Project Risk Management Module 4

Identifying Project Risk

 Identifying project risks is the second step in the risk management process.
 It involves recognizing potential risks that may occur during the project and
documenting their key characteristics.
 Considered challenging, risk identification requires asking the question: "What could
possibly go wrong?"
 The process involves creating a list of known or potential risks.
 After identification, the risks are analyzed, and appropriate risk response strategies are
developed, implemented, and monitored to align with project objectives.

Inputs Tools and Techniques Outputs

Project management plan Expert judgment Risk register
Project documents Data gathering Risk report
Agreements Data analysis Project document updates
Procurement documents Interpersonal and team skills
Enterprise environmental Prompt list
factors

Organizational process assets Meetings

Inputs to identifying risks include:

 Project Management Plan: Providing overall guidance and direction for risk
management.
 Project Documents: Offering detailed information about the project, stakeholders, and
other relevant aspects.
 Plan Procurement Management: Providing insights into risks associated with
procurement activities.
 Conduct Procurements: Offering information about risks arising from procurement
processes.
 Enterprise and Organization Factors: External conditions influencing risk identification.

Input Information provided

Requirements May indicate project objectives that are particularly at risk.
Management
Plan
Schedule May identify areas that are subject to uncertainty or ambiguity.
Management
 Plan
Cost May identify areas that are subject to uncertainty or ambiguity.
Management
Plan
Quality May identify areas that are subject to uncertainty or ambiguity, or where
Management key assumptions have been made that might give rise to risk.
Plan
Resource May identify areas that are subject to uncertainty or ambiguity, or where
Management key assumptions have been made that might give rise to risk.
Plan
Risk Provides information on risk-related roles and responsibilities, indicates
Management how risk management activities are included in the budget and
Plan schedule, and describes categories of risk, which may be expressed as a
risk breakdown structure
Scope baseline Includes deliverables and criteria for their acceptance, some of which
might give rise to risk. The scope baseline also contains the WBS, which
can be used as a framework to structure risk identification techniques.
Schedule May be reviewed to identify milestones and deliverable due dates that
baseline are subject to uncertainty or ambiguity, or where key assumptions have
been made that might give rise to risk.
Cost baseline May be reviewed to identify cost or funding requirements that are
subject to uncertainty or ambiguity, or where key assumptions have
been made that might give rise to risk.

Tools for Identifying Risk - Data Gathering:

There are several tools for identifying risks falling into four categories: data gathering tools,
data analysis tools, interpersonal and team skills, and prompt lists.
Data Gathering:
1. Brainstorming:
 Assemble a group of experts or stakeholders.
 Appoint a coordinator to facilitate idea generation.
 Encourage interactive idea-building without criticism.
 Pros: Group interaction fosters creative solutions and buy-in.
 Cons: Dominant individuals may overpower others; strong leadership needed.
Advantages:
o Session produces ideas and encourages group interaction.
o Facilitates group buy-in.
o Effectively finds creative solutions to potential problems.
Disadvantages:
o Dominant individuals can overpower other group members.
 o May take time to accomplish.
o Requires a strong leader to control the group.
2. Checklists:
 List of items, actions, or points to be considered.
 Developed based on historical information from similar projects.
 Circulated among experts or project team members for assessment.
 Pros: Based on accumulated knowledge; systematic approach.
 Cons: Relies on historical data; may not capture novel risks.
 Advantages:
o Utilizes historical information for a systematic approach.
o Helps identify events likely to impact the project.
 Disadvantages:
Relies on historical data, may not capture novel risks
3. Delphi Technique:
 Assemble a group of experts.
 Keep members separate with no personal interaction.
 Coordinator asks for forecasts and probability estimates.
 Summarize forecasts and iterate until a consensus is reached.
 Pros: Independent answers; reduces influence of strong members.
 Cons: Time-consuming; lacks predictive validity.
 Advantages:
o Allows for independent answers.
o Can be conducted easily through email.
o Reduces influence of strong group members on weaker ones.
 Disadvantages:
o Time-consuming iterative process.
o Group members cannot interact (which may be positive to identify
overlooked problems).
 Lacks predictive validity
4. Interviews and Conferences:
 Discussions between individuals or in group conferences.
 Pros: Easily administered; provides insights and adaptability.
 Cons: Interviewee biases; personal risk perceptions may differ.
 Advantages:
o Easily administered.
o Provides insights into the project through one-on-one discussions.
o Adaptable to various activities throughout implementation.
o Disadvantages:
o Interviewee may have personal biases.
 o Personal risk perception of the interviewee may differ from the
interviewers.

