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Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




               Risk management is essential for any significant project. and is useful for any project where an 
            unfavorable outcome is undesirable. Certain information about key project cost, performance, and 
            unfavorable outcome is undesirable Certain information about key project cost performance and
            schedule attributes are often unknown until the project is underway. The emerging risks that can 
            be identified early in the project that impact the project later, are often termed “known 
            unknowns.” These risks can be mitigated with a good risk management process. For risks that are 
            beyond the vision of the project team a properly implemented risk management process can also 
            rapidly quantify the risks impact and provide sound plans for mitigating its affect.
               Risk management is concerned with the outcome of future events, whose exact outcome is 
            unknown, and with how to deal with these uncertainties. Outcomes are categorized as favorable or 
            unfavorable, and risk management is the art and science of planning, assessing, handling, and 
            monitoring future events to ensure favorable outcomes. A good risk management process is 
            proactive and fundamentally different than issue management or problem solving, which is 
            reactive. 
               This presentation describes the fundamental of Risk Management in 5 easy steps – using Jack 
            Nicholson’s “Five Easy Pieces” 1970’s movie as a backdrop. The Five Pieces are:
              1. Hope is not a strategy
              2. All point estimates are wrong
              3. Without integrating Cost, Schedule and Technical Performance you’re driving in the rearview 
                  mirror
              4. Without a model for risk management, you’re driving in the dark with the headlights turn off
              5. Risk Communication is everything
               Risk management is an important skill that can be applied to a wide variety of projects. In an era 
            of downsizing, consolidation, shrinking budgets, increasing technological sophistication, and shorter 
            development times, risk management provides valuable insights to help key project personnel plan 
            for risks, alert them of potential risk issues, analyze these issues, and develop, implement, and 
            monitor plans to address risks  long before they surface as issues and adversely affect project cost, 
            performance, and schedule.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                               1
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            1. Hoping that something positive will result is not a very good strategy. Preparing for success is the 
               basis of success.
            2. Single point estimates are no better than 50/50 guesses in the absence of knowledge of the 
               standard deviation of the  underlying distribution
            3. Without connecting cost, schedule, and technical performance of the effort to produce the 
               product or service the connection to value cannot be made.
            4. Risk management is not an ad hoc processes that you can make up as you go. A formal 
               foundation for risk management is needed.
               foundation for risk management is needed
            5. Identifying risks without communication them is a waste of time.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                                 2
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




               Project Managers constantly seek ways to eliminate or control risk, variance and uncertainly. 
            This is a hopeless pursuit. 
               Managing “in the presence” of risk, variance and uncertainty is the key to success. Some projects 
            have few uncertainties –only the complexity of tasks and relationships is important – but most 
            projects are characterized by several types of uncertainty. Although each uncertainty type is 
            distinct, a single project may encounter some combination of four types:
            1. Variation – comes from many small influences and yields a range of values on a particular 
               activity. Attempting to control these variances outside their natural boundaries is a waste 
               activity. Attempting to control these variances outside their natural boundaries is a waste
               (Muda)
            2. Foreseen Uncertainty – are uncertainties identifiable and understood influences that the team 
               cannot be sure will occur. There needs to be a mitigation plan for these foreseen uncertainties.
            3. Unforeseen Uncertainty – is uncertainty that can’t be identified during project planning. When 
               these occur, a new plan is needed.
            4. Chaos – appears in the presence of “unknown unknowns”


               “Managing Project Uncertainty: From Variation to Chaos,” Arnoud De Meyer, Christoph H. Loch 
               and Michael T. Pich, MIT Sloan Management Review, Winter 2000.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                              3
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            Larger variances can be  tolerated in early periods. But tolerances for risk must decrease as the 
            program matures.
            At all times, avoiding unseen risk is mandatory.
            Any unknown risk must be discovered before it becomes and issue.
            The management of variance must first recognize four types of risk, their associated variances and 
            the impact of these risks and variances:
            1. Normal Variation – in activity durations, costs, and technical and business performance level 
               delivered by the project. 
            2. Foreseen Risks – are indentified, but have uncertain influences on the project
            3. Unforeseen Risks – are not formally identified in the planning stage, are not anticipated and a 
               mitigation plan has not been identified.
            4. Chaos – is fundamental uncertainty about the basic structure of the project plan itself.
            The key concept here is that as the project proceeds the risk must be reduced. But also the 
            tolerance for risk must be reduced as well. This means that the variance and the tolerance must be 
            reduced in tandem. They must track each other to the end of the project.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                            4
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




