Residual Risk Quantification in the Engineering Outsourcing Industry through Monte Carlo Simulation

Residual Risk Quantification in the Engineering Outsourcing Industry through Monte Carlo Simulation
Chakradhar Iyyunni
Institute of Project Management, Larsen & Toubro, Vadodara, India Email : ciyyunni@Lntipm.org

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Abstract —This Risk analysis methods and processes though mature do not seem to yield any useful guidance for short duration projects in engineering outsourcing industry. We show here judicious use of the analyses of uncertainty could bring to light useful strategies to manage risk. Keywords —Residual Risk, Uncertainty, Risk Mitigation

I. I NTRODUCTION The Indian Engineering Outsourcing industry has matured over the last twenty years and with it the customer relationships now have heightened expectations. The IT industry had to deal with evolving software methodologies and to cope with the inherent complexity and uncertainties that has spawned the new field of "Software Engineering". While the ITeS industry has to deal with additional complexity due to proprietary nature of technologies, engineering specification for products and plants that have to also cater to the cost pressures of emerging or new markets, and virtualization of the work. Besides, Engineering outsourcing projects are typically short duration, lack industry and customer big picture (best practices and trends), and are relegated to a support function in the minds of the customer's engineering teams. Also Engineering outsourcing teams are small in size, moderately-skilled with extensive use of Information and Communication Technology (ICT) enablers, lack specific work expectation guidelines, diffused scope statements and fast paced delivery. Engineering outsourcing industry uses the bottom of the talent pyramid (0-3years experience) as its primary instrument for delivery. This coupled with discontinuous nature of engineer's skill-usage, knowledge and type of work makes it imperative for the industry, organizations and delivery teams to deal with certain basic uncertainties. From the experience of EPC projects, our penchant for risk characterization are at three levels, i.e., inherent, customer-specific and project execution categories. While, Kaplan and Mikes [1] consider organizational and business risks in three categories, namely, preventable, strategic and external. The basic uncertainties in delivery, therefore, could stem from inherent nature, customer specific or related

to project execution team. The inherent nature uncertainty stems from market expectations or those entwined in the basic characteristics of technology. Customer specific uncertainty stems from corporate culture, perspective towards outsourcing or propensity towards relationship with Engineering Services Outsourcing (ESO) organization. Project or Execution risks from teams that may not have the right competency skill mix or lack of awareness and training in Project Management. Most mature teams evolve to take care of obvious variability and unknowns in the project situation and hence rule-based risk management loses its utility, charm for regular application and more insidious is when the risk function is compromised (becoming deal makers at the expense of being deal questioners). Additionally, risks from various knowledge areas often interact in a nonlinear fashion. For example, mitigation of risks related solely to either scope or schedule is easily dealt while a combination of risks arising from both these knowledge areas would indeed be confounding. A number of basic uncertainties give rise to risk situations. Also, risks could cascade further downstream risks. The IT industry has developed Agile methodologies to deal with some of these issues. But, this is not always work-able for engineering outsourcing projects. Mitigating above mentioned combination-risks or risk trains are also of considerable importance to the engineering outsourcing industry. For large projects, use of Hulett's risk driver approach [2] would yield significant benefits. It is not clear if enough risk information would be available for small projects. For Schedule risks stem from the classic literature of Archibald and Villoria [4,5] and significant progress has been report in recent literature by Hulett [2]. In the paper, we provide an uncertainty based characterization scheme and the concomitant Monte Carlo analysis that an organization could use to assess such risks and evaluate options to deal with them. We consider an detailed example of estimation a fixture design and other illustrations from design/stress-analysis, pipeline installation to assess uncertainty in delivery. The key question this paper seeks to answer is the robustness of the estimated effort and hence the derived schedule, which we address via Monte Carlo analysis.

