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Topic 8 Risk Management & Procurement Management

Topic 8 Risk Management & Procurement Management. Schwalbe: Chapters 11, 12. Learning Objectives. At the end of this topic, you should be able to: Define risk and the importance of good project risk management List the elements involved in risk management planning

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Topic 8 Risk Management & Procurement Management

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  1. Topic 8 Risk Management & Procurement Management Schwalbe: Chapters 11, 12 ICT 327 Management of IT Projects Semester 2, 2004

  2. Learning Objectives • At the end of this topic, you should be able to: • Define risk and the importance of good project risk management • List the elements involved in risk management planning • List common sources of risks on information technology projects • Describe the risk identification process and tools and techniques to help identify project risks • Discuss the qualitative risk analysis process and explain how to calculate risk factors, use probability/impact matrixes, the Top Ten Risk Item Tracking technique, and expert judgment to rank risks ICT 327 Management of IT Projects Semester 2, 2004

  3. Learning Objectives • At the end of this topic, you should be able to: • Explain the quantify risk analysis process and how to use decision trees and simulation to quantitative risks • Provide examples of using different risk response planning strategies such as risk avoidance, acceptance, transference, and mitigation • Discuss what is involved in risk monitoring and control • Describe how software can assist in project risk management • Explain the results of good project risk management ICT 327 Management of IT Projects Semester 2, 2004

  4. Why is Project Risk Management important? • It is the art and science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives • Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates • Risk management is often neglected, especially on IT projects (Ibbs and Kwak) • 55 percent of runaway projects did no risk management at all (KPMG) ICT 327 Management of IT Projects Semester 2, 2004

  5. Project Management Maturity by Industry Group and Knowledge Area ICT 327 Management of IT Projects Semester 2, 2004

  6. What is Risk? • A dictionary definition of risk is “the possibility of loss or injury” • Project risk involves understanding potential problems that might occur on the project and how they might impede project success • Risk management is like a form of insurance; it is an investment ICT 327 Management of IT Projects Semester 2, 2004

  7. Example risk: It might rain • How do you manage that risk? • Take a chance? • Take an umbrella? Jacket? Drive? • Does it matter if you get wet? If not, then do nothing. ICT 327 Management of IT Projects Semester 2, 2004

  8. Anatomy of a risk • Likelihood of it occurring • Impact if it does • e.g. something could be very likely, but low impact. ICT 327 Management of IT Projects Semester 2, 2004

  9. Risk of rain in Perth Project: Outdoor picnic Rating Likely? (probability) Impact Mitigation Jan Unlikely High M Backup location H High Don’t hold event or hold indoors Likely J July ICT 327 Management of IT Projects Semester 2, 2004

  10. Risk Utility • Risk utility or risk tolerance is the amount of satisfaction or pleasure received from a potential payoff • Utility rises at a decreasing rate for a person who is risk-averse • Those who are risk-seeking have a higher tolerance for risk and their satisfaction increases when more payoff is at stake • The risk-neutral approach achieves a balance between risk and payoff ICT 327 Management of IT Projects Semester 2, 2004

  11. Risk Processes • Risk Management Planning • Risk Identification • Qualitative Risk Analysis • Risk Response Planning • Risk monitoring and control ICT 327 Management of IT Projects Semester 2, 2004

  12. Question • Are you: • risk-averse (conservative) • risk-neutral, or • risk-seeking in relation to: • finances (investment) • food • recreation activities ICT 327 Management of IT Projects Semester 2, 2004

  13. Risk Utility Function and Risk Preference ICT 327 Management of IT Projects Semester 2, 2004

  14. What is Project Risk Management? • The goal of project risk management is to minimize potential risks while maximizing potential opportunities. • Example 1: an opportunity may exist to expand into another country, but the risk of failure is very high. How is this risk managed? • Example 2: Possible to deliver system both on web and hand-held. Hand-held is more difficult, is it worth the risk of failure? ICT 327 Management of IT Projects Semester 2, 2004

  15. Processes • Risk management planning: deciding how to approach and plan the risk management activities for the project • Risk identification: determining which risks are likely to affect a project and documenting their characteristics • Qualitative risk analysis: characterizing and analyzing risks and prioritizing their effects on project objectives • Quantitative risk analysis: measuring the probability and consequences of risks • Risk response planning: taking steps to enhance opportunities and reduce threats to meeting project objectives • Risk monitoring and control: monitoring known risks, identifying new risks, reducing risks, and evaluating the effectiveness of risk reduction ICT 327 Management of IT Projects Semester 2, 2004

  16. Risk Management Planning • The main output of risk management planning is a risk management plan • The project team should review project documents and understand the organization’s and the sponsor’s approach to risk • The level of detail will vary with the needs of the project ICT 327 Management of IT Projects Semester 2, 2004

