chapter 11&12

Chapter 11: Project Risk Management

~ Learning Objectives:~
 Understand what risk is and the importance of good project risk management
 Discuss the elements involved in risk management planning and the contents of a risk management plan
 List common sources of risks in information technology projects

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

~ Risk Utility ~
 Risk utility or risk tolerance is the amount of satisfaction or pleasure received from a potential payoff
 Utility rises at a decreasing rate for people who are risk-averse
 Those who are risk-seeking have a higher tolerance for risk and their satisfaction increases when more payoff is at stake
 The risk-neutral approach achieves a balance between risk and payoff

Project Risk Management Processes
 Risk management planning: deciding how to approach and plan the risk management activities for the project
 Risk identification: determining which risks are likely to affect a project and documenting the characteristics of each
 Qualitative risk analysis: prioritizing risks based on their probability and impact of occurrence
 Quantitative risk analysis: numerically estimating the effects of risks on project objectives
 Risk response planning: taking steps to enhance opportunities and reduce threats to meeting project objectives
 Risk monitoring and control: monitoring identified and residual risks, identifying new risks, carrying out risk response plans, and evaluating the effectiveness of risk strategies throughout the life of the project

Risk Management Planning
 The main output of risk management planning is a risk management plan—a plan that documents the procedures for managing risk throughout a project
 The project team should review project documents and understand the organization’s and the sponsor’s approaches to risk
 The level of detail will vary with the needs of the project

Contingency and Fallback Plans, Contingency Reserves
 Contingency plans are predefined actions that the project team will take if an identified risk event occurs
 Fallback plans are developed for risks that have a high impact on meeting project objectives, and are put into effect if attempts to reduce the risk are not effective
 Contingency reserves or allowances are provisions held by the project sponsor or organization to reduce the risk of cost or schedule overruns to an acceptable level

Risk Breakdown Structure
 A risk breakdown structure is a hierarchy of potential risk categories for a project
 Similar to a work breakdown structure but used to identify and categorize risks

Risk Identification
 Risk identification is the process of understanding what potential events might hurt or enhance a particular project
 Risk identification tools and techniques include:
 Brainstorming
 The Delphi Technique
 Interviewing
 SWOT analysis

 Brainstorming is a technique by which a group attempts to generate ideas or find a solution for a specific problem by amassing ideas spontaneously and without judgment

 The Delphi Technique is used to derive a consensus among a panel of experts who make predictions about future developments

 Interviewing is a fact-finding technique for collecting information in face-to-face, phone, e-mail, or instant-messaging discussions

 SWOT analysis (strengths, weaknesses, opportunities, and threats) can also be used during risk identification and helps identify the broad negative and positive risks that apply to a project

Risk Register
 A risk register is: A document that contains the results of various risk management processes and that is often displayed in a table or spreadsheet format and a tool for documenting potential risk events and related information
 Risk events refer to specific, uncertain events that may occur to the detriment or enhancement of the project

Probability/Impact Matrix
 A probability/impact matrix or chart lists the relative probability of a risk occurring on one side of a matrix or axis on a chart and the relative impact of the risk occurring on the other
 List the risks and then label each one as high, medium, or low in terms of its probability of occurrence and its impact if it did occur
 Can also calculate risk factors

Decision Trees and Expected Monetary Value (EMV)
 A decision tree is a diagramming analysis technique used to help select the best course of action in situations in which future outcomes are uncertain
 Estimated monetary value (EMV) is the product of a risk event probability and the risk event’s monetary value

What Went Right?
 A large aerospace company used Monte Carlo simulation to help quantify risks on several advanced-design engineering projects, such as the National Aerospace Plan (NASP)
 The results of the simulation were used to determine how the company would invest its internal research and development funds
 Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft

Sensitivity Analysis
 Sensitivity analysis is a technique used to show the effects of changing one or more variables on an outcome
 For example, many people use it to determine what the monthly payments for a loan will be given different interest rates or periods of the loan, or for determining break-even points based on different assumptions
 Spreadsheet software, such as Excel, is a common tool for performing sensitivity analysis