               Project duration and costs are random variables drawn from some underlying probability 
            distribution.
               The use of point estimates for durations and costs is many times the first impulse in an 
            organization low on the project management maturity scale. Understanding cost and durations are 
            actually “random variables,” drawn from an underlying distribution of possible value is the starting 
            point for managing in the presence of uncertainty.
                In probability theory, every random variable is attributed to a probability distribution. The 
            probability distribution associated with a cost or duration describes the variance of these random 
            probability distribution associated with a cost or duration describes the variance of these random
            variables. A common distribution of probabilistic estimates for cost and schedule random variables 
            is the Triangle Distribution. 
               The Triangle Distribution is used as a subjective description of a population for which there is 
            only limited sample data, and especially where the relationship between variables is known but 
            data is scarce. It is based on the knowledge of the minimum and maximum and a “best guess” of 
            the modal value (the Most Likely). 
               Using the Triangle Distribution for the costs and durations, a Monte Carlo simulation of the 
               Ui      h T i l Di ib i f h                     dd      i      M     C l i l i         f h
            network of activities and their costs can be performed. Monte Carlo methods are used to 
            numerically transform and integrate the posterior quantitative risk assessment into a confidence 
            interval. The result is a “confidence” model for the cost and completion times for the project based 
            on the upper and lower bounds of each distribution assigned to each duration and cost.
               This approach to estimating provides insight into the behavior of the plan as well as sensitivity 
            between the individual elements of the plan.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                              5
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            Estimating is a very vague art in the absence of a formal process. One place to start is with the 
            statistical definition of an “estimate.” 
            But even that definition has three (3) different possibilities.
               The Mode is the most likely value. The value that occurs most often when statistical samples are 
               drawn from the underlying population.
               The Median is the “middle” value between the highest and lowest value from the total of all 
               samples drawn from the underlying statistical population.
               The Mean is the “average” of all the samples drawn from the population.
            The most important concept is to understand that the “sum” of all the “estimates” is never one of 
            these three estimates.
            The details of this are beyond the scope of this presentation but it has to do with “summing” 
            probability  distributions is not actually a summation process – it is a convolution process. This 
            means that the probability distribution – represented by an integral equation – is convolved with 
            the other integral equations.
            the other integral equations