Data Analysis

Root Cause: Cause and Effect Diagrams:

Root cause analysis, a crucial technique for identifying risk events, involves various methods,
one of which is the cause-and-effect diagram (Ishikawa or fishbone diagram). This diagram
serves multiple purposes:
1. Find Underlying Causes:
o Identify the root causes of problems or potential opportunities.
2. Develop Preventative Actions:
o Formulate actions to prevent identified issues from arising.
3. Discover Threats:
o Uncover potential risks and threats to the project.
4. Find Opportunities:
o Identify opportunities that may positively impact the project.
Sample Cause-and-Effect Diagram (4M):
 Categories: Man, Machine, Materials, and Methods.
 Detailed causes under each category are visually identified.
Example: The 4M cause-and-effect diagram illustrates how risks in categories like Man,
Machine, Materials, and Methods can contribute to project problems.
Root Cause: SWOT Analysis:
 SWOT Analysis Framework:
o Strengths: Identify business strengths.
o Weaknesses: Assess business weaknesses.
o Opportunities: Explore future business opportunities.
o Threats: Analyze current competitor actions.
SWOT as a Risk Trigger:
 Positive Risks:
o Strengths and opportunities provide a foundation for positive risk events.
 Negative Risks:
o Weaknesses and threats reveal potential negative risk events.

Document Review and Analysis: Business Risk

Risk as a Business-Wide Challenge:
 Scope of Risk:
o Risk is not exclusive to projects; it is a pervasive challenge for the entire business.
o Sources of risk include the business itself, market dynamics, partnerships, vendor
relationships, and customer-related factors.
Project Risk as Microcosm of Business Risk:
  Interconnected Nature:
o Project risk is a microcosm of broader business risk.
o Risks affecting the business, such as closures or market changes, can directly
impact projects.
 Consideration of Business Decisions:
o The decisions made in the project selection process can significantly impact
project risk.
o Understanding business-wide risks is crucial as project risk is a subset of these
broader risks.
Document Review and Analysis: Review Project Selection:
 Derivation of Projects:
o Projects originate from identified needs or opportunities within the business.
 Project Selection Process:
o Projects undergo a selection process to align them with organizational strategic
objectives and assess financial viability (NPV).
 Key Questions for Project Managers:
o To ensure the right project selection, project managers must pose essential
questions:
1. Alignment with Strategic Plan: Is the potential project aligned with the
organization's overall strategic plan?
2. Existence of Need: Was there a genuine need for the project?
3. Financial Availability: Are funds available for the project?
4. Organizational Will: Is there a strong commitment to ensuring the project's
success?
 Risk Implications:
o Failure to consider these factors during project selection may lead to significant
risk issues.

Knowledge
Area Risk Conditions
Integration Inadequate planning; poor resource allocation; poor integration
management; lack of post-project review
Scope Poor definition of scope or work packages; incomplete definition of
quality requirements; inadequate scope control
Time Errors in estimating time or resource availability; poor allocation and
management of float; early release of competitive products
Cost Estimating errors; inadequate productivity, cost, change, or
contingency control; poor maintenance, security, purchasing, etc.
Quality Poor attitude toward quality; substandard
design/materials/workmanship; inadequate quality assurance
program
Resources Poor conflict management; poor project organization and definition of
responsibilities; absence of leadership
Communications Carelessness in planning or communicating; lack of consultation with
key stakeholders
Risk Ignoring risk; unclear assignment of risk; poor insurance
management
Procurement Unenforceable conditions or contract clauses; adversarial relations

Data Analysis: Review of Project Selection Methods

Logical Process for Project Selection:
 Importance of Logical Process:
o Project selection requires a systematic and logical approach.
o The selection methods employed should align with organizational goals and
strategies.
Key Project Selection Methods:
 Hierarchy of Decision Aids:
o Projects should be screened through a hierarchy of decision aids.
o Decision aids include:
 Checklists
 Scoring models
 Profile models
 Value contribution models
 Cash flow models (more stringent)
 Categorization and Prioritization:
o Projects need to be categorized and prioritized based on several criteria:
 Addressing a problem, opportunity, or directive
 Timeframe for completion (long-term vs. short-term)
 Alignment with organizational strategy and overall project priority
Checklist for Aligning Projects with Strategic Objectives:
 Strategic Alignment Checklist:
o The checklist helps align potential projects with strategic objectives.
o Criteria include:
 Addressing a problem, opportunity, or directive
 Project duration and urgency
 Fit within the organization's strategy and overall priority

