BPP 3143 PROJECT RISK

MANAGEMENT

Chapter 1: Introduction to Risk

Management
 Lesson Outcome

•Understand fundamental aspects of risk management:

definition of risk and sources of risk

•Understand the concept of risk attitude and how to

manage it
I keep six honest serving men , they taught
me all I knew; their names are what and
why and when and how and where and
who. – Rudyard Kipling
 Definition of Risk

ISO • Effect of uncertainty on objectives.

GUIDE 73 • Effect may be positive or negative.
& ISO • It is described by an event, a change
in circumstances or a consequences.
31000

Institute of • Combination of the probability of an

Risk event and its consequence.
Managemen • Consequences can range from
positive to negative.
t
 Definition of Risk

Institute • Uncertainty of an event occurring

of that could have a impact on the
achievement of the objectives.
Internal • Risk is measured in terms of
consequences and likelihood.
Auditors

“Orange • Uncertainty of outcome, within a

Book” range of exposure, arising from a
from HM combination of the impact and the
probability of potential events.
Treasury
 Definition of Risk (cont’d)
•Two primary components of risk for a given event:
• A probability (likelihood) of occurrence of that event
• Magnitude of the event occurring (Impact)

•Risk =ƒ(likelihood, impact)

• As either the likelihood or impact increases, so does risk

• Both the likelihood and impact must be considered in risk

management
 Definition of Risk (cont’d)
Impact

Low likelihood High likelihood

High impact High impact

Low likelihood High likelihood

Low impact Low impact

Likelihoo
d
 Definition of Risk (cont’d)
Impact

TRANSFER TERMINATE
the risk to the activity
another party generating the
risk

TREAT
the risk to reduce
TOLERATE the likely impact
the risk its likely or exposure
impact

Likelihoo
d
 Definition of Risk (cont’d)
•Risk constitute a lack of knowledge of future events

•Favorable future events are called opportunities, whereas

unfavorable events are call threats or risks

•Another element of risk is its cause; something or lack of

something can induce a risky situation – source of
danger/hazard
 Definition of Risk (cont’d)
•For example:

A large hole in a road is a much greater danger to a

driver who is unaware of it than the one who travels the
road frequently and knows enough to slow down and go
around the hole.
 Uncertainty Spectrum

No information Partial information Complete information

UNKNOWN KNOWN KNOWN

UNKNOWN UNKNOWN

TOTAL GENERAL SPECIFIC TOTAL

UNCERTAINTY UNCERTAINTY UNCERTAINTY CERTAINTY

SCOPE OF PROJECT RISK MANAGEMENT

 Tolerance for Risk
•No specific textbook answer on how to manage risk – one
size does not fit all projects or circumstances

•Project manager must rely upon sound judgment and the

use of appropriate tools in dealing with risk

•Ultimate decision on how to deal with risk is based in part

upon the project manager’s tolerance of risk
 Tolerance for Risk (cont’d)
•Project manager is responsible for:
• Setting risk acceptability thresholds
• Identifying risks (threats or opportunities)
• Assessing probability & impacts
• Proposing appropriate responses
• Implementing agreed actions

•ALL of the above are affected by Risk Attitude

 Risk Attitude

What is “RISK
ATTITUDE”?
 Risk Attitude (cont’d)
• Attitude = Chosen response to a given situation

•Only defined in relation to something specific

• “ Attitude towards what?”

•Affected by perception of situation

• “ What do I think it is?”
 Risk Attitude (cont’d)
• Risk Attitude = Risk + Attitude
• Chosen response to uncertainty that matters, influenced by
perception

•Risk attitude exists on a spectrum

•The attitude operates at many levels – individual, groups,

nations
 Sources of Risk

•Two main sources:

• Internal risks

• External risk
 Sources of Risk (cont’d)

•Internal risks
• Originated inside the project

• Two categories:
i) Market risk

ii) Technical risk

 Sources of Risk (cont’d)

Market risk
• Risk not fulfilling either market needs or the
requirements

•Sources :
• incomplete or inadequate needs and requirements
definitions
• Failure to identify changing needs and requirements
• Failure to identify competitors’ latest products
 Sources of Risk (cont’d)

Technical risk
• Risk not meeting time, cost or performance
requirements due to technical problems

• Tends to be higher in projects involving activities

that are unfamiliar or new acquired method or
technology
 Sources of Risk (cont’d)
 External Risk
• Originate from sources outside the project
• Have little or no control over these
• Include:
• Market conditions
• Competitors actions
• Government regulations
• Interest rates and exchange rate
• Decision by senior management or the customer
regarding project priorities, staffing etc
• Customer needs and behaviour
 Conclusion

•Risk associated with a project must received

careful examination

•With careful planning and wise management, some

inherent project risks can be substantially reduced
or virtually eliminated