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                             6
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            The actual duration or cost are random variables, drawn from a probability distribution.
            The Mean, Mode, Median are statistical terms that characterize probability distributions – not point 
            values.
            When we naively speak about a duration or cost in the absence of a variance, the result is suspect. 
            Ignoring for the moment the Mean, Mode, and Median issues, this missing variance creates odd 
            outcomes.
            The median temperature in Cody Wyoming is very close to the median temperature in Trinidad 
            Tobago . Both are around 78°. In Trinidad the variance is significantly less than in Cody. 
            Tobago Both are around 78° In Trinidad the variance is significantly less than in Cody
            Cody has a temperature range between 10°F and 100°F. The Median is 60°F. Fudge this up  to 78°
            In Trinidad Tobago, the maximum temperature runs around 89°F with minimums running around 
            68°F. Means of 77°F in the winter and 85°F in the summer.
            Answering the variance question is as important or possibly more important than answering the 
            Median question.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                              7
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            In the project planning business, the use of deterministic and probabilistic  analysis are both useful. 
            The deterministic description is great for “power point” type displays of the scheduled activities and 
            management briefings. This type of information shows a “static” description of the schedule, cost, 
            or technical performance.
            The probabilistic description is useful as the basis for risk analysis. This type of information shows 
            the range of possible values each variable can take one. The analysis derived from these variables 
            shows to impact on the project. This itself is a variance – a variance of impact.
            The difference between Probability and Statistics is important to the notion of “randomness” of 
            The difference between Probability and Statistics is important to the notion of “randomness” of
            durations and cost.
            We need to know things about the underlying statistical behavior of the durations and costs before 
            we can ask question about the probabilistic confidence in the planned completion date and planned 
            completion costs.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                                 8
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            In many descriptions of project management – cost, schedule, and quality are considered as the 
            “Iron Triangle.” Change one and the other two must change as well. It turns our this is too narrow a 
            view of what's happening  on a project.
            It’s the Technical Performance Measurement that replaces Quality. Quality is one of the Technical 
            Performance measures.
            Cost and Schedule are obvious elements of the project. Technical  Performance Measures describe 
            the status of technical achievement of the project at any point in time. 
            The Planned technical achievement is part of the Performance Measurement Baseline (PMB) in the 
            The Planned technical achievement is part of the Performance Measurement Baseline (PMB) in the
            same way the Planned Value (BCWS) is part of the PMB.
            The Technical Performance Measurement System (TPMS) uses the techniques of risk analysis and 
            probability to give program managers the early warning needed to avoid unplanned costs and 
            slippage in schedule. Systems engineering uses technical performance measurements to balance 
            cost, schedule, and performance throughout the life cycle.  
            Technical performance measurements compare actual versus planned technical development and 
            design.  They also report the degree to which system requirements are met in terms of 
            performance, cost, schedule, and progress in implementing risk handling.  Performance metrics are 
            traceable to user‐defined capabilities.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                              9
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            Measures of Effectiveness, Measures Performance, and Measures of Quality are typical Technical 
            Performance Measures.
            The Cost and Schedule “measures” are straightforward in most cases. 
            The measures of Technical Performance involve Effectiveness, Performance, Technical Performance
            Measures of Effectiveness (MOE) define the operational mission success factor as defined by the 
            customer. These are:
            1. Stated from the customer point of view;
            2.   Focused on the most critical mission performance needs; 
            3. Independent of any particular solution; 
            4. Actual measures at the end of development. 
            Measures of Performance (MOP) characterize physical or functional attribute relating to the system 
            operation: 
            1. Supplier’s point of view
               Supplier s point of view
            2. Measured under specified testing or operational conditions
            3. Assesses delivered solution performance against critical system level specified requirements
            4. Risk indicators that are monitored progressively.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                            10
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            Risk Management is a full time effort. Even if it is a part‐time job.
            Someone needs to “own” the risks and the process around risk management.
            Someone or a collection of “someone's” needs to have risk management in their mind(s) at 
            all times
            Risk Management is not something you can do once and them forget. The risks don’t just 
            go away. They are forever there, even if they are mitigated, retired or bought down.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                  11
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




              Risk Management means using a proven risk management process, adapting this to the project 
            environment, and using this process for everyday decision making.
                Technical performance is a concept absent from the traditional approaches to risk management.  
            Yet it is the primary driver of risk in many technology intensive projects. Cost growth and schedule 
            slippage often occur when unrealistically high levels of performance are required and little 
            flexibility is provided to degrade performance during the course of the program. Quality is often a 
            cause rather than an impact to the program and can generally be broken down into Cost, 
            Performance, and Schedule components.
            The framework shown here provides:
               Risk management policy
               Risk management structure
               Risk Management Process Model
               Organizational and behavioral considerations for implementing risk management
               The performance dimension of consequence of occurrence
               Th     f        di    i    f              f
               The performance dimension of Monte Carlo simulation modeling
               A structured approach for developing a risk handling strategy