  17. Questions Addressed in a Risk Management Plan ICT 327 Management of IT Projects Semester 2, 2004

  18. Contingency & Fallback Plans, Contingency Reserves • Contingency plans: predefined actions that the project team will take if an identified risk event occurs • Fallback plans: developed for risks that have a high impact on meeting project objectives • Contingency reserves or allowances: provisions held by the project sponsor that can be used to mitigate cost or schedule risk if changes in scope or quality occur ICT 327 Management of IT Projects Semester 2, 2004

  19. Common Sources of Risk on Information Technology Projects • Several studies show that IT projects share some common sources of risk • The Standish Group developed an IT success potential scoring sheet based on potential risks • McFarlan developed a risk questionnaire to help assess risk • Other broad categories of risk help identify potential risks ICT 327 Management of IT Projects Semester 2, 2004

  20. Information Technology Success Potential Scoring Sheet ICT 327 Management of IT Projects Semester 2, 2004

  21. McFarlan’s Risk Questionnaire Elapsed Time Effort in days # Business areas Extra hardware

  22. Other Categories of Risk • Market risk: Will the new product be useful to the organization or marketable to others? Will users accept and use the product or service? • Financial risk: Can the organization afford to undertake the project? Is this project the best way to use the company’s financial resources? • Technology risk: Is the project technically feasible? Could the technology be obsolete before a useful product can be produced? ICT 327 Management of IT Projects Semester 2, 2004

  23. What Went Wrong? Many information technology projects fail because of technology risk. One project manager learned an important lesson on a large IT project: focus on business needs first, not technology. David Anderson, a project manager for Kaman Sciences Corp., shared his experience from a project failure in an article for CIO Enterprise Magazine. After spending two years and several hundred thousand dollars on a project to provide new client/server-based financial and human resources information systems for their company, Anderson and his team finally admitted they had a failure on their hands. Anderson revealed that he had been too enamored of the use of cutting-edge technology and had taken a high-risk approach on the project. He "ramrodded through" what the project team was going to do and then admitted that he was wrong. The company finally decided to switch to a more stable technology to meet the business needs of the company. Hildebrand, Carol. “If At First You Don’t Succeed,” CIO Enterprise Magazine, April 15, 1998 ICT 327 Management of IT Projects Semester 2, 2004

  24. Risk Identification • Risk identification is the process of understanding what potential unsatisfactory outcomes are associated with a particular project • Several risk identification tools and techniques include • Brainstorming • The Delphi technique • Interviewing • SWOT analysis ICT 327 Management of IT Projects Semester 2, 2004

  25. Potential Risk Conditions Associated with Each Knowledge Area

  26. Quantitative Risk Analysis • Assess the likelihood and impact of identified risks to determine their magnitude and priority • Risk quantification tools and techniques include • Probability/Impact matrixes • The Top 10 Risk Item Tracking technique • Expert judgment ICT 327 Management of IT Projects Semester 2, 2004

  27. Sample Probability/Impact Matrix ICT 327 Management of IT Projects Semester 2, 2004

  28. Sample Probability/Impact Matrix for Qualitative Risk Assessment

  29. Chart Showing High-, Medium-, & Low-Risk Technologies ICT 327 Management of IT Projects Semester 2, 2004

  30. Top 10 Risk Item Tracking • Similar to the 10 ten songs for the week/month. • Top 10 Risk Item Tracking: is a tool for maintaining an awareness of risk throughout the life of a project • Steps: • Establish a periodic review of the top 10 project risk items • List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item ICT 327 Management of IT Projects Semester 2, 2004

  31. Example of Top 10 Risk Item Tracking ICT 327 Management of IT Projects Semester 2, 2004

  32. Expert Judgment • Many organizations rely on the intuitive feelings and past experience of experts to help identify potential project risks • Experts can categorize risks as high, medium, or low with or without more sophisticated techniques ICT 327 Management of IT Projects Semester 2, 2004

  33. Quantitative Risk Analysis • Often follows qualitative risk analysis, but both can be done together or separately • Large, complex projects involving leading edge technologies often require extensive quantitative risk analysis • Main techniques include • decision tree analysis • simulation ICT 327 Management of IT Projects Semester 2, 2004

  34. Decision Trees & Expected Monetary Value (EMV) • A decision tree is a diagramming method used to help you select the best course of action in situations in which future outcomes are uncertain • EMV is a type of decision tree where you calculate the expected monetary value of a decision based on its risk event probability and monetary value ICT 327 Management of IT Projects Semester 2, 2004

