229 Chapter 11 PROJECT RISK MANAGEMENT Project risk management typically involves the processes of risk managem\ ent planning, risk identification, risk analysis, risk response planning, an\ d risk monitoring and control. Project risk management is one of the critical a\ ctivities impacting the success of a project. This chapter contains four issue - based cases relating to Project Risk Management, Chapter 11 of the PMBOK ® Guide . 1. Risk Policies in Project Russia Risk Policies in Project Russia is a comprehensive case. It brings the readers back in time to the war between France and Russia in 1812. The case details project risk management in that famous war project. 2. Risk under the Microscope As an issue - based case, Risk under the Microscope shows how a project team practices project risk management. The case also illustrates how com- munication plays an important role in successful risk management. 3. Monte Carlo in Italy Monte Carlo in Italy is an issue - base cased. It portrays a risk management practice of a company. The case discusses the use of Monte Carlo Analysis, a quantitative risk analysis tool. 4. Probability and Impact Probability and Impact is an issue - based case. It presents the use of prob- ability and impact as a risk analysis procedure. The case also discusses the development of appropriate risk thresholds for the nature of risk events\ . CASE STUDIES IN PROJECT, PROGRAM, AND ORGANIZATIONAL PROJECT MANAGEMENT Dragan Z. Milosevic, Peerasit Patanakul & Sabin Srivannaboon Copyright 0 2010 by John Wiley & Sons, Inc. All rights reserved. 230 CASE STUDIES CHAPTER SUMMARY Name of Case Area Supported by Case Case Type Author of Case Risk Policies in Project Russia Risk Management in a War Project Issue - based Case Dragan Z. Milosevic Risk under the Microscope Risk Management Process Issue - based Case Ferra Weyahuni Monte Carlo in Italy Risk Management Process Issue - based Case Meghana Rao Probability and Impact Qualitative Risk Analysis Issue - based Case Jovana Riddle 231 Risk Policies in Project Russia Dragan Z. Milosevic This case study reviews some of the major risk management tactics used i\ n a typi- cal war project — Napoleon ’ s war with Russia in 1812. The war outcome had a stunning end and caused turbulent rami cations for the European map. A lot of ink was poured to explain the destruction of Napoleon ’ s forces, known as the Grand Army, and experts only agreed on the fact that the Russian winter had a majo\ r impact on the war outcome. In the study, we take a risk view of the war con ict. MISERY AND DEATH WAITED THE GRAND ARMY For Napoleon, many dilemmas stayed unresolved even after entering Russia\ . He looked amazed by the glory awaiting conquerors of Russia but at the same\ time he was painfully aware that he might make the same error Charles XII, Sw\ edish military genius, committed one century earlier — attacking the Russians in the winter. Listen to what Count de Segur, who was with him in Russia, has to say about that.
“ The last days of July and the first ones of August in 1812 were stiflingly hot in Vitebsk. In the old city palace Napoleon Bonaparte, Emperor of the French\ , prowled restlessly from room to room in his undergarments. His mind, brilliant author of 12 years of triumphs and 20 famous victories, was torn between\ prudent counsel to encamp now against the coming winter and bold counsel to marc\ h straight on to Moscow. So he paced . . . in this state of perplexity he spoke a few disconnected words . . . ‘ Well, what are we going to do? ’ ‘ Shall we stay here? ’ ‘ Shall we advance? ’ ‘ How can we stop on the road to glory? ’ For 15 torrid days, Napoleon groaned under the weight of his thoughts. B\ y night he tossed his coat, arising frequently from his biography of Charl\ es XII — he would never . . . He shouted, ‘ I ’ ll never repeat the folly of Charles. ’ ” Instead of the glory, misery and death were awaiting the Grand Army by the time it exited the “ sacred soil of Russia ” , as the Russians had the habit of saying in Kovno, December 13, 1812. Segur was a witness: “ Instead of the four hundred thousand soldiers who fought so many successful battles with the\ m, 232 CASE STUDIES who had rushed so valiantly into Russia, they saw issuing from the white\ , ice - bound desert only one thousand soldiers and troopers still armed and twe\ nty thousand being clothed in rags, with bowed head, dull eyes, ashy, cadaverous faces, and long ice - stiffened beards . . . And, this was the Grand Army! ” So, 380,000 soldiers of the Grand Army perished. How was this possible? Do the risk planning practices of Napoleon have anything to do with this? Let ’ s review major events and practices in turn. BACKGROUND The underlying cause of almost each war tends to be of an economic natur\ e. This war, in Europe from the beginning of the 19th century, is no exception. The three strategic players to the con ict are the great powers of England, France, and Russia. France and England are major rivals and contenders for the centr\ al place in Europe. One more power is involved — Russia. The main hero of this con ict who was heavily favored to win this war was France. How was the strategi\ c triangle formed? The French wanted to execute their economic blockade of England, reduce \ their goods from European markets, and thus stifle the economy of the co\ untry.
