Basic Concepts of Risk

Management as
Demonstrated by Post-
Mortem Failure Analysis
 What is Risk?

• Risk is the possibility, or uncertainty of an

event occurring that will have an impact
(positive or negative) on the achievement of
project objectives.
 Risk is inherent in every project,
regardless of size and complexity
 Risk intrinsically is neither good nor
bad
 Risk is not something to fear, but
something to manage
 Risk is a fundamental element of
opportunity
 Benefits of Good Risk Management

• Proactive, not reactive

• Reduces surprises and negative consequences
• Take advantage of opportunistic risks
• Control of the project future
• Improves performance chances

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The “Normal” Risk Event Graph

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 The Risk
Management
Process

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The Risk Breakdown Structure (RBS)

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 Risk Severity Matrix
Failure Mode and Effects Analysis (FMEA)
Impact × Probability × Detection = Risk Value

User Interface
4 Backlash problems
Likelihood

Red zone (major risk)

3 Yellow zone (moderate risk)
Green zone (minor risk)

System
2
freezing

Hardware
1 malfunc-
tioning

1 2 3 4 5
Impact
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 Quantitative Analysis of Risk
• Uncertainties measured by standard statistical functions
These are:
• Mean Values (Expectation)

• Variance / Standard Deviation

• Probability of Exceedance

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 Mean Value (Expectation)

• Mean Value or expected value of a random variable X:

∞
o E(X) = ∫−∞ 𝑥𝑥 𝑑𝑑𝑑𝑑(𝑥𝑥) where F(X) is the cumulative distribution function of X
• In Excel, Mean Value is calculated with formula “average()”

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 Graph of mean value
• For symmetric distributions

• For asymmetric distributions

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 Variance
• For a discrete random variable:
o Var(X) = ∑∞
𝑖𝑖=1 𝑝𝑝𝑖𝑖 [𝑥𝑥𝑖𝑖 −𝐸𝐸(𝑋𝑋)] 2

• In Excel, Variance is calculated with function “var.s()”.

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 Standard deviation
• Standard deviation 𝜎𝜎 of random variable X :
o 𝜎𝜎(X) = 𝑉𝑉𝑉𝑉𝑉𝑉 𝑋𝑋

• Standard deviation measures the “spread” around the mean

• 𝜎𝜎].
For normal random variable
approximately 95% of realizations fall
in that interval.

• In Excel formula “stdev.s()”

calculates the standard deviation.

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 Probability of Exceedance (POE)
• Probability of exceeding threshold value y .
• The shaded area on the graph is the
probability of exceedance.

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POE Insurance Loss Calculation

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 • Activity duration follows a beta distribution.

• Three time estimates for each activity: optimistic,

pessimistic, and most likely.

PERT—Program
Evaluation Review
Technique

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 Activity Time Calculations

The weighted average activity time is computed by

the following formula:

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 Monte Carlo method

• Monte Carlo simulation

• Estimates various quantitative characteristics

• Random numbers replace uncertain values.

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 For Active, Ongoing Projects: Key Risk Register Components

• Many variations and templates exist. . .here are the key

components of a standard tool:
– Risk identification
– Condition
– Consequence
– Qualitative analysis
• Probability
• Impact
• Exposure
– Mitigation
– Contingency
– Triggers
– Assignee

Completion of each is done in a step-wise fashion for all identified risks

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 Failure Analysis Register
– Failure identification: describe the failure point

– Condition: capture the likely cause of the failure

– Consequence: the result of the failure

– Mitigation: document the team’s plans to lower the probability or to reduce the impact ahead of
time (preventative steps)

– Contingency: what countermeasures or contingencies did the team take to avoid the risk or failure

– Triggers: what event or circumstance happened that cause the team to invoke the contingency
plan

– Assignee: who had assigned responsibility within the project team to address, manage or
otherwise monitor this risk and to raise alarms at the appropriate time
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 Troubled Project General Facts
• Doomed to fail
• Political savvy and courage
• Failure > success
• Failure in many places, but success in only one
• No failures overnight
• Companies and troubled projects
• PMs and skills to manage troubled projects
• Stakeholder and client input

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 Troubled Project Turnaround – Some Observations

• Very high project success rates

• Followers, not leaders
• Demonstrated turnaround skills
• Warning sign recognition
• Recovery costs
• Recovery goals can be different than original
• For some, little or no recovery

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 Failure Root Causes

• Three general categories of failures:

– Management mistakes

– Planning mistakes

– External influences

corrosionpedia

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 • Two different concepts and
approaches

• Recovery

Project Recovery • Rescue

and Rescue

eCameron Inc

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