3 Levels of Risk Management
At the PMI Hungary Chapter international Art of Projects conference in Budapest this month, Rick Graham spoke about risk management in the globalised world. He talked about how Monte Carlo analysis is used to establish risk and how companies gather sophisticated data to make good decisions about the actions they need to take as a result of identifying risk.
Rick said that there are three levels of risk management that apply to projects.
1. Project risk
This is perhaps the most obvious. These risks do not recognise interdependencies and risks outside the scope of the project. Rick recommended doing Monte Carlo analysis at this level to identify project risk. He also talked about scenario building as a good tool for project risk identification and management, giving the example of Shell.
Shell was the only company which modelled the risk of the OPEC countries putting up the price of oil. Because of their analysis they were able to adapt their plants to deal with less refined oil and gained a two-year head start on the competition when the prices did go up.
Rick recommended “building limited models around sensitive areas”: in other words, not spending time on modelling when the risk is low or when it isn’t worth doing. Models and analysis help explain the risk you are taking at the project level in comparative terms, which helps set them in context for team members and stakeholders.
2. Project selection risk
At this level the question relates to how risk plays a part in making decisions about which projects should be started. The challenge here is whether the business just says yes or no to a project without looking at the overall position and the wider business requirements.
For example, a risky project may not be inherently bad for the business. If you always say no to risky projects you end up with a portfolio full of low risk but also probably low benefit projects that present reduced opportunities for the company.
This level links to the strategic objectives and how the deliverables will be achieved in the organisational context.
It should also include the risk of not doing or deferring the project, as that decision presents a different path forward for the business with its own challenges.
3. Project portfolio risk
This is where you start to look outside the projects as individual initiatives and start to gather rich data about the organisation’s approach to risk management as a whole.
Rick recommended doing Monte Carlo analysis at programme level to identify risks across dependent streams of work. He then talked about using this output to identify the right combination of projects to work on at portfolio level.
The problem I found with this model is that there isn’t any level that I can see where risks fit that fall outside the project but that are managed in some shape or form by the project manager. For example, dependencies on other projects – the risk that the other project may not deliver on time. Or the risk that the company might go bust – this is out of scope of the project but something like this could feasibly be on your risk register.
This model also assumes that you have a process to apply risk management to.
Rick said that you can only do portfolio level risk management if there is one single repository of project data. This isn’t the case in many businesses where project managers are based in functional silos and even if there is a PMO it serves one business unit and not the enterprise as a whole.
A spreadsheet is good enough for this: no need to invest in anything more complicated, he said. You can start to put some science behind your spreadsheet once you have everything documented in one place.
Do you measure and manage risk at these three levels? Let us know how it works for you in the comments.
Project Cost Management: Planning
Categories: cost management
Project cost management is the process that forces you to think about the procedures, policies and documents you need to manage your project finances. Many of these will already be in place but you’ll use the process to work out how you will apply them in your project and to make sure that you’ve got everything you need to be able to adequately manage, spend and control your budget.
As with all PMBOK® processes, there are inputs, outputs and the tools and techniques you need to get the job done.
Your project management plan
Your project management plan is critical for a lot of the processes, so it’s definitely something that you’ll be looking at here. In fact, your cost management plan is one of the sub-plans, so you should pull out your overall plan and start to think about how managing costs fits in with the rest of your project processes.
Your project charter
Your overall summary budget comes from the charter. You’ll use this figure, and any other bits of information from the charter, to develop a detailed project budget. Ideally your charter will give you lots of leeway each way because you can guarantee that the person who came up with the summary budget figure didn’t have as much information about how much the project will cost as you will in a few weeks.
Enterprise environmental factors and organisational process assets
These crop up all over the PMBOK. They really relate to how your company does business so they include things like:
The market conditions in your region and industry that may affect how you work
Tools and techniques
You’ve got to love your subject matter experts. When you need to put together your cost plan, experts are essential. They’ll be able to give you a view of what’s realistic, based on their prior experience, previous projects and their background.
You might have several different ways that the project could be funded and analysis will help you determine which is the best approach for this project. That’s not as complicated as it sounds – you’ve probably made ‘make or buy’ decisions before without realising that they formed part of this section of the process.
Who doesn’t like a good meeting? I’m surprised meetings don’t appear more often in the PMBOK. Putting together the cost management plan isn’t something that the project manager can do alone, so throw a meeting and invite some buddies along to thrash out how you are going to manage the cash.
The cost management plan
The output of all of these meetings, expert discussions is the cost management plan. The document sets out how you will apply the processes and principles necessary for managing the budget, any assumptions you’ve made and key decisions such as funding and timescales.
Check out these 7 things for your project’s cost management plan to check that you’re progressing along the right lines.
Next time in this series I’ll look at estimating project costs. In the meantime, what questions do you have about cost management? Let me know in the comments and I’ll answer them in a future article.
Project Budgeting in 60 seconds
How to demo your project deliverables
Demos and prototypes save your project time and money because you can get early feedback. I’ve talked about that before (in this video) but a couple of people have asked me for some more tips around setting up demos. And I’m very happy to oblige.
Let’s get on with it then, shall we?
The demo environment
Pick a nice room. By that I mean one that is large enough to fit everyone in comfortably and that’s got enough power sockets. Everyone brings a device along these days and they all need plugging in.
Understand the room’s heating and lighting controls. You don’t want people getting fidgety because they forgot their jacket – you want them concentrating on your amazing project deliverable.
If you are doing your demo via a web conference, get the software set up well before you expect everyone else to join the call. Test your microphone and headset and make sure you can share control of the screen with your co-presenters, if you have any.