The French threatened to attack any country that would violate the block\ ade.
Candidates for such a violation risked war with Napoleon ’ s Grand Army, the most famous army of its time. To beat Russia was a big feat for each army; a trophy for every general. \ Napoleon had already defeated all armies he could dream of. But nobody h\ ad beat Russia! To be truthful, many had famous warriors had tried but the Russian winter proved to be an invincible opponent and a major ally of Russia. S\ ome lived to send the message about what they learned to potential invaders.\ Swedish King Charles XII, known as Charles the Madman, the warrior with the pedi\ gree, in 1709 attacked Russia in the winter, lost the whole army, and proclaimed in writing: Don ’ t attack Russia in the winter! But future invaders did not listen. Napoleon saw Russia as a great trophy. Yes, alleged Russian violation of the blockade was used for the proxy cause of his attack, but this had not be\ en proven.
Some rumors circulated that said that Napoleon, the second most successf\ ul general of all time (Alexander the Great was considered the first), dr\ eamed of overtaking Alexander the Great, and becoming number 1. Possible, but such were ambitions of Napoleon, who was often called the Anti - Christ and the tormentor of Europe. In truth, the Grand Army was made up of all European nations. There were, for example, 79,000 Bavarian, Italian, and French soldiers and 34,\ 000 Austrian soldiers. The Grand Army was a microcosm of European armies. But they did not volunteer in the army; they had to serve because their coun\ try was subdued by France. In case of Napoleon ’ s serious defeat, his army could face the rebellion of the foreign soldiers which meant that war carried the poten\ tial for freeing Europe from the domination of Napoleon. Project Risk Management 233 Lastly, winds of bourgeois revolution were felt throughout Europe. Napoleon ’ s expectations were that Russian farmers would accept their own revolution\ and that they would take his side. He was incorrect, although he hoped to ex\ port the revolution and expand its ideas. IT STARTED LONG BEFORE THE WAR BEGAN Paris balls and parties as social gatherings were very much appreciated \ and among the best of their kind in Europe. The winter balls were especially good. People who typically frequented the balls were nobility and the politically eli\ te. If you had gone to a classy Paris ball you would have had a chance to see some \ very well - known and powerful people. There was a hierarchy of balls, that depended on the power of or historic strength (tradition) of the host(ess) or\ the list of invitees. The higher those were, the higher signi cance of the ball. If Napoleon was in attendance, the ball would be of the rst level of hierarchy. Such are the reasons that balls and parties of a higher rank were used to host the pe\ ople with high intelligence knowledge, and so were automatically suitable for gath\ ering intelligence data. People of Russian nobility and the politically elite used to be frequent\ guests of these balls and parties. And they fit very well. Be reminded that that the higher class in Russia had spoken French as a first language. So, Russians felt\ at home in Paris. As people with strong social capital they liked to mingle with the Frenc\ h crowd of high social standing, and were constantly invited to the balls.\ Napoleon liked to frequent the balls. He had a specific question for the\ high military visitors from Russia who were there: “ What would you do if you commandeered the Russian Army and I attacked you (with the Grand Army)? ” Different visitors gave him different answers, often made up. But some replied extremely truthfully like general Beniggsen, who happened to be the comm\ and- ing officer of the Russian army at the time of Napoleon ’ s attack. He was asked by Napoleon and his answer was exactly what he would do a few years late\ r: “ I would never fight your army back, it is too strong; I would retreat an\ d retreat, waiting for the winter to finish you. ” It is not clear how Napoleon processed this information nor whether he believed it. But it is a fact that Napoleon h\ ad a spar- row in his hand, whether consciously knowing it or not. LESSONS OF THE PAST During the times of Charles XII, one of the greatest secrets was the siz\ e of the population of Sweden. Why? The King did not want anyone outside the coun- try to know just how many people lived in his country who were available\ to ght in a war. That number would actually show a small country that does not have the population that supports its war policies. Despite a ferocious \ reputa- tion, Swedish soldiers, whose ancestors