The Importance of Improving Risk Management in Your Projects

If you have been reading the Post-Gazette (http://projectgazette.com) for any length of time, you have begun to realize that projects are not doing well nor have they been over the past two decades according to both Forrester Research and the Standish Group surveys and reports. The continuation of current practices by the self-proclaimed project management standards bodies specifically in the risk management area has not been particularly helpful given their repeating of risk processes and techniques that have not produced the valuable information towards the reduction of uncertainty that a mature project risk management program should provide.

The current project risk management environment is decades old compared to the risk management environment of the financial, insurance, and construction industries. The project risk management environment has remained literally unchanged for now 3 editions of the renowned Project Management Institute’s Project Management Body of Knowledge Guide (PMBOK® Guide) which was just released in its 5th Edition with project risk management almost word-for-word of its two previous editions.

Basing project risk management on an outdated and ineffective two dimensional (2D) model where a summary value is arrived at by the product of two subjectively assigned integers from 1 to 5 to both a risk parameter of severity (intensity of the risk impact to the project) and its likelihood (assessment of the chance the risk will occur). This unit-less value is now the proxy for the risk potential’s evaluation of damage to the project. As such, this level of simplistic measuring of risk would be laughed out of the conference rooms if it were presented in our financial, insurance, or construction industries. Why does the project management discipline continue such limited and ineffectual treatment of a significant pillar that project risk management should be? Sad, so-sad.

While not a complete solution to this mistreatment of project risk, an intermediate step to improve your project risk management today, not tomorrow, or next week, but something that you can begin using right now without the time wasting need to discuss, analyze, or research, is an small but powerful upgrade to this 2D model. I am referring to the use of a risk equivalent value (REV) where the severity value of the current bodies of knowledge is replaced with a currency-denominated cost of the risk potential’s impact – not a unit-less value of 1 to 5. Likewise, the outdated likelihood value is replaced with a true probability weighted value of 0.0 to 1.0 that estimates the risk potential’s chance of becoming a reality based on past history, input from your subject matter experts (SME), or industry provided experiences. The REV is now a currency-denominated probability-weighted equivalent value that can be compared to other risk potentials not only within your project but across programs and even portfolios.

Using the information that has been provided in previous PPG issues such as the use of three-point estimations (not totally a sound practice, but, hey, baby steps, baby steps), de-biasing of SME estimations, historical actuals (based on lessons learned values that you religiously archive, right?), and in this issue’s discussion of the utilization of linear regression analysis (LRA), you have all the tools to significantly improve your risk management activities. Why wait to take this step? Start putting some of these techniques to work today in place of those that have shown that they do not “make the grade.” Remember, the purpose of a mature and well-heeled project risk management program is NOT about seeing how many risks you can put into your risk register, but with the providing of valuable information that can help your project decision makers make better decisions through the reduction of uncertainty surrounding possible future outcomes. Continuing to operate project risk management as it is being touted in the current bodies of knowledge is to truly instantiate the concept of continued ineffective practices while expecting different results. If something does not work, try something else – anything else!

Finally, the real solution to the project risk management problem is the complete scrapping of the current accepted 2D model for a more realistic and powerful model based on the true aspects of risk management where the three vectors of a risk potential’s character are uncovered and managed. These three vectors are:

  • the risk cost of impact (RCI),
  • the risk probability of occurrence (RPO), and
  • the trigger probability of existence (TPE)

these three vectors result in a current-denominated, doubly weighted probability value that covers all the aspects of a project’s true risk potential, not just part of them. The complete coverage of these concepts is beyond this article’s focus, but if you cannot wait for next month’s PPG issue, you may download the white paper that details this innovative and powerful project risk management model from the MCLMG Research & Publishing web site. We will be covering the details to this new more intuitive and conceptually more accurate risk model in the next three issues of the PPG. Stay tuned.

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