Resource utilization. Professional pride. that such risks could arise from specifically the breakdown of communication. personal aspects of the knowledge worker from which a knowledge worker derives motivation and the continuous adjustments to the re-alignment to customer needs and requirements. 1. In Fig. there are enough types of Market analyses in the literature but a lot is yet to be understood. Tension from cultural dimensions mismatch Status of Trust.2 PMI India Research & Academic Conference. from these dashboards can only provide additional constraints (not mitigate risks) which the risk mitigation action has to satisfy. It is evolved / revealed only in the future. Legal or Regulatory. 2013 becomes clear at a future date from advances in Science and Technology while the unavailable region in Market is the aspects of sentiment in the people owing to various continuously changing PES(T)LE conditions which may not accessible to analysis. organizational culture. 8 External Managing uncertainty instead of risks in the engineering outsourcing industry will be dealt separately elsewhere. Pressure due to Virtualization [10] Technical competence and capability aligned to project requirements. Economic. so the unavailable part is the influence of these dynamic aspects which are not irreducible to numbers. 31 Jan. For the sake of our ensuing discussion. two other major sources of uncertainty arise from Customer relationship and managing information and People interactions and Processes. The relationship between Engineering Outsourcing teams and Customer personnel to work synergistically is subject to many pressures from internal (those opposing outsourcing for instance) and external (competitors to both parties) sources. SOURCES O F U NCERTAINTY Traditionally. situations threatening the viability of customer-specific business model or broadly from undeveloped organizational culture such as lack of vision. Additionally. The unavailable region in Technology. established processes etc. India. TABLE I D ESCRIPTION OF UNCERTAINTY SUB-AREAS FOR ENGINEERING O UTSOURCING INDUSTRY . . margins) do not help in mitigating scope-schedule risks. Uncertainty Map for the Engineering Outsourcing Industry 7 Customer Relationship and Information Internal We claim that there is a significant core region of each of these uncertainties that is not accessible for analysis which in risk parlance is referred to as the unknownunknowns. related to dynamic aspects from PES(T)LE analysis) Novel to Organization not to the market /those outside the organization Current work by your competitor which is as yet unknown to you Motivation. A brief description of the internal / external aspects is encapsulated below in Table-1. Environmental aspects). 1. 1.. we have mapped 8 regions which are enumerated. So we choose to delineate Technology and Market uncertainties where Market now refers to PES(T)LE without the Technology. i. for instance. For the engineering outsourcing industry this Technology-induced risk factors are very significant due to the inherent nature of the business. Mapped region 1 Market 2 External Category Type Internal Uncertainty Description Business-specific (Organization is either an Imitator. revenue streams etc. It is also possible. In this work. uncertainty arises from the Market conditions characterized by PESTLE (Political. internal or external to the team or organization. Chennai. Business dashboards (with revenues. we strive to characterize the nature of risk . Leader or Innovator) Market risk (Consumer specific. via two aspects pertaining to its origins. A map of the uncertainty is provided below in Fig.02 Feb. Recognition/matching of requirement to expectation between organization and customer Problems that develop from a combined ScopeSchedule risk may arise from un-mitigated risks in either Scope Plan or Schedule Plan or due to some compounding effect because of missed-steps in integration between Scope and Schedule Plans. in organizations which are capable but not mature (in the CMM framework). Status of Sales-delivery synergy. The red/ dark areas are unavailable for exploration at the current space-time and the current team composition. Social.e. The unavailable part of People Interactions and Processes are those induced by continuous on-boarding and attrition. II. coherent strategy. 3 Technology 4 5 People Interactions and Processes Internal External Internal 6 External Fig. Technological. We differentiate the available region of the uncertainty for incorporation into risk analysis.

