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BUSM1276 Evaluating and
Managing Project Risk
SESSION 1: Introduction,
definitions, etc.
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Course Aims and Objectives:
To understand the concepts of risk in a projectcontext.To explore the principles and processes ofsystematic project risk management.To apply these principles and processes in asimulated project environment (RMSAssignment).
To develop a Risk Oriented Thinking
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Course topics:
Risk.Threat & Opportunity.Risk and quality.Risk and uncertainty.Risk contexts:
Project and project stakeholder organisational structures.Project decision-making.
Systematic risk management.Risk identification.Risk analysis.Risk response.Risk monitoring and control.
Recording and evaluating risk outcomes.Building a risk management systemDisaster Recovery and Emergency ManagementQuantitative Risk Management.
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Suggested reading...
HB 436: 2004. Risk Management Guidelines Companion to AS/NZS 4360. Standards
Australia. NSW.AS/NZS 4360 (2004) Risk management. Standards Australia. NSW. ISBN 0-7337-0147-7.
AS/NZS 3931 (1998) Risk analysis of technological systems-application guide. StandardsAustralia. NSW. ISBN 0-7337-1711-X.
Raftery, J. (1994) Risk analysis in project management. E & F N Spon Ltd. (an imprint ofChapman-Hall). London. ISBN 0-419-18420-1.
Flanagan, R & Norman, G. (1993) Risk management and construction. Blackwell Science
Publications. London. ISBN 0-632-02816-5.Chicken, J. (1994) Managing risks and decisions in major projects. Chapman and Hall, UK.
Chapman, C.B. and Ward, S.C. (1997) Project risk management: processes, techniques andinsights. John Wiley and Sons. UK.
Parkin, J. (1996) Management decisions for engineers. Thomas Telford. London.
Smith, N.J. (1999) Managing risk in construction projects. Blackwell Science Ltd. Oxford.
Edwards, P.J. & Bowen, P.A. (2005) Risk Management in Project Organisations. UNSWPress/Elsevier Science International.
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Why has Risk Management Become So
Important?Always importantPost September 11Crisis in world insurance marketsCorporate Collapses
EnronWorldcomHIHOnetel
Old Insurance model may no longer be validEmergence of Corporate Governancehttp://en.wikipedia.org/wiki/Corporate_governance
Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way acorporation is directed, administered or controlled. Key elements of good corporate governance principles
include honesty, trust and integrity, openness, performance orientation, responsibility and accountability,mutual respect, and commitment to the organization
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When it goes wrongEsso/Longford
2 dead, class-action, criminal prosecution
http://en.wikipedia.org/wiki/1998_Esso_Longford_gas_explosion
Collins Class Submarines
2.5 years behind schedule, budget blow-out, specifications not methttp://en.wikipedia.org/wiki/Collins_class_submarine
HIH
http://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htm
Southern Cross Station Redevelopment
Claim for losses on project - contractor unable to meet deadlines in contract due to conflict with rail operator. VicGov forced to pay $32.25m for contract variations.
Pan Pharmaceutical
http://www.tga.gov.au/recalls/pan.htm
Dell Laptop batteries Recall https://www.dellbatteryprogram.com/
New Holden Commodore safety buckle Recall http://carsguide.news.com.au/story/0,20384,20734114-21822,00.html
Myki $500million project already ?? months latehttp://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2
Connext new trains braking system problem
Poor risk management 'costing billions
http://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-risk
New Terminal At Heathrow, Credit Crunch, Bail out Packages, Where the hell are you (Campaign), iphone roll out in Oz,
http://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-riskhttp://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-riskhttp://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2https://www.dellbatteryprogram.com/http://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htmhttp://www.vnunet.com/vnunet/news/2159588/firms-waste-billions-poor-riskhttp://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2http://www.theage.com.au/news/national/citys-500m-ticket-chaos/2008/03/01/1204227055164.html?page=2http://carsguide.news.com.au/story/0,20384,20734114-21822,00.htmlhttp://carsguide.news.com.au/story/0,20384,20734114-21822,00.htmlhttps://www.dellbatteryprogram.com/https://www.dellbatteryprogram.com/http://www.tga.gov.au/recalls/pan.htmhttp://www.tga.gov.au/recalls/pan.htmhttp://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htmhttp://www.aph.gov.au/Library/pubs/RN/2002-03/03rn32.htmhttp://en.wikipedia.org/wiki/Collins_class_submarinehttp://en.wikipedia.org/wiki/1998_Esso_Longford_gas_explosion7/27/2019 BUSM1276 Lecture 1.Ppt
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Approximately 20% of risk is insurable. The
remaining 80% must be managed effectively.