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                              12
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            The traditional three variables the “iron triangle” are inappropriate in today’s integrated software, 
            hardware and operational world and there are two other “triangles.”
            One includes Risk, Customer Satisfaction, and Quality
            The other includes CMMI, Six Sigma, and Lean.
            The three collections of three attributes form a “system” to assess risk, address these risks and 
            manage the project in the presence of this risk.
            Putting these 3 sets of 3 together results in a view of 
               Product risk – the risk that the product will not performance as specified or perform to the needs 
               of the customer
               Programmatic risk – the risk that the project will be over budget or behind schedule in producing 
               the product
               Process risk – the risk that the processes used to build the product or management the project 
               will fail in their desired outcomes.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                               13
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            It does no good to manage risks if the results are not communicated to all the participants.
            Only the participants can define the needed mitigations
            Risk communication is the basis of risk mitigation. It serves no purpose to have a risk plan and the 
            defined mitigations in the absence of a risk communication plan.
            This plan needs to address the following:
               Executive summary – a simple summary of the program and the risks associated with the 
               activities of the program. Each risk needs an ordinal rank, a planned mitigation is the risk is active 
               (a risk approved by the Risk Board), and the mitigations shown in the schedule with associated 
               costs.
               Program description – a detailed description of the program and the risk associated with each of 
               the deliverables. This description should be “operational” in nature, with the consequences 
               description in “operational” terms as well.
               Risk reduction activities by phase – using some formal risk management process that connects 
               risk, mitigation and the IMS. The efforts for mitigation need to be in the schedule.
               risk mitigation and the IMS The efforts for mitigation need to be in the schedule
               Risk management methodology – using the DoD Risk Management process is a good start. This 
               approach has proven and approved by high risk, high reward programs. The steps in the 
               processes are not optional and should be executed for ALL risk processes.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                                   14
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            This list comes from guidance in the defense program management business. While some 
            of the statement may not be appropriate for the commercial world, every statement has 
            some applicability to every project – not matter what the domain. Whether formal or 
            informal the programmatic risk assessment of a project needs to ask or answer these 
            statements.
            The actions needed to close any gaps from these statements are outside the scope of this 
            presentation. 
            But the next step is to have the project management team start to answer these questions.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                  15
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            Many speak about risk management as part of the project management process.
            But do they do risk management as part of the project management process? 
            Test yourself and anyone who claims to be doing risk management  




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                    16
Colorado Springs PMI
Risk Management in Five Easy Pieces
Colorado Springs, Colorado May 8th , 2008




            The first set of questions should be:
               How do we earn back the investment in risk management? 
               How can be measure the benefits of risk management?
               Who gets to say what the value of risk management is?
            These is monetized questions are risk. So the answers have to be monetized as well. 
            attaching money to risk is the starting point. attaching money to the mitigation activities is 
            the next. The risks and their mitigations need to be represented in the schedule and cost 
            the next The risks and their mitigations need to be represented in the schedule and cost
            baseline. Otherwise risk management is not Project Management.




Glen B. Alleman
Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112
www.lewisandfowler.com                                                                                        17

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PHX Corporate Presentation March 2024 Final
 

