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A Newsletter from Harvard Business

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Managementupdate
Managing Project Risk
by Loren Gary

The Essentials
Managing Project Risk
by Loren Gary

ts not possible to anticipate everything that can put a projects


plan or schedule at risk. But
what sets skilled managers apart is
the ability to prepare for the types of
execution risk that are foreseeable:

Financial resource risk: For example, a cash-flow shortage in


the projects third quarter.
Human resource risk: The possibility, say, that a key employee
will leave before a projects completion or that a group of technicians will not have completed
the necessary training by the
time theyre supposed to begin
work on their piece of the
project.
Supply risk: A looming strike at
a suppliers plant means you
may not have enough of the key
components you need for the
final assembly of your product.
Quality risk: The worry that, in
your rush to meet the release
date for a new version of your
software, some significant bugs
havent been adequately addressed. Or the concern that a
low-cost manufacturer will fail
to ensure that the parts are machined to the precise tolerances
you require.
Each form of risk can be addressed
though this three-step methodology:

1. Identify and prioritize


Conduct a systematic audit of all the
things that could go wrong with your

project. In doing so, solicit opinions


from a wide range of peoplenot
just project team members but people in the operating units and on the
corporate staff, as well as customers
and suppliers. The goal here is to spot
both internal risks, such as competition for software engineers time, and
external risks, such as an emerging
technology that threatens to make
the new product line youre working
on obsolete.
A typical audit uncovers dozens of
risks. To assess each risks potential
for damage and likelihood to occur:

Make an estimate of the negative impact of each risk, and express it in dollar terms.
Assign a probability to the risk,
and express it as a percentage.
Calculate the expected value by
multiplying the monetary impact by the probability. Thus, a
one-month delay in the schedule that is estimated to cost
$25,000 and has a 40% probability of occurring will have an
expected value of $10,000.
Rank your audit list by the expected value.

2. Take action to avoid or


minimize the risks
You may need to alter the projects
scope to avoid the most drastic risks
(the ones youre not prepared to confront). For example, a sausage maker,
fearful of bacterial contamination in
the production or distribution chan-

nel, may decide to minimiz his risks


by producing only precooked and
aseptically packaged meats.
Or say youre concerned that a
product designer whos critical to
your project is thinking about leaving. You can minimize the associated
risks by making sure the designer has
a visible and attractive career trajectory ahead of her in your company,
and coaching and training other employees so they can fill her shoes if she
does leave. And diversify your risk by
making sure the designer isnt responsible for too many important
tasks.

3. Develop contingency plans


Some risks cannot be avoided; others can be reduced, but only in part.
For such risks, you need a contingency plan. By preparing a course of
action in advance, you dont lose
time when adversity strikesinstead, youre able to respond quickly
and effectively.
For example, a team working on a
two-year project to modernize a
manufacturing plant realized that
there was a genuine risk that it might
not meet its deadline. The projects
sponsor agreed to set up a reserve
fund for hiring outside help if the
project fell behind schedule.
This contingency plan included a
monthly progress review and a provision that falling three or more weeks
behind schedule would trigger the release of the reserve funds. In addition, two managers were charged
with identifying at least three vendors
capable of helping out with the
project.