Part I

Pascal B. Xavier

Part I

Pascal B. Xavier

“It is likely that unlikely things should happen.” Aristotle (384 BC – 322 BC)

“The excitement that a gambler feels when making a bet is equal to the amount he might win times the probability of winning it.” Blaise Pascal (1623-1662 )

“We define the art of conjecture, or stochastic art, as the art of evaluating as exactly as possible the probabilities of things, so that in our judgments and actions we can always base ourselves on what has been found to be the best, the most appropriate, the most certain, the best advised; this is the only object of the wisdom of the philosopher and the prudence of the statesman.” Jacob Bernoulli (1655 - 1705)

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Risk Definition What is Risk? In its broadest sense, risk can be defined as the

likelihood and consequence of loss of anything having value, associated with people, facilities, information, equipment, and reputation.

What is a Hazard? A hazard is the potential to lose these items of

value through specific agents and context e.g. Electricity near water, handling chemicals unprotected, excessive noise, constant stress, bad publicity, or other adverse effects.

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Risk Management Perceived as a Discipline

Figure Courtesy of Software Engineering Institute, Carnegie Melon

Figure 1: Risk and Project Management.

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Figure 2: Risk perception, risk assessment and risk management

Risk Definition

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Risk Definitions Risk analysis is a systematic use of information to

identify specific sources of harm (hazards) and to estimate the risk.

Risk evaluation compares the estimated risk against given risk criteria using a quantitative or qualitative scale to determine the significance of the risk.

Risk appetite is the level of risk that an organization is prepared to accept, before action is deemed necessary to reduce it (Averse, Minimal, Cautious, Open, Hungry)

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Figure 3: A Close look at Risk Terminology

Risk Definitions

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The Risk Management Process

Figure 4: The Risk Management Process (AS/NZS ISO 31000:2009)

Establish the Context (5.3)

Risk Assessment (5.4)

Risk Identification (5.4.2)

Risk Analysis (5.4.3)

Risk Evaluation (5.4.4)

Co

mm

un

icat

ion

an

d C

on

sult

atio

n (

5.2

)

Risk Treatment (5.5)

Mon

ito

ring

an

d R

evie

w (

5.6

)

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A Risk Management Overview

Figure 5: Risk Management Overview for Multiple Risks

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Portfolio, Program and Projects A business portfolio is an organization’s set of

investments, holdings, products, businesses and brands. A product portfolio is the product’s mix of market segments. e.g. health care, energy and aviation (GE, 3M, etc.)

Health care program could include drugs, foods, supplements, vaccinations, screening tests, exercises, hospital treatment, and physiotherapy.

A health care project could involve the development of a specific vaccine.

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Risk Management Levels

Figure 6: Risk Management is Everyone’s Business

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Project Portfolio Management A project portfolio is a collection of project

programs that work together to meet strategic business objectives.

It is about customer satisfaction and timely launch of suitable products and services onto the market for increased financial returns.

It has to achieve project program purpose and strategic alignment against the business.

Project portfolio risk is reduced through diversification.

Greater adaptability towards change.

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Project Program Management A project program is a group of related projects,

managed in a coordinated way i.e. cross benefits between projects (e.g. drugs and vaccination).

While a project is a temporary organization, the program is a more permanent structure that provides strategic direction to the project collection.

Project programs are able to adapt better to changes in the market place than portfolios.

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Dimensions Project Program Portfolio

Scope Manage risk through project life cycle

Track benefits / costs in project risk strategies

Align project risk and business strategies

Primary role Identify and respond to individual project risks

Implement value creating and value protecting strategies

Diversify project risks across project portfolio

Focus on Project risk analysis and risk register

Organizational project risk issues

Strategic project risk issues

Outcomes Project risks are controlled and monitored

Program delivered within agreed project risk strategies

Improved business performance

Measures Project risk response is cost-effective

Business values are created and protected

Overall business success is increased

Skill required Project risk management Organizational leadership Executive leadership

Responsibility of

Project manager Project sponsor, Project Management Office

Steering committee, project sponsor

Responsibility to

Project sponsor Steering committee Board of Directors

Compliance with

Project risk management practices

Project risk governance principles

Project risk governance principals

Table 1: Risk Governance (PRG) in Portfolio, Program and Projects

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Project Stages Activities Processes Structures and Relationships

Project Identification

Determine project risk tolerance and appetite; Identify strategic project risks; Approve overall project risk profile

Business/Project interaction; Project Portfolio Management

Board of Directors; Steering Committees

Project Planning Determine project risks; Develop value-creating and value-protecting risk strategies

Portfolio, Program and Project Management; Investment Management

Project Sponsors; Steering Committees; Project Managers

Project Delivery Produce project risk management plan; Manage project risks through project development lifecycle

Project Management; Value Realization; Performance Management

Project Sponsors; Steering Committees; Project Managers

Project Closure Review project investment; Review project risk outcomes; Update ‘Lessons Learned’ repository; Determine PRG success/failure

Performance Management Project Sponsors; Steering Committees; Project Managers

Table 2: PRG Activities, Processes; Structures and Relationships

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Risk Management, Governance and Compliance Risk governance integrates management

information reporting with management control structures to ensure strategies, directions and instructions are undertaken systematically.

