Chapter 11:

Project Risk Management

Information Technology Project Management, Ninth Edition
Note: See the text itself for full citations

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives (1 of 2)

• Explain the concept of risk as it relates to project management,

and list the advantages of managing project risks according to
best practices
• Discuss the elements of planning risk management and the
contents of a risk management plan
• List common sources of risks on information technology (IT)
projects
• Describe the process of identifying risks and create a risk register
and risk report
• Discuss qualitative risk analysis and explain how to calculate risk
factors, create probability/impact matrixes, and apply the Top Ten
Risk Item Tracking technique to rank risks

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives (2 of 2)

• Explain quantitative risk analysis and how to apply decision trees,

simulation, and sensitivity analysis to quantify risks
• Provide examples of using different risk response planning
strategies to address both negative and positive risks
• Discuss how to monitor risks
• Describe how software can assist in project risk management
• Discuss considerations for agile/adaptive environments

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Importance of Project Risk Management (1 of 7)

• Project risk management is the art and science of identifying,

analyzing, and responding to risk throughout the life of a project
and in the best interests of meeting project objectives
• Risk management is often overlooked in projects, but it can help improve
project success by helping select good projects, determining project
scope, and developing realistic estimates

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Importance of Project Risk Management (2 of 7)

• Research shows a need to improve project risk management

• Study by Ibbs and Kwak shows risk management has the lowest
maturity rating of all knowledge areas
• A similar survey was completed with software development companies in
Mauritius, South Africa, and risk management also had the lowest
maturity
• KLCI study shows the benefits of following good software risk
management practices

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Importance of Project Risk Management (3 of 7)

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Global Issues

• Many people around the world suffered from financial losses as

various financial markets dropped in the fall of 2008, even after
the $700 billion bailout bill was passed by the U.S. Congress
• According to a global survey of 316 financial services executives, over
70 percent of respondents believed that the losses stemming from the
credit crisis were largely due to failures to address risk management
issues
• Worldwide banking and insurance sectors will spend about $78.6
billion on risk information technologies and services in 2015,
growing to $96.3 billion by 2018

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The Importance of Project Risk Management (4 of 7)

• A dictionary definition of risk is “the possibility of loss or injury”

• General definition of a project risk: an uncertainty that can have a
negative or positive effect on meeting project objectives
• Managing negative risks involves a number of possible actions that
project managers can take to avoid, lessen, change, or accept the
potential effects of risks on their projects
• Positive risk management is like investing in opportunities

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Best Practice

• Some organizations make the mistake of only addressing tactical

and negative risks when performing project risk management
• David Hillson suggests overcoming this problem by widening the scope
of risk management to encompass both strategic risks and upside
opportunities, which he refers to as integrated risk management
• Hillson described the importance of good working relationships;
especially between the project sponsor and project manager

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The Importance of Project Risk Management (5 of 7)

• Risk utility is the amount of satisfaction or pleasure received from

a potential payoff
• Utility rises at a decreasing rate for people who are risk-averse
• Those who are risk-seeking have a higher tolerance for risk and their
satisfaction increases when more payoff is at stake
• Risk-neutral approach achieves a balance between risk and payoff

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The Importance of Project Risk Management (6 of 7)

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Advice for Young Professionals

• Young project professionals are sometimes more willing to take

risks with unique or untested approaches
• Take the time to find out what other, more experienced people might feel
about the circumstances of a project before making up your mind about
potential risks
• Then, taking other views into account, you can determine how best to plan for the
impacts that might occur while balancing the rewards of a potential payoff from a
unique or untested approach

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The Importance of Project Risk Management (7 of 7)

• Project risk management processes

• Planning risk management: deciding how to approach and plan the risk
management activities for the project
• Identifying risks: determining which risks are likely to affect a project and
documenting the characteristics of each
• Performing qualitative risk analysis: prioritizing risks based on their
probability and impact of occurrence
• Performing quantitative risk analysis: numerically estimating the effects
of risks on project objectives
• Planning risk responses: taking steps to enhance opportunities and
reduce threats to meeting project objectives
• Implementing risk responses: implementing the risk response plans
• Monitoring risk: monitoring identified and residual risks, identifying new
risks, carrying out risk response plans, and evaluating the effectiveness
of risk strategies throughout the life of the project
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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Planning Risk Management (1 of 3)

• Main output of this process is a risk management plan

• Documents the procedures for managing risk throughout a project
• The project team should review project documents as well as
corporate risk management policies, risk categories, lessons-
learned reports from past projects, and templates for creating a
risk management plan
• It is also important to review the risk tolerances of various stakeholders

