If project managers had unlimited funding they could always identify a multitude of risk events. Some of the risk impacts may be insignificant, whereas others may expose the project to severe danger. With a large number of possible risk events, it is impossible to address each and every situation. It may be necessary to prioritize risks.
Assume that the project manager categorizes the risks according to the project’s time, cost, and performance constraints, as illustrated in Figure below.
Prioritization of risks:
According to the figure, the project manager should focus his/her efforts on reducing the scheduling risks first. The prioritization of risks could be established by the project manager, by the project sponsor, or even by the customer. The prioritization of risks can also be industry- or even country-specific, as shown in Figure below. It is highly unlikely that any project management methodology would dictate the prioritization of risks. It is simply impossible to develop standardization in this area such that the application could be uniformly applied to each and every project.
Ordering of tradeoffs:
The prioritization of risks for an individual project is a good starting point and could work well if it were not for the fact that most risks are interrelated. We know from tradeoff analysis that changes to a schedule can, and probably will, induce changes in cost and performance. Therefore, even though schedules have the highest priority in Figure above, risk response to the schedule risk events may cause immediate evaluation of the technical performance risk events. Risks are interrelated.
The interdependencies between risks can also be seen from Table 11–6. The first column identifies certain actions that the project manager can opt for to take advantage of the opportunities in column 2. Each of these opportunities, in turn, can cause additional risks, as shown in column 3. In other words, risk mitigation strategies that are designed to take advantage of an opportunity could create another risk event that is more severe. As an example, working overtime could save you $15,000 by compressing the schedule. But if the employees make more mistakes on overtime, retesting may be required, additional materials may need to be purchased, and a schedule slippage could well occur, thus causing a loss of $100,000. Therefore, is it worth risking a loss of $100,000 to save $15,000?
TABLE : RISK INTERDEPENDENCIES
To answer this question, we can use the concept of expected value, assuming we can determine the probabilities associated with mistakes being made and the cost of the mistakes. Without any knowledge of these probabilities, the actions taken to achieve the opportunities would be dependent upon the project manager’s tolerance for risk.
Most project management professionals seem to agree that the most serious risks, and the ones about which we seem to know the least, are the technical risks.
The worst situation is to have multiple technical risks that interact in an unpredictable or unknown manner.
As an example, assume you are managing a new product development project.
Marketing has provided you with two technical characteristics that would make the product highly desirable in the marketplace. The exact relationship between these two characteristics is unknown. However, your technical subject matter experts have prepared the curve shown in Figure below. According to the curve, the two characteristics may end up moving in opposite directions. In other words, maximizing one characteristic may require degradation in the second characteristic.
Working with marketing, you prepare the specification limits according to characteristic B in Figure below. Because these characteristics interact in often un-
known ways, the specification limit on characteristic B may force characteristic A into a region that would make the product less desirable to the ultimate consumer.
Although project management methodologies provide a framework for risk management and the development of a risk management plan, it is highly unlikely that any methodology would be sophisticated enough to account for the identification of technical dependency risks. The time and cost associated with the identification, quantification, and handling of technical risk dependencies could severely tax the project financially.
Another critical interdependency is the relationship between change management and risk management, both of which are part of the singular project management methodology. Each risk management strategy can results in changes that generate additional risks. Risks and changes go hand in hand, which is one of the reasons companies usually integrate risk management and change management together into a singular methodology. Table below shows the relationship between managed and unmanaged changes. If changes are unmanaged, then more time and money is needed to perform risk management. And what makes the situation even worse is that higher salaried employees and additional time is required to assess the additional risks resulting from unmanaged changes. Managed changes, on the other hand, allows for a lower cost risk management plan to be developed.
TABLE : UNMANAGED VERSUS MANAGED CHANGES
Project management methodologies, no matter how good, cannot accurately define the dependencies between risks. It is usually the responsibility of the project team to make these determinations.
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