  35. Expected Monetary Value (EMV) Example ICT 327 Management of IT Projects Semester 2, 2004

  36. Simulation • Simulation uses a representation or model of a system to analyze the expected behavior or performance of the system • Monte Carlo analysis simulates a model’s outcome many times to provide a statistical distribution of the calculated results • To use a Monte Carlo simulation, you must have three estimates (most likely, pessimistic, and optimistic) plus an estimate of the likelihood of the estimate being between the optimistic and most likely values ICT 327 Management of IT Projects Semester 2, 2004

  37. What Went Right? A large aerospace company used Monte Carlo simulation to help quantify risks on several advanced-design engineering projects. The National Aerospace Plan (NASP) project involved many risks. The purpose of this multibillion-dollar project was to design and develop a vehicle that could fly into space using a single-stage-to-orbit approach. A single-stage-to-orbit approach meant the vehicle would have to achieve a speed of Mach 25 (25 times the speed of sound) without a rocket booster. A team of engineers and business professionals worked together in the mid-1980s to develop a software model for estimating the time and cost of developing the NASP. This model was then linked with Monte Carlo simulation software to determine the sources of cost and schedule risk for the project. The results of the simulation were then used to determine how the company would invest its internal research and development funds. Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft. ICT 327 Management of IT Projects Semester 2, 2004

  38. Risk Response Planning • After identifying and quantifying risks, you must decide how to respond to them • Four main strategies: • Risk avoidance: eliminating a specific threat or risk, usually by eliminating its causes • Risk acceptance: accepting the consequences should a risk occur • Risk transference: shifting the consequence of a risk and responsibility for its management to a third party • Risk mitigation: reducing the impact of a risk event by reducing the probability of its occurrence ICT 327 Management of IT Projects Semester 2, 2004

  39. General Risk Mitigation Strategies for Technical, Cost, and Schedule Risks ICT 327 Management of IT Projects Semester 2, 2004

  40. Risk Monitoring and Control • Monitoring risks involves knowing their status • Controlling risks involves carrying out the risk management plans as risks occur • Workarounds are unplanned responses to risk events that must be done when there are no contingency plans • The main outputs of risk monitoring and control are corrective action, project change requests, and updates to other plans ICT 327 Management of IT Projects Semester 2, 2004

  41. Risk Response Control • Risk response control involves executing the risk management processes and the risk management plan to respond to risk events • Risks must be monitored based on defined milestones and decisions made regarding risks and mitigation strategies • Sometimes workarounds or unplanned responses to risk events are needed when there are no contingency plans ICT 327 Management of IT Projects Semester 2, 2004

  42. Using Software to Assist in Project Risk Management • Databases can keep track of risks. Many IT departments have issue tracking databases • Spreadsheets can aid in tracking and quantifying risks • More sophisticated risk management software, such as Monte Carlo simulation tools, help in analyzing project risks ICT 327 Management of IT Projects Semester 2, 2004

  43. Sample Monte Carlo Simulation Results for Project Schedule ICT 327 Management of IT Projects Semester 2, 2004

  44. Sample Monte Carlo Simulations Results for Project Costs ICT 327 Management of IT Projects Semester 2, 2004

  45. Results of Good Project Risk Management • Unlike crisis management, good project risk management often goes unnoticed • Well-run projects appear to be almost effortless, but a lot of work goes into running a project well • Project managers should strive to make their jobs look easy to reflect the results of well-run projects ICT 327 Management of IT Projects Semester 2, 2004

  46. Project Procurement Management Schwalbe: Chapter 12 ICT 327 Management of IT Projects Semester 2, 2004

  47. Learning Objectives • Understand the importance of project procurement management and the increasing use of outsourcing for information technology projects • Describe the procurement planning process, procurement planning tools and techniques, types of contracts, and statements of work • Discuss what is involved in solicitation planning and the difference between a request for proposal and a request for quote • Explain what occurs during the solicitation process ICT 327 Management of IT Projects Semester 2, 2004

  48. Learning Objectives • Describe the source selection process and different approaches for evaluating proposals or selecting suppliers • Discuss the importance of good contract administration • Describe the contract close-out process • Discuss types of software available to assist in project procurement management ICT 327 Management of IT Projects Semester 2, 2004

  49. Importance of Project Procurement Management • Procurement means acquiring goods and/or services from an outside source • Other terms include purchasing and outsourcing • Experts predicted that by the year 2003 the worldwide information technology outsourcing market would grow to over $110 billion • U.S. federal spending on IT outsourcing is projected to increase from $6.6 billion in 2002 to nearly $15 billion by 2007 due to an emphasis on e-government, homeland security, and the shortage of IT workers in government ICT 327 Management of IT Projects Semester 2, 2004

  50. Why Outsource? • To reduce both fixed and recurrent costs • To allow the client organization to focus on its core business • To access skills and technologies • To provide flexibility • To increase accountability ICT 327 Management of IT Projects Semester 2, 2004

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