the Vikings also enjoyed standing of 234 CASE STUDIES exceptional ghters, would be defeated more frequently should their enemies know how many Swedish opponents they faced in the long term. In the beginning of the 18th century, Charles found himself in the long war with Peter the Great, the Russian tsar. Charles dominated the Baltics, where Peter wanted to build the Russian fleet which would become the influenti\ al force. After several smaller victories of Charles ’ army, the major battle took place in 1709 near the river Poltava. Charles ’ army was not only defeated but it was destroyed. The ruler Charles managed to flee southward to Russian arch nemesis Turkey. He published a book (actually his aid authored the book) whose major message to future invaders of Russia was very simple: “ Don ’ t attack Russia in the winter . . . ” Napoleon not only read the book carefully but liked to be seen reading i\ t over and over. He tried to serve as an example to his generals and made sure they read the book and understood the experiences of Charles. In fact, the bo\ ok had immeasurable value for the Grand Army. In terms of risk planning processes, Napoleon used the book in a proper way, at least initially. RUSSIAN WINTER In a simpli ed manner, rst, judging by the campaigns before Russia, e.g., Egypt, as usual, Napoleon did not have but the slightest of sketches abo\ ut how to direct the war against Russia. Troops were told that Napoleon was burning from desire to have the decisive battle against Russians as soon as poss\ ible, defeat them, and make them surrender. Over! And all of that was to happen before the infamous Russian winter came. The Russian strategy was diametri- cally opposed. Exactly like general Beniggsen — German by origin at the time of the vision — the commander of the Russian army predicted they would retreat, retreat, and retreat (surprisingly Segur observed that “ there was more order in their victory than in our victory. ” ) and told his troops to avoid a decisive battle as much as possible, and wait for the Russian winter to come and help \ nish off French forces. Well, two strategies look very mutually exclusive, if one happens, that one excludes the other. Let ’ s see how the two strategies unfolded in several risk events. On June 20, 1812, unknown to the Russians, the multinational Grand Army entered Russian territory. To their surprise they were able to set foot on Russian soil without meeting with any resistance. They found peace there: they had left war on their side. However, a single Russian officer commanding a night patrol soon appeared. He asked the intruders who they were. ‘ Frenchmen, ’ they told him. ‘ What do you want? ’ he questioned further. ‘ And why have you come to Russia? ’ One of the sappers answered bluntly, ‘ To make war on you! ’ While a stealthy entry was favorable to the Grand Army from the aspect of having the opposing army surrender, it was not so. Namely, for an army to surrender, it has to be formed, which the Russian Army was not. Project Risk Management 235 The battle of Borodino lasted one day and was the only battle in the war\ of greater interest, but was not the decisive battle. That occurred on September 7, 1812, 79 days after entry of the Grand Army into Russia. The battle had an enormous number of casualties — 43 generals of the Grand Army were wounded or killed; 20,000 killed or wounded troops — but failed to produce a clear winner, although the Russians went back to their retreating strategy and disappe\ ared for a time. In strategy terms, Napoleon ’ s officers believed that their army made a big mistake, not keeping in contact, chasing the opponent and trying to dest\ roy them.
Instead, they regrouped allowing the Russians to take off. So Napoleon had a chance to finish the war early enough to avoid the trouble of winter. Appatently Napoleon had no great desire to accelerate his army and force a decisive\ battle.
So the Russians continued to buy time and kept waiting for winter to do \ its job, increasing Napoleon ’ s war risk. Napoleon entered a burned and deserted Moscow on September 14, 1812.
The Russians destroyed the city in order to prevent the Grand Army from using Moscow supplies. At this season of the year, Russia is fully aware of his advan- tage. From there they continued to negotiate the Russian surrender who d\ id not intend to surrender but again, buy time. As Segur says, “ Thus far Napoleon had conquered only space. ” The retreating Russian armies were in front of him and Moscow was but 20 days away. In a situation, when every date meant a lot for survival of the Grand Army, the Russians outsmarted Napoleon and opened the possibility of winning t\ he war.
