Risk Management

Mrs. Meenakshi
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What do you infer?

Pro active,
Prevent Loss

Reactive,
Reduced Profits

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What do you infer?

Pro active ,
Prevent Loss

PREPARE & PREVENT

& NOT
REPENT & REPAIR

Reactive,
Reduced Profits

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Risk Definition
• Project Risk:
Any possible event that can impact a project (Positive or Negative)
(Positive effect generally called as “Opportunity”).
• Risk Management:
The Art and Science of Identifying, Analyzing and Responding to risk factors
throughout the life of a project and in the best interest of its objectives.
• Risk :
• Which we assumed, but did not anticipate
• Something which we did not see but occurred
• Can arise from internal sources or external sources
• May also happen from some strategic business decision, which has gone
wrong
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Causes of Risk
Changing Technology Govt Regulations Trouble in land acquisition Outbreak in epidemic

Labour Unrest Exit of key personnel Currency fluctuations Change in design

Rising commodity prices Quality Related Cultural Changes Competition

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Objective of Today’s session

Concept of Risk & Risk Management

- Risk Management Process
- Risk Identification
Risk Analysis
- Qualitative & Quantitative approach
- Risk Response strategies

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Enterprise Risk Management Process Flow
Risk
Identification
What can go wrong?

Risk Risk
Monitoring Communication Analysis
and feedback
HowHow
has has
the the
riskrisk What is the likelihood
changed? and impact
and impact of
of risk?
risk?
changed?

Risk
Response
Should it be avoided,
transferred, reduced or Stay Ahead
or accepted?
accepted? Stay Relevant
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What is the difference between Risk & Problem

• A problem statement would be: “We have insufficient resources for installation
& commissioning activities which will delay the project by one week.”
• A risk statement could be: “We may have insufficient resources for installation &
commissioning activities which would delay the project by one week.”
• Problem is a certainty – Something that requires immediate action to solve it
• If a risk is not identified and managed, it can cause a problem.

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Uncertainty to Disaster

Uncertainty Risk Problem Crisis Disaster

To be strategized To be Planned To be dealt with To be Managed To be Recovered

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Goal of effective Project Risk Management
1, 3- Uncertainties can 4 - A project becomes more
impact Project processes prone to profitability
and outcomes leakage if more unknown
unknowns surface during
execution. Hence goal
High should be to reduce these
uncertainty

1
x 4
unknown unknowns to a
reasonable extent.

RM Focus

2- Project processes and

outcome are certain
Low
uncertainty
2
x 3

Few unknowns Lots of unknowns

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Uncertainty Spectrum

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Terminology
Risk Appetite and Risk Threshold refer to level of Risk an individual or an
organization is willing to accept.

• Risk Appetite (OR Tolerance):

- It’s high level description of acceptable risk e.g. ..
- Sponsor is ready to accept little risk to the schedule of this project.
• Risk Threshold :
- It’s a specific point at which Risk becomes unacceptable
- Sponsor will not accept if schedule of this project delays by 2 weeks or more

Both Appetite and Threshold are specific to individual or organization.

E.g. Organization may have more appetite for cost & schedule but zero
threshold for customer satisfaction or reputation
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Plan Risk Management

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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Risk Management Plan
• Approach, tools and data sources that may be used to perform risk
Methodology management on the project

Roles and responsibilities • Defines roles and responsibilities of risk management team

Budgeting • Assigns estimates, resources

Timing • Defines when and, frequency of risk management processes

Risk Categories • A structure that indicates all risks typically referred to as Risk Breakdown Structure (RBS)

Definitions of risk probability and

• Definitions of risk probability levels and its impact
impact

Probability and impact matrix • Prioritizing risks basis their probability and impact

Revised stakeholders’ tolerances • Includes stakeholders tolerances

• Defines how the outcomes will be documented, analyzed and

Reporting formats communicated

• Document how risk activities will be recorded for the benefit of the current
Tracking project, as well as for future needs and lessons learnt. How risk
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Risk Identification

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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Risk Identification Checklist