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UNIVERSALITY OF RISK
We are all exposed to risk during our lives.We all have to deal with risk.For good risk management, the differences
arise in how we perceive those risks, andhow we respond to them.
We cannot avoid risk completely. Retreat from the world does not work! A recluse living
in a cave still faces risks every day
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RISK
There is a 60% chance of rain showers
occurring over the area during the next
24 hours.The flight might be delayed.
Which of these is a risk?
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DEFINITION OF RISK
Risk is:
The chance that an adverse event willoccur during a stated period of time.
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DEFINITION OF RISK
This definition implies:
That probability (chance) is associated withthe of occurrence of an event.That the event has a measurable adverse(unfavourable) outcome (impact,consequence).That the risk event and its consequences are
each constrained to a period of time.
Weather forecast example: There is a 75% chance of heavy showers occurring over the next
5 days. (RM: beware putting washing out to dry; take an umbrella to work; and cancel
Wednesdays golf date.)
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ELEMENTS OF RISK
EVENT
Consequence / Impact
Consequence / Impact
Consequence / Impact
ProbabilityOf Occurrence
Duration of exposure to event (Time)Duration of exposure to consequences (Time)
latent defect phenomenon in most construction projects; or the medical negligence
issue
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DEFINITION OF RISK(AS/NZS 4360: 2004)
Risk is:
The chance of something happening thatwill have an impact on objectives.
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RE-DEFINITION OF RISK
Risk is:
The chance of something happening during a
stated period of time that will have an impact on
objectives.
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Threat:There is a chance P that event E will occur during theT period, leading to X adverse consequences.
Opportunity:There is a chance P that, if opportunity C is exploitedduring the T period, benefit B be will be obtained
THREAT & OPPORTUNITY RISK STATEMENTS
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RISK AS A SOCIAL CONSTRUCT
Risk is a social construct:
It arises out of (human) societys world views and
perceptions of events and their impacts.
Different people will have different views aboutwhat constitutes risk; the source of risk events;
and their treatment.
A persons attitude towards risk is not necessarily
consistent over all risks, nor even for specific risksover time.
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EXAM
PLES
A society which knows nothing about surgery or disease
may have no concept of health risks.
Some insurance companies have removed the term acts
of God from their policy contracts, as this has no meaningfor some people.
A heart surgeon might be: highly risk averse at the operating table;
off-hand about putting a plaster on the cut she got from a thorn on
a rose bush in the garden;and very anxious to place a $10,000 bet on a particular horse in a
well-known race!
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RISK CONTEXTS
One persons (organisations) risk threat may
be anothers risk opportunity.
Example:The takeover company from the earlier example is presented with anew investment opportunity.
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RISK CONTEXTS
The context is the key to
identifying risks.
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RISK CHARACTERISTIC
Risk is usually dynamic:
For a risk event, the probability andimpact elements of risk may changeover the time element.
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EXAMP
LES
The technical risk of accident caused by falling from height may be
constant (in terms of probability and impact) for the full period of a
pipeline project.
The probability of the same risk might start as low, then increase
sharply, and finally decline again as a multi-storey building project
emerges from the ground, structural floors are added, and the external
scaffold is eventually removed from the completed faade. The impact
is likely to remain the same throughout the period.
For a software development project, the probability of the risk of
losing key data occurring may be constant throughout, but the impact is
likely to increase over time.For an open-air entertainment event, the probability of weather risk
will change over time (seasons), as also will the type of impact (winter
storms and summer heat).
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RISK AND QUALITY
On the other hand, achieving high quality outcomes
may involve taking more risks.
The difference between risk and quality
management lies in their overall objectives.Quality management is more about aiming to get
things right.
Risk management is concerned with dealing with
the possibility that something will go wrong.These could be seen as points on the same
continuum...