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Planning Risk Management (2 of 3)

• Additional plans
• Contingency plans: predefined actions that the project team will take if
an identified risk event occurs
• Fallback plans: developed for risks that have a high impact on meeting
project objectives, and are put into effect if attempts to reduce the risk
are not effective
• Contingency reserves or allowances: funds included in the cost baseline
that can be used to mitigate cost or schedule overruns if known risks
occur
• Management reserves: funds held for unknown risks that are used for
management control purposes

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Planning Risk Management (3 of 3)
Topic Questions to Answer

Methodology How will risk management be performed on this project? What tools and data
sources are available and applicable?
Roles and responsibilities Which people are responsible for implementing specific tasks and providing
deliverables related to risk management?
Budget and schedule What are the estimated costs and schedules for performing risk-related activities?

Risk categories What are the main categories of risks that should be addressed on this project? Is
there a risk breakdown structure for the project? (See the information on risk
breakdown structures later in this chapter.)
Risk probability and impact How will the probabilities and impacts of risk items be assessed? What scoring
and interpretation methods will be used for the qualitative and quantitative
analysis of risks? How will the probability and impact matrix be developed?
Revised stakeholders’ Have stakeholders’ tolerances for risk changed? How will those changes affect the
tolerances project?
Tracking How will the team track risk management activities? How will lessons learned be
documented and shared? How will risk management processes be audited?
Risk documentation What reporting formats and processes will be used for risk management
activities?

Table 11-2 Topics addressed in a risk management plan

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Common Sources of Risk on IT Projects (1 of 3)

• Several studies show that IT projects share some common

sources of risk
• The Standish Group developed an IT success potential scoring sheet
based on potential risks
• Other broad categories of risk help identify potential risks
• Market risk
• Financial risk
• Technology risk
• People risk
• Structure/process risk
• A risk breakdown structure is a hierarchy of potential risk
categories for a project

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Common Sources of Risk on IT Projects (2 of 3)

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Common Sources of Risk on IT Projects (3 of 3)
Knowledge Area Risk Conditions

Integration Inadequate planning; poor resource allocation; poor integration management; lack of post-
project review
Scope Poor definition of scope or work packages; incomplete definition

Time Errors in estimating time or resource availability; errors in determining the critical path; poor
allocation and management of float; early release of competitive products
Cost Estimating errors; inadequate productivity, cost, change, or contingency

Quality Poor attitude toward quality; substandard design, materials, and workmanship; inadequate
quality assurance program
Human resource Poor conflict management; poor project organization and definition of responsibilities;
absence of leadership
Communications Carelessness in planning or communicating

Risk Ignoring risk; unclear analysis of risk; poor insurance management

Procurement Unenforceable conditions or contract clauses; adversarial relations

Stakeholders Lack of consultation with key stakeholder; poor sponsor engagement

Table 11-3 Potential negative risk conditions associated with

each knowledge area. *Source: R.M. Wideman
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What Went Wrong?

• In a 2013 survey, risk management was a high priority

• However, only 66 percent of companies said they often build it into their
strategy planning decisions
• Airline incidents cause concerns, especially when lives are lot
• The 2015 Germanwings crash resulted in 150 deaths, allegedly due to
the co-pilot’s poor mental state
• They responded immediately by implementing a rule that two people
must be in the cockpit at all times and are considering changes to
medical and psychological tests for pilots

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Identifying Risks (1 of 5)

• Understanding what potential events might hurt or enhance a

particular project
• You cannot manage risks if you do not identify them first
• Another consideration is the likelihood of advanced discovery
• Often viewed at a program level rather than a project level
• Suggestions for identifying risks: tools and techniques
• Brainstorming
• The Delphi Technique
• Interviewing
• SWOT analysis

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Identifying Risks (2 of 5)

• Brainstorming
• Group attempts to generate ideas or find a solution for a specific
problem by amassing ideas spontaneously and without judgment
• An experienced facilitator should run the brainstorming session
• Be careful not to overuse or misuse brainstorming
• Psychology literature shows that individuals produce a greater number of ideas
working alone than they do through brainstorming in small, face-to-face groups
• Group effects often inhibit idea generation

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Identifying Risks (3 of 5)

• Delphi Technique
• Used to derive a consensus among a panel of experts who make
predictions about future developments
• Provides independent and anonymous input regarding future events
• Uses repeated rounds of questioning and written responses and avoids
the biasing effects possible in oral methods

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Identifying Risks (4 of 5)