1. Scope 7. Subcontractor 13. Joint Ventures

2. Schedule 8. Weather 14. Quality
3. Commercial 9. Construction 15. Logistic
4. Legal 10. Supplier/ Vendor 16. Environmental
5. Safety 11. Currency 17. Political
6. Technology 12. Labor 18. Society

Technical Contractual Financial Weather Socio-Economic

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Risk Register
• A tool to note all risks at one place
• Used to identify potential risks in a project
• Includes all information about each identified risk, such as
- The nature of that risk,
- Level of risk,
- Who owns it and
- What are the mitigation measures in place to respond to it.
• It helps to have a plan in place to respond quickly before risks become problems

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Risk Register

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Perform Qualitative Analysis

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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Risk Assessment Matrix

Low Medium High

High
High
Likelihood

Medium

Probability
Low

Low
Low Consequences High

Consequences

Matrix can be (2 x 2), (3 x 3), (5 x 5) etc. Stay Ahead

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L&T Risk Profile

Risk Assessment Profile

SEVERITY CRITERIA PROBABILITY CRITERIA

Category Cost Overrun (% of CV) Category Criteria

I Catastrophic >2% A Most Likely > 75 %
II Major 1%<S<2% B Likely 50 % < P < 75 %
III Significant 0.5 % < S < 1 % C Occasional 25 % < P < 50 %
IV Minor 0.25 % < S < 0.50 % D Unlikely 10 % < P < 25 %
V Insignificant < 0.25 % E Remote 0 % < P < 10 %

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Risk Profile : Impact (Severity of Consequence)

Loss Caused by unsafe

Class Cost Overrun Overall Project Schedule
practices
Loss of Human life and
VH: Catastrophic >2% of CV Above 5 weeks
Property
Between 3 weeks to 5
H: Major 1%< S <2% of CV Loss of Human Life
weeks
Between 2 weeks to 3 Accident causing loss
M: Significant 0.5%< S < 1% of CV
weeks of >1 day
Between 1 week to 2 Accident causing loss
L: Minor 0.25% <S <0.5% of CV
weeks of ≤ 1 day

VL: Insignificant <0.25% of CV Less than 1 week Minor

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Risk Matrix : L&T Template
Probability
A -Most Likely Medium High Critical Critical Critical
1.00>P>0.75

B -Likely
0.75>P>0.50 Medium High High Critical Critical

C -Occasional
0.50>P>0.25 Low Medium High Critical Critical

D -Unlikely
0.25>P>0.10 Low Low Medium High High

E -Remote
0.10>P>0.00 Low Low Low Medium Medium

Severity V IV III II I
Insignificant Minor Significant Major Catastrophic
S<0.25 0.25>S>0.5 0.5<S<1.0 1.0<S<2.0 S>2.0

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Perform Quantitative Analysis

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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EMV Analysis ( Expected Monetary Value)

• Statistical Analysis
• Calculates the average outcomes of the scenarios
• Adopts a Risk neutral assumption
• Assessment : Probability X Impact
• Decision Tree
• Opportunities : + ve Value
• Threats : -ve Value

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Decision Tree – Product Decision Example
• To absorb some short-term excess production capacity at it’s Faridabad plant, Special
Instrument Products is considering a short manufacturing run either of two new
products,
- A temperature sensor OR
- A pressure sensor
• Market for each product is known if the products can be successfully developed.
However, there is some chance that it will not be possible to successfully develop them.
• Revenue
- A temperature sensor : Rs. 1.0 Cr
- A pressure sensor : Rs. 40 L
• If developed is unsuccessful for a product then there will be no sales, and the
development cost will be totally lost.
• Development Cost
- A temperature sensor : Rs. 10.0 L
- A pressure sensor : Rs. 1.0 L

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Decision Tree : Product Decision
Development Cost Development Outcome Sales Revenue Net Profit

Success 1,00,00,000
90,00,000
10,00,000

Failure 0
Temperature Sensor -10,00,000

Pressure Sensor Success 40,00,000

39,00,000
1,00,000

Failure 0
-1,00,000
Neither
0
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EMV : Product Decision
Development Cost Development Outcome Sales Revenue Net Profit