mostly from improper understanding of PMBOK knowledge areas and/or Process Groups which then create trigger situations i. These are broadly coming from good engineering practices. re-alignment via scopebriefing 2. Schedule pressure creating scope completion (lack of value-added engineering) errors. schedule or both emanate from various risks factors.or domain. Problem areas Schedule Risk factors Estimation Errors Resource Errors Input Errors Source of Risk (Triggers) Lack of Scope Model specific corrections. and non-existence of risk function(s) independent of delivery process. and insufficient work instruction Non-convertible inputs from one form to another which introduce extra effort for scope completion (improper Requirements specification/gathering becoming cost and schedule ‘bombs’ Lack of alignment with customerspecific practices. In some teams. Example : Work that needs to be coordinated with owners and manufacturers such as ship modification or design. improper scopebriefing. Improper portfolio sustenance Movement of people across teams. Mitigation : Sensitivity analysis for unavailable material properties. IV.[16] innovative methods to slash deliverable times (> 50%) is usually accomplished by creating appropriate new/ different work-methodology via an appropriate requirements break-down structures and Group Think techniques. Intra-portfolio: jumping between projects. robust engineering process and strong engineering focus (with higher design quality). 4. the breeding ground for these scope-schedule combination risks. Scope Engineering Errors Execution Execution Errors Description Poor understanding of statement of work usually accompanied by untenable clarification.or issues log sheets. we consider an example that displays a low level of risk. in a three prong manner. 12 and then 15. Mitigation : implementation and adoption of mature concurrent engineering practices.or (customer) Industrysegment centered-ness. Mitigation : appropriate use of Expert review cycles and right performance indicators such as residual analysis completion times and software license usage. Level of Combined Risk Low Nonlinear Effort-Schedule Link 3 Table 3 shows characterized how problems in scope. Medium Table 4 shows list of various scales of mitigation actions. T ABLE III RISK TRIGGER R EGISTER FOR C OMBINATION SCOPE-SCHEDULE RISKS. The challenges associated with collection of Risk data are addressed by Hillson [3. the premise in ITeS of executing skill-based work without a significant depth of either discipline. Communication Strain (priority) from Onsite-Offshore alignment and Differently oriented Sales-Delivery teams.Residual Risk Quantification in the Engineering Outsourcing Industry through Monte Carlo Simulation triggers. T ABLE II E XAMPLES O F W ORK COMPOSITION WITH DIFFERENT L EVELS OF COMBINATION R ISKS.e. APPLICATION We describe below. Example : Deep -water pipeline installation (Deriving contingency situations). Root-causes for the exposure to the specific uncertainty that gives rise to combination of interactions of (ScopeSchedule) risks: 1. absence of the "Master Builder" [14] (one who can manage between many engineering disciplines with respect to scope. Example : Creep analysis of frames. interaction between the administration of portfolios or programs and projects. by example. Conceptual or Detailed Engineering of a passenger or container vessel for manufacturing. 8]. resource readiness (ready bearing without immersions). The activity precedence table and resource requirement for the project is enumerated in Table 5. attritions. Upon completion of activity 7. quality and provide significant input to all aspects of execution). III. activities 8. 3. The number of activities specified are 15 and the network diagram is very basic with most of the activities being linearly sequenced from 1 through 7. 9.. I LLUSTRATION O F M ETHOD Given below is a broad sketch of an outsourced design activity of about 800hours. 14 can be worked in parallel and upon their completion feed into activity 10 and there after the work is affected in a linear fashion with activity 11. to manage scope or schedule or both. Project-specific gaps and slip-ups. The analysis of the scopeschedule risks for the context of this paper. three broad categories of engineering outsourcing work. [9] High . First of kind Calculations for construction methods. Widget estimations with multiplicative scaling Un-trained resource. in Table-2.