Risk Management in Five Easy Pieces

  • 1. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Risk management is essential for any significant project. and is useful for any project where an  unfavorable outcome is undesirable. Certain information about key project cost, performance, and  unfavorable outcome is undesirable Certain information about key project cost performance and schedule attributes are often unknown until the project is underway. The emerging risks that can  be identified early in the project that impact the project later, are often termed “known  unknowns.” These risks can be mitigated with a good risk management process. For risks that are  beyond the vision of the project team a properly implemented risk management process can also  rapidly quantify the risks impact and provide sound plans for mitigating its affect. Risk management is concerned with the outcome of future events, whose exact outcome is  unknown, and with how to deal with these uncertainties. Outcomes are categorized as favorable or  unfavorable, and risk management is the art and science of planning, assessing, handling, and  monitoring future events to ensure favorable outcomes. A good risk management process is  proactive and fundamentally different than issue management or problem solving, which is  reactive.  This presentation describes the fundamental of Risk Management in 5 easy steps – using Jack  Nicholson’s “Five Easy Pieces” 1970’s movie as a backdrop. The Five Pieces are: 1. Hope is not a strategy 2. All point estimates are wrong 3. Without integrating Cost, Schedule and Technical Performance you’re driving in the rearview  mirror 4. Without a model for risk management, you’re driving in the dark with the headlights turn off 5. Risk Communication is everything Risk management is an important skill that can be applied to a wide variety of projects. In an era  of downsizing, consolidation, shrinking budgets, increasing technological sophistication, and shorter  development times, risk management provides valuable insights to help key project personnel plan  for risks, alert them of potential risk issues, analyze these issues, and develop, implement, and  monitor plans to address risks  long before they surface as issues and adversely affect project cost,  performance, and schedule. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  1
  • 2. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 1. Hoping that something positive will result is not a very good strategy. Preparing for success is the  basis of success. 2. Single point estimates are no better than 50/50 guesses in the absence of knowledge of the  standard deviation of the  underlying distribution 3. Without connecting cost, schedule, and technical performance of the effort to produce the  product or service the connection to value cannot be made. 4. Risk management is not an ad hoc processes that you can make up as you go. A formal  foundation for risk management is needed. foundation for risk management is needed 5. Identifying risks without communication them is a waste of time. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  2
  • 3. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Project Managers constantly seek ways to eliminate or control risk, variance and uncertainly.  This is a hopeless pursuit.  Managing “in the presence” of risk, variance and uncertainty is the key to success. Some projects  have few uncertainties –only the complexity of tasks and relationships is important – but most  projects are characterized by several types of uncertainty. Although each uncertainty type is  distinct, a single project may encounter some combination of four types: 1. Variation – comes from many small influences and yields a range of values on a particular  activity. Attempting to control these variances outside their natural boundaries is a waste  activity. Attempting to control these variances outside their natural boundaries is a waste (Muda) 2. Foreseen Uncertainty – are uncertainties identifiable and understood influences that the team  cannot be sure will occur. There needs to be a mitigation plan for these foreseen uncertainties. 3. Unforeseen Uncertainty – is uncertainty that can’t be identified during project planning. When  these occur, a new plan is needed. 4. Chaos – appears in the presence of “unknown unknowns” “Managing Project Uncertainty: From Variation to Chaos,” Arnoud De Meyer, Christoph H. Loch  and Michael T. Pich, MIT Sloan Management Review, Winter 2000. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  3
  • 4. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Larger variances can be  tolerated in early periods. But tolerances for risk must decrease as the  program matures. At all times, avoiding unseen risk is mandatory. Any unknown risk must be discovered before it becomes and issue. The management of variance must first recognize four types of risk, their associated variances and  the impact of these risks and variances: 1. Normal Variation – in activity durations, costs, and technical and business performance level  delivered by the project.  2. Foreseen Risks – are indentified, but have uncertain influences on the project 3. Unforeseen Risks – are not formally identified in the planning stage, are not anticipated and a  mitigation plan has not been identified. 4. Chaos – is fundamental uncertainty about the basic structure of the project plan itself. The key concept here is that as the project proceeds the risk must be reduced. But also the  tolerance for risk must be reduced as well. This means that the variance and the tolerance must be  reduced in tandem. They must track each other to the end of the project. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  4