30% Success 1,00,00,000

90,00,000
10,00,000
EMV = (90,00,000 x 30%) + (-10,00,000 x 70%) = 20,00,000
Failure 0
Temperature Sensor -10,00,000
70%

80% Success 40,00,000

Pressure Sensor 39,00,000
1,00,000
EMV = (39,00,000 x 80%) + (-1,00,000 x 20%) = 31,00,000
Failure 0
-1,00,000
20%
Neither
0
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Plan Risk Response

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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Negative Risks Response Strategies

RISK

RISK RISK RISK RISK

ACCEPT AVOID TRANSFER MITIGATE

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Avoid
• You try to eliminate the risk or its impact.
• Mainly used for critical risks (such as catastrophic events)
• You do this by changing your plan, by changing the project scope, or by changing
the schedule.
• Used when you identify the risk in a very early stage;
• Else it’s difficult to adopt at a later stage as changing scope /schedule is costly

Example
• You observe that during certain periods of your project there is a chance of rain
and you have planned outdoor activities at that time.
• You move these activities to a few days later to avoid the impact of rain.

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Mitigate
• You will try to lessen the impact of the risk.
• Also decreases the severity of the risk.
• You do so by either by decreasing the probability of the risk happening or the
effect of the risk

Example
• Installation of sprinkler system in a building.
• Sprinklers cannot prevent fire but are aimed at reducing loss caused by fire
should one break out.
• You mitigate the risk this way.

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 Transfer
• Used when you lack skills or resources to manage the risk
• You transfer the risk to a third party to manage it.
• Transferring does not eliminate the risk; it only shifts the responsibility of
managing the risk to the third party.

Example
• There is a task to install some equipment, and you do not have expertise in
this task.
• The task is complex, and few contractors have successfully installed it
before.
• Therefore, you sub contract this activity to the Contractor.
• Thus, you have transferred the responsibility of the whole task to a third
party

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Accept
• You take no action to manage the risk except acknowledging it.
• You use this strategy when the risk is not critical.
• If it is not possible or practical to respond to the risk through the other
strategies, or
• You can accept the risk acknowledging it actively or passively.
- Active : By keeping provision of contingency amount
- Passive : By just noting in risk register

Example
• You are digging to construct a building, and there is ac chance that you may find
artifacts, though probability is low.
• So you note it down and take no action. A response plan may cost you a lot with
no guarantee of finding an object of interest.

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Other Risks
• Secondary Risks
- It is the type of risk which
occurs due to effect of risk
treatment.
- E.g. You put of fire using water.
But used so much of water that
now surface becomes slippery
and pose hazard.

• Residual Risks
- It is a portion of a risk that is
“left after a risk treatment”
- E.g. You put of the fire, but still
hot surface remains. You have
to wait till it cools down.

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Enhance
• You try to increase the chance of a opportunity happening to get benefits out of
this opportunity.
• This response strategy is opposite of the mitigation risk response strategy.

Example
• Let us say your project will be completed in three months.
• You find out that the government is about to float a similar type of project in two
months.
• Therefore, you can bid for a new project if you can complete your project in two
months.
• You try to compress the schedule so that the project can be completed ahead of
time and enhance your chance to bid for the new project

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Exploit
• Exploiting is about doing everything to ensure that the event happens.
• You make sure you realize the opportunity.
• You take the opportunity seriously and develop a strategy to realize it.

Example
• Suppose you are constructing a building, and suddenly the client tells you that if
you complete the project two months before the actual completion date, he will
give you a financial incentive.
• This is an opportunity for you
• You exploit this opportunity to complete the project ahead of time.
• You give overtime to your team members, bring in more employees, motivate the
team members by announcing rewards if they help you complete the project
ahead of time, etc

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Enhance Vs Exploit

Enhance
You try to realize the opportunity
You increase probability by certain
percentage
Opposite of the mitigation risk response
Takes the situation leniently
Exploit
You ensure that you will realize the
opportunity.
You increase the probability to 100%
Opposite of the avoid risk response strategy.
Takes it aggressively

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Share
• When you are not capable of realizing the opportunity on your own.
• You team up with another company and work together to realize the
opportunity.