Again, Napoleon did not show a willingness to change strategy and catch \ the Russians, thus reducing their risk. Amazing was the French lack of attention to details and no contingency plann. RISK TREATMENT It is interesting to observe how the best of the best, for instance, the\ Grand Army, follow the normal risk policy which, in this case, would be among one of\ the widely accepted policies such as PMBOK ’ s. It has six processes: risk management planning, risk identi cation, qualitative risk analysis, quantitative risk analysis, risk response planning, and risk monitoring and control. Grand parties and balls, as a place for top intelligence, probably cover\ ed the processes of risk management planning and risk identification, more so t\ han, say, qualitative risk analysis. There were no indications that risk events like a retreat- ing strategy and the Russian winter were subjected to risk analysis, ris\ k response planning, or risk monitoring and control. No details in Segur ’ s book hint to a mitigation or adaptation of the military strategy to account for Russian\ continu- ous retreating as a valid military strategy. Hence, at best, the French heard about Russian intentions in terms of a Russian approach, but did not take the \ action to prevent that or learn to move the soldiers faster. 236 CASE STUDIES As for the writings of Charles XII, they had significant influence among\ the top officers of the Grand Army. How significant? He did some sort of risk management planning and identified risks such as those offered in the book and he assessed risks qualitatively by describing the heavy impact of the se\ ason.
However, we don ’ t see that Napoleon did any risk analysis, let alone response planning or taking any risk monitoring and control steps. Napoleon didn \ ’ t make any adaptation in his military strategy to not be facing the Russians du\ ring winter.
Nor did he quit after studying the message of Charles to not attack Russ\ ians dur- ing winter. If we take Napoleon ’ s approach as insufficient, we conclude that he didn ’ t really listen to Charles ’ advice. Probably, he saw the quality of his Grand Army as incomparably higher than the one of the Swedish. The fact is, then, that the analysts considered the French advantage to be a better army, but the Russians had familiarity of terrain and climate. Maybe Napoleon was right, maybe \ not, in leading his solders to death. Speaking of the Borodino, the battle there had enormous importance. Technically viewed, it is not known whether any steps in a risk analysis were even c\ onsidered.
This means that risk management planning, risk identification, qualitati\ ve risk analysis, quantitative risk analysis, risk response planning, and risk m\ onitoring and control were not considered relevant. But wait a minute, Napoleon ’ s decision at Borodino to allow the Russians to run away made some of his generals ang\ ry and some spoke of treason. Maybe French nationalism played a role, or maybe \ Napoleon thought there had to be one more battle to settle the account, but the m\ istake to let the Russians go and not make it the central piece of their risk stra\ tegy were blun- ders. The French didn ’ t have the luxury of seeing such a chance again. The importance of an empty and burned Moscow, aside from public relations, had one more cause of importance. This was a time for diplomatic moves, to have a Russian surrender. Napoleon thought that the Russians did not want to surrender but only pretended to. He believed, and some French generals as well, that at this point Russians had the advantage. “ Napoleon entered Moscow with only 90,000 troops. ” Russians played this negotiation game, just for one reason — to buy time and prolong the French stay on Russian soil until the winter\ would finish them off. In such conditions, PMBOK ’ s six risk policies did not have their usual significance. More accurately, the French ship had already sunk enough by then, and it was time for the Russians to secure the win.
Discussion items 1. Identify major risk events, perform risk analyses, and develop risk resp\ onse plans. 2. In your opinion, how did Napoleon control each of the major risk events \ on your list? 3. Do you think the way in which Napoleon controlled risks related to major\ risks influenced the war outcome? 237 Risk under the Microscope Ferra Wayahuni The Field Service Engineer (FSE) at RedGate Technology had called an escalation Level 4 meeting to resolve a computer failure issue during the project — tool upgrade for imaging and wafer transfer improvement. The company ’ s escalation process requires that the FSE escalate the problem, if it has not been r\ esolved after six hours. The escalation is now closed; however, the tool was down for three days, which means daily schedule of the upgrade may need to be\ revis- ited. The tool at the RedGate Technology site is the rst tool to be upgraded so the team wants to capture as much learning experience as possible to make th\ e next upgrades run more smoothly. This is a case about the unknown project problem that suddenly occurred and how risk planning prepared the team for mitig\ ation of damage, even though a root cause was not known. THE MEETING The project update meeting with the core team is underway:
Product Engineer: Adam McAllister Technical Support Engineer: Donna Nolan Systems Engineer: Calvin James Project Manager: Jason Orange Program Manager: Julia Gallagher Jason: Hi everyone. Thanks for coming. Julia suggested we meet and review our upgrade schedule. We have another tool to be upgraded in two months so we should make quick changes on any design or work instructions that nee\ d to be improved. Donna sent out the escalation report describing what happen\ ed and the root cause of the issue.