C.) We have set the three-point estimates for each activity to be approximated by a triangular distribution. (1) To check the size of each component as per standard (2) To check fine machining. triggers does not provide a robust understanding of the schedule robustness.D 1 V. 1 2 Activity Name Description To Fix the location & clamping points.B 1 8. dowel &relief holes concentricity (3) To check the clashes between panel & parts of panel. . training procedures Mitigation Actions Schedule Combination Methods Customer buy-in Extra efforts via of scope batch mode clarification analysis of efforts and basis parametric dataof estimates sets . We have considered 15000 experiments for the simulation. To make necessary changes in design as per QC team Suggestion.D D Trigger Description Uncertain (layout) requirements from customer (process layout fixed) Technology expectations (walkthrough. Panel flow. political changes. 1 2 1. To study & decide welding points & welding guns & set orientation of the panel.D A. most likely.B A. A traditional risk analysis using possible sources of risks i. To make changes as per comment put by Simulation team. To decide panel sequence. 795 and 1103 (wildly pessimistic) respectively. 31 Jan.2 8 13 A. No. A.4 C 1 6 7 8 5 6 7 B.5 years of industrial experience) C = Very Good (Good quality knowledge of Fixture Design : 3. To prepare list of no of part require in whole assy To cross check the list of part with actual design Dependence on Prior Activities 1 Skill Resource Required 3 3 Panel Study Process study C. The following triggers. The Monte Carlo simulations are done using @Risk software which is an add-in to Microsoft Excel [15].9 A. (Such a calculation should not be carried out ! refer [2] for detailed discussion. The results are presented below in Fig.C C. 3 and Fig-4. telecommunication failures. 10 11 Update Design as per comment from QC team Prepare 2D for assembly & each post with its respective parts 2D. ergonomics beyond simulation) Input not in time Skill Resource availability Input not clear (Query resolution) Availability of Software modules (or their procurement) Environmental risk such as natural disaster.e. B. Chennai.QC 9 A.D are defined below: A = User (Has rudimentary awareness of fixture Design1 to 1. 2 = at User Level A).. No. 2013 The different levels of resource skill requirements. wherein the 90%. 2 = at User Level B.B 1 1 1 3 4 5 6 7 8 9 Design-QC 7 C.C 2 Scope Sensitivity analysis Design for Constructability Moving team members across projects Work instruction. R ESULTS The sum of the optimistic. listed in Table 6. could impact any of the 15 activities. Rough machining.5 to 6 years of industrial experience) D = Excellent (Good quality knowledge of Fixture Design: 6 to 10 years of industrial experience) The work is planned with SEVEN resources (3 = at User Level C or D . Effort Estimation (in hours) along with major risks of the activities is enumerated in Table 7.4 TABLE IV RISK MITIGATION ACTIONS IN A T HREE PRONG MANNER ScopeSchedule Risk Unavailable creep material properties for stress analysis Difficulty in following the design intent by Manufacturing PMI India Research & Academic Conference.5 years of experience) B = Good (Know basics of fixture Design : 2 to 3.2 D 3 4 Design Fixture & base plate Review Design with Simulation team Update Design as per Simulation team comment Review design with client &update design Revise design with standard parts 5 1. T ABLE VI T RIGGER D ESCRIPTIONS Trigger No. Fig.C 1 13 14 15 Update 2D as per QC comment BOM preparation QC-BOM 1. More resources Design offers a Design and sequence of Manufacturing manufacturing teams interact early in the design operations cycle to identify challenges Innovative Automated or methods to slash customized deliverable times procedures (> 50%) TABLE V ACTIVITY D EFINITION A ND PRECEDENCE RELATIONSHIP Sl.02 Feb.2. 95% and 99% confidence level results are presented. To make 2D of Each assembly & its individual part. pessimistic times are respectively 572 (wildly optimistic). India. Lack of supplier quality 3 Layout Study 1. 2.2. We have made the key assumption made that only two of the risks actually impact the schedule for any activity.3 B. of stations & robot specification To model base plate & to build individual Unit or post(Clamping & locating post) To check & verify gun clashing with each individual post.B A.B 1 12 11 B. Freeze the design as per client requirements To add standard part from library.B 1 1 1 . To Define a complete part for manufacturing activity & check customer standard (Information in Title block) To make necessary changes in design as per QC team Suggestion.3.

We endorse the Kaplan . No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Activity Panel Study Process study Layout Study Design Fixtures & base plate Review Design with Simulation t Update Design with Simulation team guideline Review design with client &update design Revise design with standard parts Design-QC Update Design as per comment from QC team Prepare 2D for assy &each post with its respective parts QC-2D Update 2D as per comment BOM preparation QC-BOM & actual design Optimistic 12 35 50 160 35 35 30 25 35 25 65 15 20 20 10 Most Likely 20 50 75 200 50 50 50 40 50 30 90 20 25 25 20 Pessimistic 28 65 90 300 70 65 65 55 70 50 120 35 35 30 25 5 At 99% confidence level the work can be completed in 925. FUTURE W ORK Developing strategies for mitigation would enhance the competitiveness of the engineering services organization. This estimate could be used for repeat job or where the delivery team has a higher confidence wherein the 107 hours is can be used for contingency and a partial use of these hours should be acceptable to client (pre-project approval) for billing. Monte Carlo Results at 90% Confidence Level . At 95% confidence level.Mikes claim that risk triggers interacting across knowledge areas can only be effectively At 90% confidence level. Fig. this distribution should be narrow and the deviation between 795 hours and your 99% confidence limit should be marginal. see Fig. the work can be completed in 887hours.. 3. preferably less than 2% variation (in cost). Alternately. if you are a mature team. see Fig. if it is first time project. C ONCLUSION We have indicated above a well-done three point estimation could be useful in lieu of a detailed risk analysis for creating robust schedules. VI. 2.. The 130 hours is used for contingency and a partial use of these hours should be acceptable to client (pre-project approval) for billing as a trade-off to adhering to a stricter schedule. in the short duration projects that is the norm in engineering outsourcing industry. This is the man-hour estimate for repeat job or where the delivery team has a higher confidence. This is the man-hour estimate that needs to be used as a base estimate. Actually.Residual Risk Quantification in the Engineering Outsourcing Industry through Monte Carlo Simulation TABLE VII T HREE POINT ESTIMATES OF E ACH A CTIVITY DURATION Sl. This is especially important. 2. the work can be completed in 902. We will also study how new strategies exploiting the various uncertainty categories mentioned in Table1 would aid in managing risk for a wide range of projects indicated in Table 2. various risk mitigations as well as process maturity or innovative practices should achieve a reduction in this gap. The strategy used in this paper is utilizing project management processes and tools to throw light in this particular project situation.

