In this instalment of Ask the Experts I talk to Mike Clayton, author of Risk Happens!
Mike, what sort of budget-related risks might projects face?
“Cost over-runs” will be one of the first risks identified as soon as a project team starts brainstorming risks. Of course, it is not a risk at all, it is and outcome. Your question is critical – and to frame it in a more helpful way, “what are the uncertainties that can affect the financial outcome of a project?”
Of course, the answer will be highly situational and depend on the nature and detail of your project, but here are a few of my favourites:
- Poor specification, coupled with inadequate change control processes
- Superficial or inaccurate briefing of contractors or sub-contractors – often compounded by weak management processes
- Inadequate attention to planning leading to unreasonable budgetary expectations – often influenced by unhelpful political pressures to “keep the budget down”
- Unrealistic allowance for pilots, prototypes and testing, leading to failures and delays that should have been budgeted for
- Overly aggressive negotiation by buyers and senor users leading to squeezed budgets and over commitments from the project team
You will notice that none of these look anything like the force majeure items of natural disaster, industrial action or catastrophic failures. All of my favourites make the list because they are entirely predictable and can be readily accommodated by a realistic approach to risk from Day Zero.
OK, that’s sensible. How can we better identify risk then, so that project managers don’t just stick with the force majeure items on their risk logs?
There are lots of great techniques for identifying risks and it seems a shame to me how few are deployed on the vast majority of projects. We all know that brainstorming is a good – but not great – technique, yet it is still everyone’s favourite, in my experience.
But, as you are asking about financial risks in particular, I want to advocate for a very powerful, yet easy to deploy, approach. Easy to deploy, that is, if you are planning your project well in the first place. Any substantial project must have a robust plan and at the heart of your planning process is a work breakdown structure (WBS). And it is only one more step to create a cost breakdown structure (CBS) that builds your project budget up, step by step from the components of your work packages.
This works whether you are based in the US, where WBS tends to be built from a product based analysis or in the UK, where we would call that a product breakdown structure and build our WBS from a task orientation.
Now simply review every item of cost on your CBS critically and ask:
- What assumptions have we made?
- What uncertainties remain?
- What could go wrong?
Do you think Earned Value Analysis is a big help to project managers looking to manage financial risks on their projects?
I look on Earned Value Analysis as the gold standard of the intersection between project delivery management and project financial management. It won’t so much reduce your financial risk as give you a powerful tool to spot trends that will allow the wary PM to act early to address time and schedule over-runs. Early action is at the heart of maintaining control and good information is essential for triggering the analysis that informed action needs.
Where the overhead of implementing EVA is merited and the project team is fully trained, EVA is a tool for financial risk management throughout the delivery stages of your project.
The delivery stage is a critical time, and that’s the point that conflicts arise between risk and return, when things are changing and stakeholders are keen to see progress. How can project managers handle that conflict?
Firstly, by not thinking of it as a conflict! There is a rational judgement about a trade-off to be made, which must be informed by sound estimating based on the best available data and robust methods. That judgement must weigh risk and return and will often be a debate to be had within organisations.
Your role as a project manager is to:
- Gather the evidence and data
- Ensure the analysis is robust
- Place the analysis in an objective form before the right decision makers
- Ensure that the decision makers fully understand the analysis
- Facilitate a careful discussion
- Document the final decision
The “conflict” is a matter for good project governance.
It sounds as if project managers need to spend more time thinking about project risk, to head off some of these problems and be better prepared to make these judgements.
Yes. I think it interesting that the PMI’s Pulse of the Profession report for 2012 states that “change management and project risk management will become even more important core competencies” in 2012. That can only be a good thing. Whilst they remain the domains of Special Interest Groups within PMI and APM, too many project managers will see them as at best a specialist component to be delegated to a colleague and forgotten or, at worst, as an optional extra to project management. I would like to see more projects and programmes putting risk management front and centre of the processes, routines and behaviours.