Performance on Criteria
Potential
Criteria/Objectives High Medium Low
Project
X1 Fits in with original x
 strategy
Addresses an
x
opportunity
Long term benefits X
X2 Fits in with original
x
strategy
Addresses an
x
opportunity
Long term benefits x
X3 Fits in with original
x
strategy
Addressed an
x
opportunity
Fits in with original
x
strategy

Scoring Models for Project Selection: Key Steps

Creating a Successful Scoring Model:
1. Numerical Scale Selection:
o Identify a suitable numerical scale for categorizing high, medium, and low
positions based on the checklist criteria.
o Establish a clear and consistent scale for scoring.
2. Importance Weight Assignment:
o Assign an importance weight to each criterion or objective in the checklist.
o Weights reflect the relative significance of each criterion in the project selection
process.
3. Weighted Scoring Calculation:
o Multiply the importance weight assigned to each criterion by the corresponding
score achieved by the project on that criterion.
o This results in a weighted score for each criterion.
4. Summation of Weighted Scores:
o Sum up the weighted scores obtained for each criterion for a particular project.
o The total represents the project's overall score based on the established criteria.

Performance on Criteria Example

Step#1 – Choose Suitable Numerical Scale
3= High
2= Medium
1= Low

Step#2 – Highlight the importance of each criteria

3= High – will meet criteria
2= Medium – will partial meet criteria
1= Low – will not meet criteria

Potential
Criteria/Objectives High Medium Low
Project
X1 Fits in with original
x
strategy
Addresses an
x
opportunity
Long term benefits X
X2 Fits in with original
x
strategy
Addresses an
x
opportunity
Long term benefits x
X3 Fits in with original
x
strategy
Addressed an
x
opportunity
Fits in with original
x
strategy

Profile Model in Project Selection: Overview

Mapping Organizational Risk/Reward Profiles:
 Objective:
o Profile models map potential projects against organizational risk/reward profiles.
 Efficient Frontier:
o X1 represents low anticipated risk but below the minimum desired return.
o X6 indicates high return but with very high associated risk above the threshold.
o X2 to X5 form the efficient frontier with high return and anticipated risk within the
risk threshold.
 Efficient Frontier Characteristics:
o Projects within X2 to X5 strike a balance:
 High expected return.
 Anticipated risk within the acceptable threshold.
o Indicates projects that align with organizational risk tolerance and offer
satisfactory returns.
 Risk and Return Analysis:
o X1: Low risk but insufficient return.
o X6: High return but associated with a risk beyond the threshold.
 o X2 to X5: Optimal zone with balanced risk and return.
 Decision Criteria:
o Projects falling within the efficient frontier are generally preferred.
o Aligns with organizational risk appetite while maximizing expected returns.

Discounted Cash Flow Models: Overview

Project Profitability Analysis Using Discounted Cash Flow Models:
 Objective:
o Evaluate project profitability using stringent discounted cash flow models.
 Key Metrics:
1. Present Value (PV):
 PV represents the current value of future cash flows.
 Formula: PV=FV(1+r)nPV=(1+r)nFV
 FVFV: Future Value
 rr: Interest rate
 nn: Number of periods
2. Net Present Value (NPV):
 NPV calculates project profitability by subtracting initial investment from the
present value of discounted cash inflows.
 Formula: NPV=∑CFt(1+r)t−Initial Investment NPV=∑(1+r)tCFt−InitialInvestment
 CFtCFt: Cash flow at time tt
 rr: Discount rate
 tt: Time period
 Internal Rate of Return (IRR):
o IRR represents the discount rate at which NPV equals zero.
o It signifies the project's rate of return.
 o Decision Criterion: If IRR exceeds the cost of capital, the project is generally
accepted.
 Return on Investment (ROI):
o ROI assesses profitability by comparing gains to costs.
o Formula: ROI=NetProfitInvestmentCost×100ROI=InvestmentCostNetProfit×100
o Decision Criterion: Higher ROI is favorable.
Decision Criteria:
 Positive NPV indicates a potentially profitable project.
 IRR exceeding the cost of capital suggests a viable project.
 Higher ROI signifies better returns relative to investment.

