What is "Project Risk"? Part 1
Risk Management is very popular these days!
The headlines have been filled with stories about high profile project failures. When the inevitable post mortem examinations are conducted, poor risk management is always at the heart of the problem.
That and the technical experts were routinely ignored….
But that is a topic for another time!
The reaction is always amazing! Suddenly there are Risk Management Boards, Chief Risk Officers, Enterprise Risk Assessments and Risk Based Decision documents!
But where is the risk management expertise? Is there a positive educational requirement for the Chief Risk Officer? Does the author of the Enterprise Risk Assessment actually know the difference between Qualitative and Quantitative risk assessment? Are the executive members of the Risk Boards knowledgeable in this area?
Or do we just assume that a smart person will figure it out?
So what is risk? The standard definition is “a situation involving or being exposed to danger, harm or loss” (thanks Bing!).
And Project Risk is an even more specialized discipline! The Project Manager spends a lot of time planning every aspect of the project so that they can predict exactly how much will be delivered, when and at what cost. Risk to the project manager is variance – both good and bad. The experienced Project Manager views risk not just as a negative, but is always on the lookout for opportunities which may cause the project to perform better than expected!
Is this surprising? Do many of you spend time in your organizations Risk Management processes discussing exploitable opportunities? Have you ever?
Before we can begin discussing types of risk assessment strategies, types of risk, risk analysis and risk response strategies, we need to discuss why there needs to be a framework at all.
The Project Manager is the process expert, not an expert in the technical aspects of the project itself. The PM determines how the experts will conduct the analysis I mentioned above, however they won’t be doing the analysis themselves.
And that creates a problem.
When I teach Project Management classes, I play a game with the students – I tell them I have 10 lottery tickets, and there is a guaranteed payout of $10,000. I then ask how many will buy a ticket for $1, and gradually increase it until everyone drops out (usually around $1000). I point out that the odds of winning are exactly the same at each price point, but people drop out at different purchase prices. Why? It is because everyone has different view of risk and reward!
That different view of risk and reward is called “utility theory”.
And it is a real problem for the PM. The PM needs the experts to assess risk based on the needs of the project, not on the risk tolerance of the subject matter experts!
That is why the processes for Risk Management should be determined at the beginning of the project, and the Project Manager should ensure they are adhered to through the lifecycle of the project!
Next – Risk assessment.