Project Management

PMBOK® Guide for the Trenches, Part 4: Risk

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Categories: Risk Management


If PMI ever invites me to rewrite the risk section of A Guide to the Project Management Body of Knowledge (PMBOK® Guide) I think there are two things I would change.
 
The first deals with the inclusion of "upside risk," or opportunity, as part and parcel of risk management. I don't think it belongs. As my exhibit A, I cite the Oxford English Dictionary definition of risk: 1 a situation involving exposure to danger. 2 the possibility that something unpleasant will happen. 3 a person or thing causing a risk or regarded in relation to risk: a fire risk.

As author Mark Twain said, "Beware the man who would win an argument at the expense of language." Beyond the semantics, though, let's consider the three most prevalent ways of analyzing risk and see if they apply in managing a proposal backlog (a listing of an organization's outstanding and upcoming job bids -- or opportunities).

The simplest (and crudest) risk analysis technique is classification, in which you basically go through your work breakdown structure at whatever level and assign high-, medium- and low-risk classifications to the tasks. Associate each classification with a percent, e.g. high may mean 50 percent, medium 25 percent and low 5 percent.

Multiply the percentages by the original budget/time estimate, and you've done a risk analysis (of sorts). Try this with the proposal backlog, and you'll inevitably look astonishingly inept.
Then there's decision tree analysis. For each activity, assign alternative endings, with their impacts and odds of occurrence. Unfortunately for "opportunity" management, the only two possible outcomes of a submitted proposal are that you either win the work or you don't. Data on the gray middle is pretty useless when there's no gray middle.

Finally, Monte Carlo analysis is essentially a decision tree on steroids, with lots of statistical chicanery thrown in.

My second objection has to do with the use of risk management after the cost and schedule baselines have been set. I agree that prior to the finalization of the baselines, risk analysis is crucial to identifying and quantifying cost and schedule contingency amounts. The risk analysis can lead to informed decisions on how much and what type of insurance to buy, and what sort of alternative plans should be in place if a contingency event occurs.

But once the baselines are final, persisting in risk management strikes me as institutional worrying expressed in mind-numbing statistical jargon. To what end? Unless the response to a contingency event (in-scope, uncosted) was to significantly change from how the project team would have reacted normally, what difference does it make if it was anticipated?

I'm looking forward to the responses to this, and not necessarily from just the risk management aficionados.

Update: Risk management experts and enthusiasts are encouraged to join PMI's new Project Risk Management Community of Practice

Posted by Michael Hatfield on: April 20, 2010 03:15 PM | Permalink

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