• Interviewing
• Fact-finding technique for collecting information in face-to-face, phone,
e-mail, or virtual discussions
• Interviewing people with similar project experience is an important tool
for identifying potential risks

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Identifying Risks (5 of 5)

• SWOT analysis
• Strengths, weaknesses, opportunities, and threats
• Helps identify the broad negative and positive risks that apply to a
project

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The Risk Register (1 of 4)

• Important output of the risk identification process

• List of identified risks and other information needed to begin creating a
risk register
• Contains the results of various risk management processes and that is often
displayed in a table or spreadsheet format
• Tool for documenting potential risk events and related information
• Risk events refer to specific, uncertain events that may occur to the
detriment or enhancement of the project

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The Risk Register (2 of 4)

• Risk register contents

• Identification number for each risk event
• Rank for each risk event
• Name of each risk event
• Description of each risk event
• Category under which each risk event falls
• Root cause of each risk
• Triggers for each risk; indicators or symptoms of actual risk events
• Potential responses to each risk
• Risk owner or person who will own or take responsibility for each risk
• Probability and impact of each risk occurring
• Status of each risk

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The Risk Register (3 of 4)

No. Rank Risk Description Category Root Triggers Potential Risk Probability Impact Status
Cause Responses Owner
R44 1

R21 2

R7 3

Table 11-4 Sample risk register

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The Risk Register (4 of 4)

• Risk report contents

• Sources of overall project risk
• Important drivers of overall project risk exposure
• Summary information on risk events

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Performing Qualitative Risk Analysis

• Assess the likelihood and impact of identified risks to determine

their magnitude and priority
• Risk quantification tools and techniques
• Probability/impact matrixes
• The Top Ten Risk Item Tracking
• Expert judgment

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Using Probability/Impact Matrixes to Calculate Risk
Factors (1 of 3)

• Lists relative probability of a risk occurring on one side of a matrix

or axis on a chart and the relative impact of the risk occurring
• List the risks and then label each one as high, medium, or low in terms
of its probability of occurrence and its impact if it did occur
• Calculates risk factors
• Numbers that represent the overall risk of specific events based on their
probability of occurring and the consequences to the project if they do
occur

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Using Probability/Impact Matrixes to Calculate Risk
Factors (2 of 3)

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Using Probability/Impact Matrixes to Calculate Risk
Factors (3 of 3)

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Top Ten Risk Item Tracking (1 of 2)

• Qualitative risk analysis tool that helps to identify risks and

maintain an awareness of risks throughout the life of a project
• Involves establishing a periodic review of the top ten project risk items
• Includes the current ranking, previous ranking, number of times the risk
appears on the list over a period of time, and a summary of progress
made in resolving the risk item
• A watch list is a list of risks that are low priority, but are still
identified as potential risks
• Qualitative analysis can also identify risks that should be evaluated
quantitatively

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Top Ten Risk Item Tracking (2 of 2)

Monthly Monthly Monthly

Ranking Ranking Ranking

Risk Event Rank This Rank Last Number of Risk Resolution Progress
Month Month Months in
Top Ten
Inadequate 1 2 4 Working on revising the entire project
planning management plan
Poor 2 3 3 Holding meetings with project customer
definition and sponsor to clarify scope
Absence of 3 1 2 Assigned a new project manager to lead
leadership the project after the previous one quit
Poor cost 4 4 3 Revising cost estimates
estimates
Poor time 5 5 3 Revising schedule estimates
estimates

Table 11-5 Example of top ten risk item tracking

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Media Snapshot

• The story of the Titanic is known throughout the world, and on

April 15, 2012, people acknowledged the anniversary of the
Titanic’s sinking
• A recent article in PMI’s Virtual Library explains how to avoid “the Titanic
factor” in your projects by analyzing the interdependence of risks
• For example, the probability of one risk event occurring might change if another
one materializes, and the response to one risk event might affect another

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Performing Quantitative Risk Analysis

• Often follows qualitative risk analysis, but both can be done

together
• Large, complex projects involving leading edge technologies often
require extensive quantitative risk analysis
• Main techniques
• Decision tree analysis
• Simulation
• Sensitivity analysis

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Decision Trees and Expected Monetary Value (EMV)
(1 of 2)

• A decision tree is a diagramming analysis technique used to help

select the best course of action in situations in which future
outcomes are uncertain
• Estimated monetary value (EMV) is the product of a risk event
probability and the risk event’s monetary value
• You can draw a decision tree to help find the EMV

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Decision Trees and Expected Monetary Value (EMV)
(2 of 2)

