summary, questions and discussion