  • 5. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Project duration and costs are random variables drawn from some underlying probability  distribution. The use of point estimates for durations and costs is many times the first impulse in an  organization low on the project management maturity scale. Understanding cost and durations are  actually “random variables,” drawn from an underlying distribution of possible value is the starting  point for managing in the presence of uncertainty. In probability theory, every random variable is attributed to a probability distribution. The  probability distribution associated with a cost or duration describes the variance of these random  probability distribution associated with a cost or duration describes the variance of these random variables. A common distribution of probabilistic estimates for cost and schedule random variables  is the Triangle Distribution.  The Triangle Distribution is used as a subjective description of a population for which there is  only limited sample data, and especially where the relationship between variables is known but  data is scarce. It is based on the knowledge of the minimum and maximum and a “best guess” of  the modal value (the Most Likely).  Using the Triangle Distribution for the costs and durations, a Monte Carlo simulation of the  Ui h T i l Di ib i f h dd i M C l i l i f h network of activities and their costs can be performed. Monte Carlo methods are used to  numerically transform and integrate the posterior quantitative risk assessment into a confidence  interval. The result is a “confidence” model for the cost and completion times for the project based  on the upper and lower bounds of each distribution assigned to each duration and cost. This approach to estimating provides insight into the behavior of the plan as well as sensitivity  between the individual elements of the plan. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  5
  • 6. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Estimating is a very vague art in the absence of a formal process. One place to start is with the  statistical definition of an “estimate.”  But even that definition has three (3) different possibilities. The Mode is the most likely value. The value that occurs most often when statistical samples are  drawn from the underlying population. The Median is the “middle” value between the highest and lowest value from the total of all  samples drawn from the underlying statistical population. The Mean is the “average” of all the samples drawn from the population. The most important concept is to understand that the “sum” of all the “estimates” is never one of  these three estimates. The details of this are beyond the scope of this presentation but it has to do with “summing”  probability  distributions is not actually a summation process – it is a convolution process. This  means that the probability distribution – represented by an integral equation – is convolved with  the other integral equations. the other integral equations Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  6
  • 7. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 The actual duration or cost are random variables, drawn from a probability distribution. The Mean, Mode, Median are statistical terms that characterize probability distributions – not point  values. When we naively speak about a duration or cost in the absence of a variance, the result is suspect.  Ignoring for the moment the Mean, Mode, and Median issues, this missing variance creates odd  outcomes. The median temperature in Cody Wyoming is very close to the median temperature in Trinidad  Tobago . Both are around 78°. In Trinidad the variance is significantly less than in Cody.  Tobago Both are around 78° In Trinidad the variance is significantly less than in Cody Cody has a temperature range between 10°F and 100°F. The Median is 60°F. Fudge this up  to 78° In Trinidad Tobago, the maximum temperature runs around 89°F with minimums running around  68°F. Means of 77°F in the winter and 85°F in the summer. Answering the variance question is as important or possibly more important than answering the  Median question. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  7
  • 8. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 In the project planning business, the use of deterministic and probabilistic  analysis are both useful.  The deterministic description is great for “power point” type displays of the scheduled activities and  management briefings. This type of information shows a “static” description of the schedule, cost,  or technical performance. The probabilistic description is useful as the basis for risk analysis. This type of information shows  the range of possible values each variable can take one. The analysis derived from these variables  shows to impact on the project. This itself is a variance – a variance of impact. The difference between Probability and Statistics is important to the notion of “randomness” of  The difference between Probability and Statistics is important to the notion of “randomness” of durations and cost. We need to know things about the underlying statistical behavior of the durations and costs before  we can ask question about the probabilistic confidence in the planned completion date and planned  completion costs. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  8
  • 9. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 In many descriptions of project management – cost, schedule, and quality are considered as the  “Iron Triangle.” Change one and the other two must change as well. It turns our this is too narrow a  view of what's happening  on a project. It’s the Technical Performance Measurement that replaces Quality. Quality is one of the Technical  Performance measures. Cost and Schedule are obvious elements of the project. Technical  Performance Measures describe  the status of technical achievement of the project at any point in time.  The Planned technical achievement is part of the Performance Measurement Baseline (PMB) in the  The Planned technical achievement is part of the Performance Measurement Baseline (PMB) in the same way the Planned Value (BCWS) is part of the PMB. The Technical Performance Measurement System (TPMS) uses the techniques of risk analysis and  probability to give program managers the early warning needed to avoid unplanned costs and  slippage in schedule. Systems engineering uses technical performance measurements to balance  cost, schedule, and performance throughout the life cycle.   Technical performance measurements compare actual versus planned technical development and  design.  They also report the degree to which system requirements are met in terms of  performance, cost, schedule, and progress in implementing risk handling.  Performance metrics are  traceable to user‐defined capabilities. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  9