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Simulation (1 of 3)

• Uses a representation or model of a system to analyze the

expected behavior or performance of the system
• Monte Carlo analysis simulates a model’s outcome many times to
provide a statistical distribution of the calculated results
• Predict the probability of finishing by a certain date or the probability that the cost
will be equal to or less than a certain value
• You can use several different types of distribution functions when performing a
Monte Carlo analysis

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Simulation (2 of 3)

• Steps of a Monte Carlo analysis

• Collect the most likely, optimistic, and pessimistic estimates for the
variables in the model
• Determine the probability distribution of each variable
• Select a random value based on the probability distribution for each
variable
• Run a deterministic analysis or one pass through the model
• Repeat steps three and four many times to obtain the probability
distribution of the model’s results

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Simulation (3 of 3)

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What Went Right?

• Microsoft Excel is a common tool for performing quantitative risk

analysis
• General Motors uses simulation for forecasting its net income, predicting
structural costs and purchasing costs of vehicles, and determining the
company’s susceptibility to different kinds of risk
• Eli Lilly uses simulation to determine the optimal plant capacity that
should be built for developing each drug
• Procter & Gamble uses simulation to model foreign exchange risk
• Monte Carlo simulation can also help reduce schedule risk on
agile projects

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Sensitivity Analysis (1 of 2)

• Used to show the effects of changing one or more variables on

an outcome
• For example, many people use it to determine what the monthly
payments for a loan will be given different interest rates or periods of the
loan
• Spreadsheet software, such as Microsoft Excel, is a common tool
for performing sensitivity analysis

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Sensitivity Analysis (2 of 2)

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Planning Risk Responses (1 of 3)

• After identifying and quantifying risks, the organization must

decide how to respond to them
• Basic response strategies for negative risks
• Risk avoidance
• Risk acceptance
• Risk transference
• Risk mitigation
• Risk escalation
• Basic response strategies for positive risks
• Risk exploitation
• Risk sharing
• Risk enhancement
• Risk acceptance
• Risk escalation

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Planning Risk Responses (2 of 3)

Technical Risks Cost Risks Schedule Risks

Emphasize team support Increase the frequency of Increase the frequency of
and avoid stand-alone project monitoring project monitoring
project structure
Increase project manager Use WBS and CPM Use WBS and CPM
authority
Improve problem handling Improve communication, Select the most experienced
and communication understanding of project project manager
goals, and team support
Increase the frequency of Increase project manager
project monitoring authority
Use WBS and CPM

Table 11-6 General risk mitigation strategies for technical,

cost, and schedule risks. *Source: J. Couillard

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Planning Risk Responses (3 of 3)

• It’s also important to identify residual and secondary risks

• Residual risks: risks that remain after all of the response strategies have
been implemented
• Secondary risks: direct result of implementing a risk response

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Implementing Risk Responses

• Main executing process performed as part of project risk

management is implementing risk responses
• Key outputs
• Change requests
• Project documents updates

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Monitoring Risks

• Involves ensuring the appropriate risk responses are performed,

tracking identified risks, identifying and analyzing new risk, and
evaluating effectiveness of risk management throughout the
entire project
• Project risk management does not stop with the initial risk analysis
• Carrying out individual risk management plans involves
monitoring risks based on defined milestones and making
decisions regarding risks and their response strategies
• Project teams sometimes use workarounds—unplanned responses to
risk events—when they do not have contingency plans in place

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Using Software to Assist in Project Risk Management

• Risk registers can be created in a simple Microsoft Word or Excel

file or as part of a sophisticated database
• More sophisticated risk management software, such as Monte Carlo
simulation tools, help develop models and use simulations to analyze
and respond to various risks

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Considerations for Agile/Adaptive Environments

• All types of projects should share knowledge related to risks as

quickly as possible and keep documents up to date
• Risk is considered during each iteration for agile/adaptive projects, which
does elevate its importance
• Changing priorities can be addressed more easily by changing the
product backlog for each iteration

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Chapter Summary

• Risk is an uncertainty that can have a negative or positive effect on

meeting project objectives
• Many organizations do a poor job of project risk management, if they do
any at all
• Successful organizations realize the value of good project risk
management
• Risk management is an investment
• Costs are associated with identifying risks, analyzing those risks, and
establishing plans to address them
• Implementing risk responses involves putting the appropriate risk
response plans into action
• Monitoring risks involves monitoring implementation of risk response plans,
tracking identified risks, identifying and analyzing new risks, and evaluating
effectiveness of risk management throughout the entire project

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