Manage the expectations of the people in the room. Are you showing them a very rough outline of a product, a prototype that doesn’t quite work properly yet, a feature-rich almost-finished product, or the final thing? Set their expectations around what they are going to see so they aren’t disappointed when features don’t work or when you tell them it’s too late to change the colour because you’ve already ordered 30,000 in blue.
Review your objectives
What is it that you want people to get out of this demo? You can organise a demo or show people a prototype for a number of reasons such as:
Think carefully about why you want to do this demo and what outputs you are expecting. Do your demo attendees have the same understanding as you? It’s worth running through the objectives at the start of the meeting, just in case they don’t.
Practice, practice, practice. A complete dry run is a good idea. You want your audience to notice what you are saying, not get cut off halfway through your web conference because you don’t know how to use the meeting controls.
Walk through the demo in preparation, whether you are doing it in front of a ‘live’ audience or via a computer screen.
Prepare for questions
Be ready to answer questions. You are showing them your project deliverable in anticipation of some kind of feedback so expect them to have questions about what it does, how it does that and what else it could do. Be prepared to manage the ‘wouldn’t it be great if…’ type questions if you aren’t able to consider any modifications at this point.
Provide back up materials
Your demo attendees will hopefully be so excited about what you have built that they will want to share it with their teams. Have some materials ready so that they can do that: screenshots or handouts are great, but a test login (if software) or samples (if something else) and details of how to use it are better.
This gives them the chance to play with what you have created and if you want further feedback, let them know that you are open to their ideas and provide details of how to get them to you – direct contact, via an online request form or so on.
Demos and prototypes are a really powerful tool, especially if you are delivering a software product or a tangible item. End users particularly find this sort of workshop or meeting a very valuable session as they can see what they are getting. In my experience, showing someone a demo of your product helps build engagement too, as they start to get excited and they can see the idea become real.
However, make sure that if you are doing a demo that you are in a position to comment about when they are likely to get to access the final deliverable. There’s nothing worse than seeing a demo and getting excited about the project only to be told, or you can’t have it for 18 months. Set expectations carefully!
How have you used prototypes and demos? Let us know in the comments.
Elizabeth Harrin also blogs at A Girl’s Guide to Project Management.
Project Cost Management: An Overview
Categories: cost management
Project cost management is an important part of managing a project: A Guide to the Project Management Body of Knowledge – Fifth Edition (PMBOK Guide®) devotes over 30 pages to it. But where do you start? It’s a daunting subject because somehow managing money seems much more difficult than managing people or organising tasks, don’t you think? It doesn’t have to be that way and the PMBOK Guide actually gives you some straightforward approaches to making it easier.
For a start, project cost management the whole purpose of it – the reason why we bother with cost management at all – isn’t rocket science. It’s so that the project can be completed within the approved budget.
It is, however, wider than just budgeting. Cost management involves planning how you’ll spend the money, estimating, getting the financing, finding funding, managing and controlling the costs and of course budgeting too.
Let’s take a look.
Project Cost Management Processes
There are four processes covering cost management in the PMBOK Guide. They are:
1. Plan Cost Management
This is the process of working out how you are going to do your financial management. In this process you’ll establish what policies you should adhere to, what company procedures are relevant and set up the documentation for planning, managing, spending and controlling money as it flows in and out of your project (mainly in at the start as you get authority to spend your budget and then pretty much exclusively out – projects are expensive things and don’t normally generate an income of their own during execution).
At the end of this process you’ll have a cost management plan that tells you everything you need to know about managing your project finances. If nothing else, this should give you the confidence that you’re doing the right thing!
2. Estimate Costs
This process involves coming up with the total figure that your project is going to spend. It’s a part of your overall resource estimating – cash, after all, is a resource on your project. People costs might fall into here but people may be considered a different type of ‘cost’ and you may not need to account for them at all. You’ll also get quotes from suppliers and other third parties in this process for anything that your company can’t do itself.
During this process you’ll apply estimating techniques and build up a picture of the cost of individual activities. Weirdly, you don’t add them all together in this process. You have to wait for…
3. Determine Budget
You add up all your estimates here. This process collates all your estimated costs into a total for the whole project. This is also the process where you get authority to spend your money and that gives you an authorised cost baseline. At the end of this process you’ll also know the ‘profile’ for your spending or the run rate: how much money you need for your project at various points. This can be useful if you’re working on a multi-year project as your organisation can split the funding across several financial years and it isn’t tied up in project accounts when it could be put to better use elsewhere.
4. Control costs
Once the project is in full flight, you’ll be spending money and you’ll need some way to monitor and control what’s happening. This process takes the documentation you prepared earlier and puts it into practice. You’ll apply those policies and procedures (such as how you pay invoices) and record what is going on.
If you are doing Earned Value Analysis on your project, this is the step where that kicks in, as a monitoring and control tool.
Personally, I think Estimate Cost and Determine Budget run so closely together on many small projects that it’s hard to see where one ends and the other begins. As with many things in the PMBOK Guide, you’ll have to apply the processes pragmatically so that you don’t end up with too much bureaucracy but you do get adequate control. In fact, the PMBOK Guide does say that there is plenty of continuity between the cost management processes and the only reason they are split out into four separate processes is because they use different tools and techniques. Those tools and techniques might be different enough to make up a separate section in the book, but in reality you are likely to use them together in a budget workshop – so don’t be afraid to merge the different steps together to get the end result you want.
Over the coming weeks I’ll be looking at each of these processes in more detail, and talking more about the tools and techniques involved. In the meantime, leave your project budget process questions in the comments and I’ll make sure to answer them in a future article.
Elizabeth Harrin also blogs at A Girl's Guide To Project Management.