  • 10. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Measures of Effectiveness, Measures Performance, and Measures of Quality are typical Technical  Performance Measures. The Cost and Schedule “measures” are straightforward in most cases.  The measures of Technical Performance involve Effectiveness, Performance, Technical Performance Measures of Effectiveness (MOE) define the operational mission success factor as defined by the  customer. These are: 1. Stated from the customer point of view; 2. Focused on the most critical mission performance needs;  3. Independent of any particular solution;  4. Actual measures at the end of development.  Measures of Performance (MOP) characterize physical or functional attribute relating to the system  operation:  1. Supplier’s point of view Supplier s point of view 2. Measured under specified testing or operational conditions 3. Assesses delivered solution performance against critical system level specified requirements 4. Risk indicators that are monitored progressively. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  10
  • 11. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Risk Management is a full time effort. Even if it is a part‐time job. Someone needs to “own” the risks and the process around risk management. Someone or a collection of “someone's” needs to have risk management in their mind(s) at  all times Risk Management is not something you can do once and them forget. The risks don’t just  go away. They are forever there, even if they are mitigated, retired or bought down. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  11
  • 12. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Risk Management means using a proven risk management process, adapting this to the project  environment, and using this process for everyday decision making. Technical performance is a concept absent from the traditional approaches to risk management.   Yet it is the primary driver of risk in many technology intensive projects. Cost growth and schedule  slippage often occur when unrealistically high levels of performance are required and little  flexibility is provided to degrade performance during the course of the program. Quality is often a  cause rather than an impact to the program and can generally be broken down into Cost,  Performance, and Schedule components. The framework shown here provides: Risk management policy Risk management structure Risk Management Process Model Organizational and behavioral considerations for implementing risk management The performance dimension of consequence of occurrence Th f di i f f The performance dimension of Monte Carlo simulation modeling A structured approach for developing a risk handling strategy Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  12
  • 13. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 The traditional three variables the “iron triangle” are inappropriate in today’s integrated software,  hardware and operational world and there are two other “triangles.” One includes Risk, Customer Satisfaction, and Quality The other includes CMMI, Six Sigma, and Lean. The three collections of three attributes form a “system” to assess risk, address these risks and  manage the project in the presence of this risk. Putting these 3 sets of 3 together results in a view of  Product risk – the risk that the product will not performance as specified or perform to the needs  of the customer Programmatic risk – the risk that the project will be over budget or behind schedule in producing  the product Process risk – the risk that the processes used to build the product or management the project  will fail in their desired outcomes. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  13
  • 14. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 It does no good to manage risks if the results are not communicated to all the participants. Only the participants can define the needed mitigations Risk communication is the basis of risk mitigation. It serves no purpose to have a risk plan and the  defined mitigations in the absence of a risk communication plan. This plan needs to address the following: Executive summary – a simple summary of the program and the risks associated with the  activities of the program. Each risk needs an ordinal rank, a planned mitigation is the risk is active  (a risk approved by the Risk Board), and the mitigations shown in the schedule with associated  costs. Program description – a detailed description of the program and the risk associated with each of  the deliverables. This description should be “operational” in nature, with the consequences  description in “operational” terms as well. Risk reduction activities by phase – using some formal risk management process that connects  risk, mitigation and the IMS. The efforts for mitigation need to be in the schedule. risk mitigation and the IMS The efforts for mitigation need to be in the schedule Risk management methodology – using the DoD Risk Management process is a good start. This  approach has proven and approved by high risk, high reward programs. The steps in the  processes are not optional and should be executed for ALL risk processes. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  14
  • 15. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 This list comes from guidance in the defense program management business. While some  of the statement may not be appropriate for the commercial world, every statement has  some applicability to every project – not matter what the domain. Whether formal or  informal the programmatic risk assessment of a project needs to ask or answer these  statements. The actions needed to close any gaps from these statements are outside the scope of this  presentation.  But the next step is to have the project management team start to answer these questions. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  15
  • 16. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 Many speak about risk management as part of the project management process. But do they do risk management as part of the project management process?  Test yourself and anyone who claims to be doing risk management   Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  16
  • 17. Colorado Springs PMI Risk Management in Five Easy Pieces Colorado Springs, Colorado May 8th , 2008 The first set of questions should be: How do we earn back the investment in risk management?  How can be measure the benefits of risk management? Who gets to say what the value of risk management is? These is monetized questions are risk. So the answers have to be monetized as well.  attaching money to risk is the starting point. attaching money to the mitigation activities is  the next. The risks and their mitigations need to be represented in the schedule and cost  the next The risks and their mitigations need to be represented in the schedule and cost baseline. Otherwise risk management is not Project Management. Glen B. Alleman Lewis & Fowler, 8310 South Valley Highway, Englewood CO80112 www.lewisandfowler.com  17