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Gettingthings right
Avoidingthings going
wrong
RISKMANAGEMENT
QUALITYMANAGEMENT
Value?
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RISK AND UNCERTAINTY
Uncertainty is associated with risk because of
the inherent variability of one or more of the
three risk elements (probability, impact and
time).
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EXAMPLEO
FUNCERTA
INTY
Assume that the financial performance of three alternativeprojects (A, B, C) has been modelled financially, using MonteCarlo simulation, each with 360 iterations. The IRR outcomesfor each project are tabled below:
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EXAMPLEO
FUNCERTA
INTY
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EXAMPL
EOFUNC
ERTAINTY
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EXAMPLEO
FUNCE
RTAINT
Y
Project B has the greatest range of IRR values encountered(6.0% to 8.5%) and is therefore associated with the greatestIRR uncertainty.Project A has the smallest range of IRR values encountered(6.5% to 8.0%) and is therefore associated with the least
IRR uncertainty.Project C is less risky than B, but more risky than A, interms of IRR outcome.
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RISK AND UNCERTAINTY
Uncertainty is the lack of completeinformation about any or all of the
characteristics of a potential risk event:the probability of occurrence,the magnitude of impact,the period of exposure.
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RISK AND UNCERTAINTY
Treating uncertainty may be a matter of settingboundaries on the range of values the risk analyst(decision-maker) is prepared to consider in terms
of the magnitude of impact, or the period ofexposure associated with a particular risk; or ofassigning a particular distribution to theprobability of occurrence.
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EXAM
PLE
A property consultant may consider that a rental value of
below $200, or above $275, per m2 p.a. for a particular
building would be highly unlikely to occur.
This sets the acceptable bounds of rental rate uncertainty(for that consultant assessing that property) as $200 -$275,
and the consultant would proceed to model the financial
risk of the property investment on this basis.
Theoretically, however, an actual rental value might be
found below or above the given range.
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RISK AND UNCERTAINTY
Some economists see setting the bounds of
uncertainty in terms of the analysts capacity to
be surprisedby the outcome (Gallie, 1957).
Human judgement is therefore brought into
play, and with it the potential for human error.
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RISK AND UNCERTAINTY
Uncertainty may also be dealt withlinguistically.
Different verbal descriptors may beassigned to the elements ofprobability, impact and time.
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Risk Likelihood Descriptors
RISK CONSEQUENCE DESCRIPTOR
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RISK CONSEQUENCE DESCRIPTOR
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RISK ASSESSMENT MATRIX
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IMPACT
DURATION
PROBABILITY OF OCCURRENCE
Rare
Unlikely
Moderate
Likely
Almost
Certain
Catastrophic
Moderate
Insignificant
3. Medium
5. Long
1. Short
Major
Minor
A three-dimensional matrixfor a linguistic concept ofrisk.
(P x I x D)
AS4360AS3931
(5 x 5 x 5)
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COMPLEXITY OF RISK
Risk is a complex concept because:
The characteristics of risk are dynamic.
The characteristics of risk decision-makers are
inconsistent.Uncertainty is often associated with one or more
of the risk elements.
HENCE THE NEED FOR GOOD RISK MANAGEMENT!
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RISK MANAGEMENT: DEFINITION
Risk management is:
A systematic approach to dealing
with risk(Edwards, 2001)
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WHY USE RISK MANAGEMENT?
Using a systematic approach to risk management encourages:
More effective decisions.Effective delivery of products and services.
Effective allocation and use of resources.
High standards of customer service.
High standards of accountability.
Creativity and innovation in management practice.Improved capacity to manage in the face of competing obligations.
Improved organisational morale.
Flexibility in meeting objectives.
Transparent decision-making.
(Knight, 1999)Are all these claims valid?
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RISK MANAGEMENT: PROCESS
Systematic risk management comprises:
Establishing the risk context.
Identifying risks.Analysing risks.
Responding to risks.
Monitoring and controlling risk decisions.
Recording and evaluating outcomes.
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Summing it up
Risk is dynamicRisk is contextualUncertainty brings the riskRisk for one may be an opportunity for the otherJust insuring against the risk is not practicing RiskManagementRisk Management is a systematic approach to identifying &managing risks
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Next session:
Contexts for project risk.Objectives.Organisational structures.Decision making