Donna: Yes, I sent it to the team as well as the Field Service Engineers (FSE)\ at the site. Calvin and Adam are working on retesting the computer and identi- fying the root cause, and the x, so that we know what to do if it happens again.
I hope it won ’ t happen again, however. 238 CASE STUDIES Jason: Good. It sounds like everything is under control now in terms of trou- bleshooting the tool.
Calvin: Well, actually, I haven ’ t had any luck on reproducing the error that they saw at the site. I talked to Nick Filan, the lead FSE, about what h\ appened.
He told me that it was the “ blue screen ” phenomena — the computer worked ne and then the screen was blue all of the sudden. They were not able to recover the error at all.
Jason: Have you seen this happening before?
Calvin: I don ’ t have much experience on this tool so I don ’ t have any histori- cal issues that I ’ ve seen with my own eyes. I couldn ’ t reproduce what they said was happening prior to the “ blue screen ” phenomena, but I couldn ’ t get the blue screen on my simulator.
Jason: Yes, I realized Steve Huggins did not give you any brie ng before he left the company. It would be nice if he had documented everything that he ’ d seen when designing this system.
Adam: I haven ’ t heard of it happening before. Calvin and I can ask other engi- neers to get their input on this issue. The bad thing is that this computer is a new design so it has not been implemented on other product lines. I don \ ’ t know what kind of information I can get from asking around other engineers.
Jason: Well, it never hurts to try. Let me know if you ’ re running into more issues. Now we can update the schedule to accommodate the time lost duri\ ng troubleshooting. BACKGROUND The IEM Company is a high - tech company producing customized Ion and Electron Microscopes. The applications of their products can be used in a variety of elds, from academia to high - tech industries. Their customers are given the options of cus- tomizing the product to meet speci c process needs. The company ’ s nancial pro le shows that their sales revenue for last year exceeds $ 400 million. The company is cur- rently upgrading tools in the eld for improvement in the imaging and wafer transfer system. This is required to grow the market size and to meet customers ’ satisfaction. RISK PLAN Julia: Jason, can you give a brief update on how we are on the schedule?
Jason: Sure. From the Gantt chart that I sent you yesterday, we are currently three days behind schedule. Rob Carter, the process engineer at RedGate, told me that the tool handover to production cannot be delayed due to product\ ion backlog. We may need to add a second shift for the upgrade to mitigate the scheduling issue. Project Risk Management 239 Julia: What is the original upgrade timeline, Jason?
Jason: The tool is promised to be ready for production within two weeks.
Julia: Before we move forward on deciding what to do next, can we review your project scope and risk planning matrix? I ’ ve only seen your scheduling chart but did not have a chance to review the whole package when I approved this p\ roject.
Jason: Yes, I was aware that Marketing and Sales already promised the date to the customer before I nished creating this Gantt chart. I did not know the change on the timeline and date until I asked Markus if there were any c\ hanges on the project. If only our communication could be improved . . . Julia: Well, that was in the past, now we have to create a mitigation plan for i\ t.
Have we gured out what the root cause of the problem is?
Jason: No, our original Systems Engineer for this project, Steve Huggins, left\ the company two weeks ago. He only gave a two - week notice and then was out of the of ce the last week before he left to use up his vacation days. Calvin Jam\ es replaced him for this project; however, he is quite new to this product line so he is still learning on the go. He has not gured out the root cause of the problem yet.
Julia: Interesting. Can you describe what you included in the risk plan?
Jason: Yes, the core team brainstormed what should be considered risks for this project. We were focusing more on the design and supply chain, however.
The implementation plan was assumed to be handled by the Technical Support Group (TSG). We grouped the risk plan per main category, for example, in Design, we split up the risk plans to Hardware and Software groups. We did it this way so that we can manage it much easier since the activity list fr\ om the WBS is quite big. We used discrete estimation for probability and risk impact.
The qualitative data was per our best estimate learning from past projec\ ts.
Steve Huggins had been involved in two major tool improvement projects i\ n the past so he was very knowledgeable in this area. Here ’ s the risk plan for the Software activity list (see Table 11.1 ). Julia: So you excluded most activities in the WBS from the risk plan?
Jason: That ’ s right. We thought we should only list activities with medium and high risk. What ’ s the point of recording low - risk activities if they ’ re not going to affect the project by much? Anyway, you can see that we did include computer testing as part of our WBS.