4. We claim that risk triggers interacting across knowledge areas can be effectively dealt by moving beyond the rule-based risk management. We seek to put these ideas in the context of risk evaluation through focus groups. India.02 Feb. We want to also investigate the relevant use of Shenhar's star model of success [7] for projects in this setting. We advocate active risk control via team behavioral interventions. . Our motivation is to define the application of KaplanMikes work in the project setting. Gladwell [6] records the behavioral training given to Korean pilots in the 1980s to reduce risk of airplane crashes.6 PMI India Research & Academic Conference. forums and other group activities. We will explore the efficacy of organization-level and team-level process-centric methodologies for addressing such risk-trigger interactions. Other mechanisms (or combination thereof) for control can arise from Knowledge or Innovation management process or thru the traditional audit. 2013 Fig. 31 Jan. Chennai. Monte Carlo Results at 95% Confidence Level Fig. . Monte Carlo Results at 99% Confidence Level dealt by moving beyond the rule-based risk management [1]. Pestonjee and Muncherji [12] have explored how organizational stress could be reduced thru role definition. Fischhoff [13] has worked in modeling human behavior in perceived risk situations and has contributed significantly towards developing a behaviorally realistic risk analysis. 3. Pareek [11] has pioneered organizational role stress wherein the author identifies ten dimensions to a job role that create stress in the individual.

International Journal of Project and Business Risk Management . Harvard Business Review . pp. 35-45. 2012. [3] D. 1993. 2009. “Risk Analysis and Human Behavior”. Journal of Psychological Research . Gawande. “Managing Risks: A New Framework". Pareek. J. Earthscan Publisher. 2012. Shenhar. pp 48-60. “Strategic Project leadership:toward a strategic approach to project management”. Journal of Facilities Management .Residual Risk Quantification in the Engineering Outsourcing Industry through Monte Carlo Simulation A CKNOWLEDGEMENT I thank Vishal P. [2] D. [11] U. vol. [14] A. Villoria. 1967. Producitvity. no. . Hillson. no. “Network based Management Systems”. [8] D. “Towards a Risk maturity Model”. [12] D. 85-97. D. Patil (L&T Technology Services) for interesting discussions related to the example presented and Prof. 569-578. Mikes. Kaplan and A. M. L. 7 [7] A. Patil. 1992. Palisade Corporation. R EFERENCES [1] R. no. Ryavek. P. “Nurturing Team Performance by Managing Virtualness”. no. Hulett. June 2012. Internal Communication. 1. S. P. Value Creation and Innovation in Engineering Outsourcing teams. [15] Risk version 5. 2. vol. Brown and Company. Metropolitan Books. [5] R. John Wiley. vol. 1997. Archibald. “Using a Risk break-down Structure in Project Management”. Unpublished. 1. Little. 34. [16] C. “Practical Schedule Risk analysis”. 2003.7 . Ganesh and M. 2. The Rand Corporation. “Risk Analysis”. “Making organizational roles effective”. 2011. Tata McGraw Hill. 3. and R. Gladwell. [6] M. R&D Management. Gower Publishing Limited. [10] M. [9] V. vol. Hillson. [13] B. Research Memoranda. Krishna Moorthy (Dean. “Outliers”. 251-264 2008. [4] K. and N. . 2008. Stress audit: diagnostics and action at Micro-level HRM. 2004. pp. “Checklist Manisfesto”. July 2012. 1. MacCrimmon and C. Pestonjee. no. vol. New York. pp. 5. Gupta. Muncherji. RM-3408-PR. Fischhoff. “An analytical study of the PERT assumptions”. 3. 33. pp. Iyyunni. L&T Institute of Project Management) for guidance.

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