Example
• Suppose that due to the lack of a specific technical capability, you are not able to
bid for a project, but your company wants to get this project.
• You team up with another company that is capable of doing this task and jointly
bid for the project.
• You share the opportunity here since you are sharing profits with other company

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Accept / Ignore
• You take no action to realize the opportunity
• You leave the opportunity as is, and if it happens on its own, you will benefit
from it.
• When the cost of the response is high, and there is less of a chance of it
occurring or the benefit does not outweigh the effort involved.

Example
• Suppose you need skilled resources in your project
• And you understand some other project has such resources available for you but
at a higher cost
• You don’t pursue this opportunity, accept the situation and decide to manage till
possible

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Risk Response Strategies

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Exercise

Figure out which risk response technique is being used in these situations

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Implement Risk Response

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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Implement Risk Response

List Critical
Avoid
Risks

Reduce Develop Update

Risk Identify Mitigate/
Probability Contingency Project
Planning Risks Transfer
/ Impact Plan Plan

Identify
Create a
Accept Residual
watch list
Risks

List
Non-Critical
Risks

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Monitor & Control Risks

Perform Perform Implement

Plan Risk Plan Risk Monitor &
Identify Risks Qualitative Quantitative Risk
Management Responses Control Risks
Risk Analysis Risk Analysis Responses

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Risk Matrix and Tolerance Bandwidths

Probability
A -Most Likely
1.00>P>0.75

B -Likely
0.75>P>0.50 High
X
C -Occasional
X = Pre-Mitigation Risk
Likelihood

0.50>P>0.25

Y = Risk w/Mitigation
D -Unlikely
0.25>P>0.10
= Current Status
E -Remote Y
0.10>P>0.00
Low
Severity V IV III II I
Insignificant Minor Significant Major Catastrophic
S<0.25 0.25>S>0.5 0.5<S<1.0 1.0<S<2.0 S>2.0

Consequence/Impact
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Question 1
If an un-identified risk occurs:

A. You will use the management reserve to manage it

B. You will use the contingency reserve to manage it
C. You will not take any action
D. You will log it into the risk registers

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Question 1
If an un-identified risk occurs:

A. You will use the management reserve to manage it

B. You will use the contingency reserve to manage it
C. You will not take any action
D. You will log it into the risk registers

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Question 2
The Project Manager and the team have just completed determining what will be
done if risk events happen and who will be responsible for executing those
actions. Which of the following roles will be responsible for acting if the risk
events happen?:

A. Customer
B. Discipline Lead
C. Project Manager
D. Risk Owner

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Question 2
The Project Manager and the team have just completed determining what will be
done if risk events happen and who will be responsible for executing those
actions. Which of the following roles will be responsible for acting if the risk
events happen?:

A. Customer
B. Discipline Lead
C. Project Manager
D. Risk Owner

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Question 3
You have identified a large number of risks during your risk identification
process. What will be your next step?

A. You will prioritize them using the Qualitative Risk Analysis process
B. Go for the Quantitative Risk Analysis
C. Assign the risk owner to each risk
D. Calculate the contingency reserve

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Question 3
You have identified a large number of risks during your risk identification
process. What will be your next step?

A. You will prioritize them using the Qualitative Risk Analysis process
B. Go for the Quantitative Risk Analysis
C. Assign the risk owner to each risk
D. Calculate the contingency reserve

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Question 4
In risk management, you have many strategies to manage risks. Which strategy
will you not use with the negative risks?

A. Mitigate
B. Exploit
C. Transfer
D. Avoid

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Question 4
In risk management, you have many strategies to manage risks. Which strategy
will you not use with the negative risks?

A. Mitigate
B. Exploit
C. Transfer
D. Avoid

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Question 5
A risk is a bad event that will adversely impact the project. This statement is:

A. Always true
B. Always false
C. Sometimes true
D. None of the above

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Question 5
A risk is a bad event that will adversely impact the project. This statement is:

A. Always true
B. Always false
C. Sometimes true
D. None of the above

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For the queries, please contact
madura.meenakshi@lntipm.org
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