Julia: Yes, however, did you guys test for long - term reliability? I know we don ’ t know why we had blue screen problem in the eld but you might have caught it, if you tested the part for a long period of time.
Jason: No, we didn ’ t do that. We only tested the rst article for making sure most features worked because we didn ’ t have time for a long - term reliability test. 240 CASE STUDIES Julia: Hmm . . . that ’ s a little odd. Did you nd out the plan developed by TSG?
Jason: No. When I submitted the project charter, our scope was only on the design, development, and testing.
Donna: The TSG are responsible for performing the task of upgrading the tool, however, since you are the project manager, you are the one responsible for connecting the whole areas, including eld implementation. I was not aware that you assumed we were going to do the whole eld implementation plan, while you were working on the upgrade schedule.
Julia: I can see there ’ s a disconnect among core team members . . . Table 11.1 Software Risk Plan Task Risk Description Prob- ability * Risk Impact ** Risk Score P +(2 I) Actions Owner Preventive Trigger Points Contingent Review marketing require- ment docu ment Marketing requirement does not include all customer’s requests 2 4 10 Review marketing requirement document with the customer ’ s process engineer before design phase kicks off No customer ’ s process engineer available for review meeting by June 30th Escalate to the manager for their POC avail- ability Project manager Identify required changes on computer config- uration Not enough knowledge on new process to be implemented 3 4 11 Review other tools ’ application to see if we can use their concept Not enough data to determine what applic ation can be used as an example by June 30th Contact customer ’ s expert to see if there ’ s any current applica tions similar to the new process Software engineer Determine time and cost budget for new computer Supplier can ’ t meet our short timeline request to implement changes 4 5 14 Send specifi- cations prior to design reviews Supplier ’ s timeline is 2 weeks longer than expected Send specifi- cations to a few suppliers and go with the fastest delivery timeline.
Sourcing rep Project Risk Management 241 Task Risk Description Prob- ability*Risk Impact** Risk Score P +(2 I ) Actions Owner Preventive Trigger Points Contingent Create success measures for computer tests Success measures do not reflect all actual use cases 4 5 14 Review success measures with other software engineers for fresh - eye review No feedback from other software engineers by July 10th Escalate to project manager for help in gathering resources Software engineer *Probability (Discrete Estimation): 1 = Very Unlikely, 2 = Low Likelihood, 3 = Likely, 4 = Highly Likely, 5 = Near Certain **Risk Impact (Discrete Estimation): 1 = Very Low Impact, 2 = Low Impact, 3 = Medium Impact, 4 = High Impact, 5 = Very High Impact Discussion items 1. To some, these risk plans are wrong. What do you think might be wrong with the risk plan? Should Julia agree with the risk plan? 2. How can the project risk planning be improved in each of the following a\ reas: project organization, implementation, strategy, leadership? 3. What would be the next step for the team to recover? 242 Monte Carlo in Italy Meghana Rao ABC is a high - tech company based in the United States. Recently the company had a major shuf e in its management and the new management is planning on expanding into global markets. The CEO realizes that the best way to achieve this goal is by acquiring and merging with smaller high - tech companies in key loca- tions across the globe that provide products and services to the high - tech market.
The CEO knows that process integration is an important issue of a succes\ sful merger and acquisition. This case discusses such an activity, especially the project risk management process. GO STUDY THEM!
As a rst step toward this mission, the top management calls for a meeting of \ all the Business Unit heads and the Program Managers. The agenda of the meeting is to identify feasible locations and companies for merger. At the end of the meeting, the management identi ed three countries in Europe and three in Asia as prospective locations for expansion, based on business opportunity, government policies, avail- ability of skilled personnel, etc. The companies that were selected were all smaller companies with a good presence in their respective countries, offering high - tech products and services with a product portfolio matching ABC ’ s range of products. Additionally, ABC, being a CMM - certified company, has a strong emphasis on the processes which are followed toward being a better project - oriented organiza- tion. The management of the company understands that any merger or acquisition would result in aligning the company ’ s policies and processes with the acquired company ’ s. Therefore, it is considered important that the acquired company has an established set of processes for each phase of the product/project life \ cycle. SEND OUR STARS Since this is a critical step, the management decides that a selected gr\ oup of business managers, who have a lot of project management experience and have a goo\ d under- standing of the technology domain, would personally visit the companies \ that are short - listed and scrutinize their products and processes before nalizing any deal. Project Risk Management 243 Peter Davis is one of the business managers working for ABC. He has been with the company for a long time and has moved up the management ladder, most recently from the project manager level. He understands the technology m\ anage- ment aspects at ABC very well and has also worked for some of the top high - tech companies before joining ABC. He understands the dynamics of high - tech com- panies and also project life cycle management and is a renowned PMP - certified professional in the field. The management of ABC therefore chooses Peter as one of the managers to work with the acquisitions. Because of his prior work ex\ perience in Italy, ABC decides that Peter should go to Italy to verify the processes at PQR\ Inc. Soon after his arrival in Italy, Peter schedules meetings with the business managers and the project managers at PQR Inc. He is really surprised at \ the amount of detail that has been given to every aspect of the project life\ cycle.
