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Wednesday, June 13, 2012

Managing Uncertainty

Managing Risk is all about managing the uncertainty in your project. As I have said many times in the previous chapter, every project will have some level of uncertainty and it is this uncertainty that can lead to risks. The job of the Risk Manager is to handle all these uncertainties and the risks that arise due to them. Risk & Uncertainty go hand in hand. Uncertainty refers to the lack of knowledge on a future event which can be the source of a risk. This risk can either be a threat or an opportunity which arises out of this uncertainty.

As explained in the Types of Risks chapter, there are various types of Risks like Known risks, Known Unknown risks, Unknown Unknown risks etc… Each of these will contain varying levels of uncertainty. Our job in managing risk is to decrease the level of uncertainty, be prepared to handle the uncertainty and most importantly respond to the risk event if one occurs…

We have talked a lot about Uncertainty but we haven’t seen its official definition yet. So, here goes:

Uncertainty refers to the lack of knowledge of future events whether these events are positive or negative to the project.

These Uncertainties can lead to risks and therefore our project must plan for the potential situations to handle the risks that may affect our project objectives like scope, schedule, budget etc…

In a Majority of the cases, Risk arises from making decisions during uncertain circumstances. Let’s say your Project Teams technical architect is out on a personal emergency and won’t be returning for at least 10 more days and there is a huge design decision that needs to be taken right away. At this time, you are uncertain of which design to proceed with and ask the senior most developer to take the decision. Now, this is a risk. Though as managers we are doing the next-best-thing in consulting with the senior most developer, there is still some risk because, this guy may not be as knowledgeable as our Technical Architect and the design he chooses might create some problems in the future. However, this is a risk which was taken because of your decision during an uncertain situation.

While we cannot control the actual risk event, the whole idea behind risk management is to control the circumstances that can lead up to the risk. Let’s understanding this with a real-life example.

Let us say you need to drive your car from Chennai to Madurai to drop your grand-parents in their village home. They can’t take public transport so, driving your car is your only option. You know that en-route from Trichy to Pudukottai there is road-improvement work happening as a result there is a lot of debris on the road and might cause a flat tire. How will you handle the situation?

One alternative is to avoid that route and take the Trichy-Madurai bye-pass. Though it might take you an extra half hour of drive, the road is a highway and won’t cause any flat tires. Alternately, if you are very good at changing tires, you may carry a spare tire and take the risk to avoid driving the extra half hour…

This is exactly how we will react to Project Risks too…

Risks and Rewards

Go back to the driving to Madurai example. If you chose the second alternative of driving through the tricky stretch of road with a spare tire what was your reward? “Driving for lesser time”. The Risk you took was in pursuit of some sort of Reward. For starters you may think that this half an hour reward is too little. But, if you ask someone who has already driven nearly 350 kms from Chennai for over 5 hours, this half hour will mean a lot more.

In almost all cases, a risk is taken in pursuit of some kind of benefit. The situation is no different in our Project Scenario as well. We may take risks to achieve benefits like reducing costs, meeting a schedule deadline etc. The Rewards we obtain play a huge role in determining whether and more importantly which risks we take.

Accepting Risks

Part of managing risk is - knowing when to accept a risk. Go back to our driving to Madurai example. In case you get a flat tire while driving, what options do you have? You accept the risk, replace the flat tire and continue your journey. Isn’t it? But, in real-life project scenarios, things aren’t as clear and easy to decide. So, the decision to accept the risk is very tricky and difficult.

So, when should we accept risk? There are some general rules that can help us decide whether or not to accept a risk. This differs from company to company and so, you must check with your company’s policy on accepting risks. As a general rule of the thumb, ask yourself the following questions…

Based on your response to the above questions, you can decide whether to accept the risk or not. But, this is just the start. There is a great deal of analysis and information gathering that happens during the risk assessment phase. Only after this assessment/analysis will we be able to decide on how to handle a risk. But, the above section is here because you need to understand that “Accepting a Risk” is sometimes the only option you have and can’t ignore it as a risk response mechanism.

Risks and the Project Life cycle

Every project has a Project Life Cycle and it goes from the day it is initiated to the day it is wrapped up & closed. Risks have a direct relationship with the life-cycle stage the project is in at the moment.

The probability of a risk occurring is the highest at the beginning and reduces gradually as the project progresses through the phases. This is because, the level of uncertainty with respect to the Project Outcomes as well as what needs to be done is the highest at the beginning. As we progress through the life-cycle stages, clarity appears and the amount of uncertainty comes down. So, does the Risk…

Similarly, the impact a risk will have on the project will be the lowest at the beginning and will gradually increase as the project progresses. This is because, not much is completed at the beginning and as things get completed more and more, the impact a risk may have would also increase.

The progression of both Risk Probability & Impact through the life-stage of a project is explained in the picture below:

As you can see the probability starts at around 95% in the Initiating Stage and comes down as we move to planning, executing and so on. Similarly the Impact starts at around 5% (See from reverse for the red graph) and increases as we move towards the Projects closing phase.

Both the Risk’s Probability and its Impact determine how we will respond or handle that particular risk.

Prev: Risk Categorization

Next: Five Step Approach to Managing Project Risk

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