Risk management identifies, analyses and assesses the necessary response to risks that may derail the organisation’s business goals.

Risk compliance is achieved through processes that identify certain requirements in laws, regulations, contracts, strategies and policies.

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Board-Level Risks

Figure 7: Board-Level Risks

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Organizational Risks

Figure 8: Executive Risks

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Project Risks

Figure 9: Project Risks

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Some Risks Causes Across Knowledge Areas

Figure 10: Project Risks

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Stakeholders A person, group or organization that has an interest

or concern in an organization. Stakeholders can affect or be affected by the organization’s actions, objectives and policies. (http://www.businessdictionary.com)

A person who has an interest in or investment in something and who is impacted by and cares about how it turns out. (Webster Dictionary)

Anyone who might be affected by a decision; anyone who has a “stake” in the outcome of a situation. (Real Estate Encyclopaedia)

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Who are the Organization’s Stakeholders?

Figure 11: Stakeholders of an Organization

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Stakeholder Analysis

Figure 12: Who are your Key Stakeholders?

High Influence,

Low Interest

(Latents)

High

Influence.

High Interest

(Promoters)

Low Influence,

Low Interest

(Apathetics)

Low Influence,

High Interest

(Defenders)

Keep Informed

Actively Engage Keep Satisfied

Occasional Contact

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Strategic Factor Analysis

Figure 13: Key Stakeholders

ORGANIZATION CUSTOMERS SUPPLIERS

EMPLOYEES

OWNERS

CO

MPE

TITO

RS

CO

MPETITO

RS

COMPETITORS

COMPETITORS

Graham Kenny (2013)

Organisation Objectives

from Owners

Organisation Objectives

from Employees

Strategic Factors for

Owners

Strategic Factors for Employees

Organisation Objectives

from Customers

Organisation Objectives

from Suppliers

Strategic Factors for Customers

Strategic Factors for Suppliers

Organisation Objectives – What the Organization wants from Key Stakeholders

Strategic Factors – What Key Stakeholders want from the Organization

Note: If ‘ORGANIZATION’ is a Corporation, then ‘OWNERS’ may be Shareholders. Others include Sole Proprietor, Partnership or Cooperative.

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Service Improve contract

performance Minimize

operating costs Improve

customer management

Manufacturing Minimize

manufacturing costs

Maximize customer service

Minimize distribution costs

Maximize profit

Distribution Minimize

operating costs

Reduce inventory levels

Improve operating cycle time

Insurance Maximize

customer service

Streamline information technology

Improve service delivery margin

FMCG Improve

profitability Increase market

share Increase sales Reduce

manufacturing costs

Reduce distribution costs

What are the Organizational Objectives?

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Consumers Price Product features Packaging Customer service

Retailers Delivery Price Margin Product range Product

Presentation Customer

Service

Suppliers Consistency

of orders Order lead

time Trade terms Long

production runs

Size of orders

Employees Promotion

Prospects Salary Superannuation

/Benefits Training Physical

Working Conditions

Location Organization

Reputation Organization

Culture Job Security

Shareholders Dividends Capital

growth Financial risk Physical

working conditions

Location Organization

reputation Organization

culture Job security

What are Strategic Factors?

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Linking Strategies to Organizational Objectives through Measurement of these Objectives Establish Behavioural Outcomes required of

Stakeholders (e.g. get donors to provide funds) Develop Organizational Objectives based on

Behavioural Outcomes (e.g. to increase revenue from donors)

Develop Measures on Objectives (e.g. how much revenue from donors)

Thus, what an organization wants from its key stakeholders becomes their objectives

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Reducing Risks to Increase Positive Outcomes

ORGANIZATIONAL OBJECTIVE LEASEHOLDERS Maintain current

leaseholders EMPLOYEES To decrease no-

shows on shifts

BEHAVIOURAL OUTCOME To get current

leaseholders to renew leases at end of term

To get casual

employees to show up for shifts

RISKS

Lease not renewed

No-show at

shifts

STRATEGIC FACTORS Offer grace

period for rent Attend to

legitimate complaints expeditiously

Goodwill gestures

Automated

reminders when shift due

Incentives for good record

MEASURE $ Revenue # Current

leases %Current

leases renewed # No-shows

per shift % No-shows

per shift $ Cost of no-

shows

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Stakeholder Risk Management by Board