He scans through the company ’ s project selection process, project portfolio mapping process, project planning and control tools for the customer roa\ dmap, scope (WBS, Change Coordination Matrix, Project Change Request/Log), sched- ule (Gantt Charts, Critical Path Method, Critical Chain Schedule, Miles\ tone Prediction Chart, Slip Chart), cost (Analogous Estimate, Parametric Es\ timate, Earned Value Analysis), and quality planning (Affinity Diagrams, Quality Improvement Maps, Cause and Effect Diagrams, and control charts). Of all the tools that Peter saw at PQR Inc., one tool caught his attenti\ on. This was the Monte Carlo Analysis (MCA) tool for risk planning. PQR Inc., being a small start - up company in a high - tech market, obviously faced a high degree of risk in terms of the new technology they were dealing with, competitors, mark\ ets, etc.
So utilization of any risk planning tool would provide the company with \ a strategy to ward off any undesired events during the execution of projects. Given below is an implementation of how Monte Carlo Analysis was implemented at PQR Inc. RISK MANAGEMENT AND THE PLANNING PROCESS The risk management process at PQR Inc. has been iteratively de ned by the following ve steps:
Risk Identification: Use past project experiences and data bases to uncover any risks that might occur during the execution of the current project. These are termed risk events. Risk Analysis: Identify drivers that might lead to the occurrence of risks identified above. Risk Priority/Impact Analysis: Each risk is given a severity score by assigning a probability of occurrence and impact of the risk. The risk severity is then calculated using a P - I matrix and a specific number of risks that score high on the P - I matrix are considered. For a detailed pro- cedure of assigning probabilities to the risks, the Monte Carlo Analysis technique is used. ● ● ● 244 CASE STUDIES Risk Resolution: Develop a Risk Response Plan to prevent identified risks. Contingency plans should be made in case of risks that cannot be \ prevented. Risk Monitoring: A constant monitoring of risks is done at regular inter- vals to prevent/mitigate them. Using the above model, PQR Inc. has then implemented Monte Carlo Analysis for assigning probability to uncertain events such as schedule \ and cost probabilities. Below is an example of how MCA has been effectively applied to avoid the risk of incorrect scheduling on the project leading to late ti\ me - to - market, customer dissatisfaction, and loss in profitability. A new product development (NPD) project at PQR Inc. has a network dia- gram showing the dependent tasks/activities in the project. But seldom is the process of new product development so linear. Since time - to - market is critical for PQR Inc., most of the tasks are handled in parall\ el between Engineering and the Marketing departments (concurrent engineeri\ ng), which induces a lot of interdependencies. The uncertainty in assigning a final deadline to the project is the natu\ re of the project itself. Since the company deals with high - technology products which are very new in the market, not many projects of a similar nature have been \ under- taken to estimate the schedule of activities with certainty. But accurate assessment of timelines for the individual tasks under uncertainty is both essentia\ l as well as critical. So then, how will the company provide a final estimate, so tha\ t the risks identified are prevented? The next step followed in the process is assigning a range of possibilit\ ies for each activity. For example, say activity A can be completed in five days at a mini- mum, but can extend to 15 days at a maximum. An MCA simulation can be run on this range of possibilities to evaluate the mean likelihood of A ’ s completion time.
Single point estimates where available can be made use of without using \ MCA. The Monte Carlo process thus gives project managers a more precise compl\ e- tion time of the project. In the case of companies that focus on new pro\ duct devel- opment like PQR Inc., this gives a more accurate estimate for the time - to - market. Peter, who had a PMP certification and had used a lot of project management tools in his long tenure as a project manager, was really impressed with such a great method for reducing risks due to schedule slippages. His audition of the\ company had given him a great impression of how well PQR Inc. had been managing \ its projects and their processes. In his audit results, he therefore gladly \ recommended that ABC acquire PQR Inc.
