Getting a Return On Investment from Risk Management

1. Getting a Return On Investment from Risk Management Val Jonas CEO, Risk Decisions Group

2. Agenda • Understanding uncertainty and risk • Impact on ROI • A recent example & conclusion

3. Part 1 Understanding uncertainty and risk

4. Uncertainty & Risk { • 3 point estimates (Max, Min, Most likely) • Identified risks • (probability & Impact) Uncertainty • Risk analysis & Tornado results

5. Budget Uncertainty Analysis (Excluding Risk Events) 100% 80% Likelihood 60% 50% confidence 49% 20% 0 £55,000 £60,000 £65,000 £70,000 £75,000 £85,000 £90,000 £45,000 £50,000 £80,000 Cost (£k)

6. Maximum Minimum ‘Long’ right hand tail may indicate risk events (which should be managed in risk register) Target Likely Exposure Aggressive target Non-Aggressive target Risk Appetite Budget Uncertainty Analysis (Excluding Risk Events) Baseline (incl. Estimating Error) Cost (£k)

7. Maximum Minimum Pay attention to ‘Long’ right hand tail (must identify mitigation actions) Budget Exposure Risk Appetite Provision for Known Risks Provision for known risks

8. Managing uncertainty and risk • Manage cost and schedule over-runs • Estimating accuracy • Resource management • Project & change control • Manage known threats • Proactive risk mitigation actions • Treat, transfer, tolerate, terminate • Budget and authority in place • Exploit opportunities

9. Contracted Target Exposure Focus on ‘Left Shift’ Baseline Reserve

10. How to convince senior management? • Limited ability to interpret risk analysis results • Confusion over meaning of Risk Appetite • Consider risk budget spent as ‘wasted’ • Focussed on business objectives (and the bottom line) … We need to find new ways of getting information across to managers

11. Part 2 Impact on Return on Investment

12. Achieving return • Contracting routes • Fixed price (vs. cost plus) • Fixed base + performance payments • Bonuses & penalties for on-time or late delivery • Pain / gain-share • Business case • Need to understand sensitivity to uncertainty and risk

13. Modelling performance Inputs Outcomes

14. What-if scenarios on schedule • Analyse the schedule • Impacts of schedule uncertainty on: • 1a. Performance payments • 1b. Penalty and bonus payments • 1c. Costs of the ‘Marching Army’ • Contain the impact of schedule slippage

15. Maximum Minimum Contracted Target Exposure Risk Appetite Analysing the schedule Baseline Schedule Reserve Aggressive target Non-Aggressive target

16. 1a. Impact on performance payments Zero performance payment for late milestones Expected Reduction of 15% ROI

17. 1b. Added impact of penalties/bonuses Daily penalties / bonuses for late / early delivery Negative expected ROI (down 21%)

18. 1c. Added impact of the ‘marching army’ Assumes no opportunity for savings if finished early No chance of positive ROI (down 23%)

19. Focus on ‘Left Shift’ Contain schedule slip

20. Managing the uncertainty What-if’s based on containing the schedule slip: (Do we really want this contract?)

21. What-if scenarios on risk • 2a. The cost of risks materialising • 2b. The post mitigation position • 2b. Pain/Gain-share contracting

22. Back to base case model Inputs Outcomes

23. 2a. Impact of risks materialising Assumes no risk mitigation Risks impact (down 12%)

24. Focus on ‘Left Shift’ Manage the risks

25. 2b. Impact of risks (post mitigation) Mitigaton saves 2% ROI

26. Risk sharing scenario 15% confidence 65% confidence

27. 2c. Pain/Gainshare contracting Back to 15% ROI Customer share of the risk payment

28. More what-ifs …

29. Part 3 Conclusion

30. Not so much a question of… what is the value of risk management? but… …can we afford not to manage risk?

31. ‘Getting a Return on Investment from Risk Management’ White paper:www.riskdecisions.com Val Jonas, CEO Risk Decisions Group