Figure 14: Board Risk Management

BOARD GOVERNMENT MEDIA

REGULATORY AGENCIES

SHAREHOLDERS

Organisation Objectives – What the Board wants from Key Stakeholders

Strategic Factors – What Key Stakeholders want from the Board

LOCAL COMMUNITY

EXECUTIVE MANAGEMENT

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Stakeholder Risk Management by Board

ORGANIZATIONAL OBJECTIVE SHAREHOLDERS Raise equity for

trade GOVERNMENT Political stability Favourable regulations Favourable fiscal and monetary policies MEDIA Marketing

BEHAVIOURAL OUTCOME Increased number of shareholders Autonomy to run the business Peace and stability Sound regulations and infrastructure Increased government investment

Increased sales

RISKS

Shareholders sell their shares in large numbers Shareholders wielding too much influence and or control War Poor infrastructure Increased corporate tax Raised interest rates

Reputational damage

STRATEGIC FACTORS Receive dividends Gain assets upon liquidation Nominate directors Company growth

Local and foreign investment Employment for its citizens/residents Tax from corporate earnings

Payment for services Improved ratings

MEASURE Earnings per share Price/Earnings Ratio Intangible / tangible assets e.g. IP, broadcast rights, customer relationships, etc.

# of years without conflict/war Employment rate # of years in power # of Immigrants

Poll results Station ratings

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Stakeholder Risk Management by Executives

Figure 15: Executives/PMO Risk Management

EXECUTIVES/PMO GOVERNMENT SUPPLIERS

REGULATORY AGENCIES

LOCAL COMMUNITY

Organisation Objectives – What the Executives want from Key Stakeholders

Strategic Factors – What Key Stakeholders want from the Executives

COMPETITORS

LABOUR UNIONS

UTILITY SERVICES

INDUSTRY TRADE GROUPS

BANKS EMPLOYEES

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Group Exercise

ORGANIZATIONAL OBJECTIVE GOVERNMENT LOCAL COMMUNITY EMPLOYEES LABOUR UNIONS INDUSTRY TRADE GROUPS BANKS SUPPLIERS COMPETITORS REGULATORY AGENCIES

BEHAVIOURAL OUTCOME

RISKS

STRATEGIC FACTORS

MEASURE

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References Chris Chapman & Stephen Ward (2004) Project

Risk Management: Processes, Techniques and Insights, John Wiley and Sons

Dan Patterson (2006), “Managing Project Cost Risk”, AACE International Transactions, ppIT.05.1-IT.07.1

Eisner Amper (2013), “Concerns About Risks Confronting Boards”, Fourth Annual Board of Directors Survey

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References (Cont’d) Ezekiel A. Chinyio and Akintola Akintoye (2008),

“Practical Approaches for Engaging Stakeholders: Findings from the UK”, Construction Management and Economics, 26, pp591-599.

Gregory A. Garrett (2005), Managing Opportunity and Risk in a Complex Project Environment, Contract Management, 45(4), pp8-20

Iqbal Noor & Robert Tichacek (2009), “Contingency Misuse and Other Risk Management Pitfalls”, Cost Engineering, 51, 5, pp28-33

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References (Cont’d) Morten Huse and Violina P. Rindova (2001),

“Stakeholders’Expectations of Board Roles: The Case of Subsidiary Boards”, Journal of Management and Governance, 5, pp153-178

Payant, W. Randall (2000), “The Forsaken Side of Risk Management – Have Deterministic Approaches Gone Too Far?”, The Journal of Bank Cost & Management Accounting, 13, 2, pp55-62

Rolf Olsson (2008), Risk Management in a Multi-Project Environment – An Approach to Manage Portfolio Risks, International Journal of Quality and Reliability Management, 25, 1, pp60-71

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References (Cont’d) Stefan Olander and Anne Landin (2005),

“Evaluation of Stakeholder Influence in Implementation of Construction Projects”, International Journal of Project Management, 23, pp321-328

Young, Beth (2007), “From Compliance to Risk – The Evolution of Corporate Governance”, The Corporate Governance Advisor, 15, 3, pp12-13 Free Resources and Articles on Strategic Factors http://www.strategicfactors.com/press.htm

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Bibliography Douglas W. Hubbard (2009), “The Failure of Risk

Management – Why It’s Broken and How to Fix It”, John Wiley and Sons

Dieter Fink (2013), “Project Risk Governance – Managing Uncertainty and Creating Organizational Value”, Gower Publishing Company

Kenny, Graham (2013), “Strategic Planning – How to Write a Strategic Plan that Drives Performance” Strategic Factors Manual - Thirty Eight Edition, Section 21, pp81-96