Discussion items 1. Discuss the advantages and disadvantages of Monte Carlo Analysis in project risk management. 2. Should Monte Carlo Analysis be used in every project? Why or why not? ● ● 245 Probability and Impact Jovana Riddle Salvatore Adamo was the head of Vintel Corp ’ s Risk Management Department.
His responsibility was to manage risks for many of the company ’ s products.
However, one particular product had major risk implications and mattered to Salvatore the most. It was Vintel ’ s agship product and had a very important risk event at stake. The risk at stake had a very low probability of occurring but had a huge potential impact on the company and its future. This was the rst time in the company ’ s history that a product with such a low probability risk event could le\ ad to such enormous potential impact. This case presents how Salvatore adjusted Vintel ’ s risk analysis procedure to address this type of risk. RISK ANALYSIS STEPS In order to effectively manage risk for Vintel ’ s product, Salvatore typically followed the standard procedure. He started off with the identi cation of all potential risks.
He then identi ed the probability and impact of each risk, using a 1 - to - 5 – point scale.
For each risk, the risk score was then calculated based on a set formula\ (Probability + 2 Impact). He then used a Risk Rating table with predetermined threshold\ s to categorize risks into high (red), medium (yellow), and low (green)\ severity risks.
Typically, the threshold for high risk is 12 and above. Medium risks have a score\ ranging from 8 to 11. Risks that score below 7 are considered low risks. Usually high risks will get more management attention and Vintel will perform further investiga- tion and come up with appropriate response plans. Medium and low risks w\ ill get less management oversight. The use of this procedure would ensure that risks are analyzed in a systematic manner based on their probability and impact. ADJUSTING THE THRESHOLDS Salvatore knew from past experience that in general a very low probabili\ ty risk event does not have as high a potential impact or a severe outcome. In such a \ typical situation, using the Risk Rating table in Figure 11.1 should work ne. But for this agship prod- uct, a lot of very low probability risks have a very high level of impac\ t, and using his normal Risk Rating table may not be appropriate. “ Am I right? ” Salvatore thought. 246 CASE STUDIES “ I think I am, ” Salvatore talked to himself. He knew that he had to adjust his risk thresholds, such that those risks are in the category of high risk.\ Salvatore had a flashback to his experience with Ford Australia. Several years ago when Salvatore visited Ford Australia for technical exchange, he participated in risk analysis training. One of the risk eve\ nts they discussed was the SUV tire explosion. Typically, tire explosion is a very low probability risk event . But when it happens, it can cause the vehicles to rollover, which can lead to the severe injury or death of the passengers in the SU\ V. Besides the safety of the passengers at stake, tire explosion should impact the \ sales of the SUV by as much as $ 5 billion. This was definitely a high risk. This flashback assured Salvatore that the risk thresholds needed to be adjusted. If not for this flagship product, a risk event like “ tire explosion ” would always end up being a medium - level risk and would never get as much manage- ment attention as it should. No management attention means no further an\ alysis and no support. Then, if the risk happens, he could not imagine how huge the impact would be. “ Probably not $ 5 billion but it would definitely be ugly and no more future for me at Vintel, ” thought Salvatore.
Discussion items 1. Would adjusting the threshold be the right move for Salvatore? If it is, \ what should the new threshold be to account for the very low probability and \ very high impact risks? 2. Would adjusting the thresholds be the only solution? What else should Salvatore introduce to Vintel such that risks get proper management attention? Scale 1 2 3 4 5 Very Low Low Medium High Very High Risk Impact on Schedule Slight schedule delay Overall project delay <5% Overall project delay 5–14% Overall project delay 15–25% Overall project delay > 25% Probability Key:
NC 5 7 9 111315 High Severity HL 4 6 8 101214 Medium Severity L 3 5 7 9 11 13 Low Severity LL 2 4681012 VU 1 357911 VL 1L 2M 3H 4VH 5 Probability Key Impact Key VU Ve r y U n l i k e l y V L Very Low Impact LL Low Likelihood L Low Impact L Likely M Medium Impact HL Highly Likely H High Impact NC Near Certain VH Very High Impact IMPACT Risk Score P 2 ∗ I Figure 11.1 Example of Rating a Risk Impact on Schedule on a Five - Level Scale