NPV (Net Present Value) Decision Criteria:

 Objective:
o Evaluate project acceptance based on NPV.
  Decision Criteria:
o If NPV > $0:
 Decision: Accept the project.
 Implication: The project is expected to earn a return greater than the
company's cost of capital.
o If NPV = $0:
 Decision: Consider carefully.
 Implication: The project is expected to yield a return equal to the cost of
capital.
o If NPV < $0:
 Decision: Reject the project.
 Implication: The project is anticipated to result in a negative return.
Rationale:
 NPV reflects the net value of a project's cash flows, accounting for the time value of
money.
 A positive NPV indicates a project that is expected to generate returns exceeding the
cost of capital.
 A zero NPV suggests a project yielding returns equal to the cost of capital, requiring
careful consideration.
 A negative NPV signifies a project with anticipated returns falling short of the cost of
capital, leading to rejection.

Key Insight:
 NPV serves as a crucial metric for investment decisions, aligning project profitability with
organizational financial goals.
Decision-Making Guideline:
 Positive NPV: Favorable for project acceptance.
 Zero NPV: Requires careful evaluation.
 Negative NPV: Indicates project rejection.

Interpersonal and Team Skills Overview:

Conflict Management:
 Utilized to align stakeholders on project objectives, high-level requirements, and project
details.
 Resolves conflicts that may arise during the project, fostering consensus and
understanding.
Facilitation:
 Guides group events to successful decisions, solutions, or conclusions.
 Ensures effective participation, mutual understanding, and proper handling of resulting
actions and agreements.
Meeting Management:
 Involves preparing agendas, inviting key stakeholder representatives, and managing
follow-up minutes and actions.
 Ensures organized and productive project meetings.

Prompt List: Risk Categories

Overview: A prompt list is a categorized list of potential risks used to identify individual risk
events and assess overall project risk.
Risk Categories:
1. Technical, Quality, or Performance Risks:
o Risks related to reliance on unproven technology or unrealistic performance goals.
2. Project Management Risks:
o Risks associated with poor allocation of time and resources, as well as inadequate
quality management.
3. Organizational Risks:
o Risks stemming from inconsistent cost, time, and scope objectives within the
organization.
4. External, Unpredictable Risks:
o Risks arising from external factors like shifting legal or regulatory environments,
natural hazards, and unforeseen events.
5. External, Predictable Risks:
o Risks related to market fluctuations, operational challenges, environmental
impacts, social impacts, currency changes, inflation, and taxation.
6. Internal, Non-Technical Risks:
o Risks associated with management problems, delays, cost issues, cash flow
problems, and loss of financing.
7. Legal Risks:
o Risks related to licenses, patent rights, contractual issues, outsider and insider
lawsuits, and legal complications.
Benefits:
 Systematic identification of risk categories.
 Facilitates in-depth examination of potential risks.
 Aids in creating a comprehensive risk profile for the project.

Prompt Lists Overview:

Prompt lists are categorized tools used to identify risks and assess various aspects of a project.
Three commonly used prompt lists are PESTEL, TECOP, and VUCA.

PESTEL Prompt List:

Components:
 Political: Risks associated with governmental influence, policies, and stability.
 Economic: Risks related to economic conditions, inflation, and financial stability.
  Social: Risks arising from societal factors, demographics, and cultural influences.
 Technological: Risks related to technology advancements and obsolescence.
 Environmental: Risks associated with ecological factors and sustainability.
 Legal: Risks related to laws, regulations, and legal frameworks.
Purpose:
 Comprehensive analysis of external factors influencing the project.

TECOP Prompt List:

Components:
 Technical: Risks associated with technology and engineering aspects.
 Economical: Risks related to project cost, budgeting, and financial aspects.
 Commercial: Risks related to market dynamics, competition, and sales.
 Organizational: Risks arising from internal organizational factors.
 Political: Risks associated with political influence and government policies.
Purpose:
 Focuses on diverse aspects, encompassing both internal and external factors.

VUCA Prompt List:

Components:
 Volatility: Risks associated with unexpected and sudden changes.
 Uncertainty: Risks arising from lack of predictability and knowledge gaps.
 Complexity: Risks related to intricate and multifaceted situations.
 Ambiguity: Risks arising from unclear and vague circumstances.
Purpose:
 Addresses the dynamic and unpredictable nature of the project environment.