Risk Response Planning
 After identifying and quantifying risks, you must decide how to respond to them
 Four main response strategies for negative risks:
 Risk avoidance
 Risk acceptance
 Risk transference
 Risk mitigation

Response Strategies for Positive Risks
 Risk exploitation
 Risk sharing
 Risk enhancement
 Risk acceptance

Residual and Secondary Risks
 It’s also important to identify residual and secondary risks
 Residual risks are risks that remain after all of the response strategies have been implemented
 Secondary risks are a direct result of implementing a risk response Media Snapshot
 A highly publicized example of a risk response to corporate financial scandals, such as those affecting Enron, Arthur Andersen, and WorldCom, was legal action
 The Sarbanes-Oxley Act is considered the most significant change to federal securities laws in the United States since the New Deal
 This Act has caused many organizations to initiate projects and other actions to avoid litigation

Risk Monitoring and Control
 Involves executing the risk management process to respond to risk events
 Workarounds are unplanned responses to risk events that must be done when there are no contingency plans
 Main outputs of risk monitoring and control are: Requested changes, Recommended corrective and preventive actions and Updates to the risk register, project management plan, and organizational process assets

Results of Good Project Risk Management
 Unlike crisis management, good project risk management often goes unnoticed
 Well-run projects appear to be almost effortless, but a lot of work goes into running a project well
 Project managers should strive to make their jobs look easy to reflect the results of well-run projects

Chapter12: Project Procurement Management

Learning Objectives
 Understand the importance of project procurement management and the increasing use of outsourcing for information technology projects
 Describe the work involved in planning purchases and acquisitions for projects, the contents of a procurement management plan and contract statement of work, and calculations involved in a make-or-buy analysis
 Discuss what is involved in planning contracting, including the creation of various procurement documents and evaluation criteria for sellers

Importance of Project Procurement Management
 Procurement means acquiring goods and/or services from an outside source
 Experts predict that global spending on computer software and services will continue to grow
 People continue to debate whether offshore outsourcing helps their own country or not

Contracts
 A contract is a mutually binding agreement that obligates the seller to provide the specified products or services and obligates the buyer to pay for them
 Contracts can clarify responsibilities and sharpen focus on key deliverables of a project
 Because contracts are legally binding, there is more accountability for delivering the work as stated in the contract

Project Procurement Management Processes
 Project procurement management: acquiring goods and services for a project from outside the performing organization
 Processes include:
 Planning purchases and acquisitions: determining what to procure, when, and how
 Planning contracting: describing requirements for the products or services desired from the procurement and identifying potential sources or sellers (contractors, suppliers, or providers who provide goods and services to other organizations)
 Requesting seller responses: obtaining information, quotes, bids, offers, or proposals from sellers, as appropriate
 Selecting sellers: choosing from among potential suppliers through a process of evaluating potential sellers and negotiating the contract
 Administering the contract: managing the relationship with the selected seller
 Closing the contract: completing and settling each contract, including resolving any open items

Types of Contracts
 Different types of contracts can be used in different situations
 Fixed price or lump sum contracts: involve a fixed total price for a well-defined product or service
 Cost reimbursable contracts: involve payment to the seller for direct and indirect costs
 Time and material contracts: hybrid of both fixed price and cost reimbursable contracts, often used by consultants
 Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service
 A single contract can actually include all four of these categories, if it makes sense for that particular procurement

Procurement Management Plan
 Describes how the procurement processes will be managed, from developing documentation for making outside purchases or acquisitions to contract closure
 Content varies based on project needs


Contract Statement of Work (SOW)
 A statement of work is a description of the work required for the procurement
 If a SOW is used as part of a contract to describe only the work required for that particular contract, it is called a contract statement of work
 A SOW is a type of scope statement
 A good SOW gives bidders a better understanding of the buyer’s expectations

Planning Contracting
 Involves preparing several documents needed for potential sellers to prepare their responses and determining the evaluation criteria for the contract award
 Request for Proposals: used to solicit proposals from prospective sellers
 A proposal is a document prepared by a seller when there are different approaches for meeting buyer needs
 Requests for Quotes: used to solicit quotes or bids from prospective suppliers
 A bid, also called a tender or quote (short for quotation), is a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer

Selecting Sellers and also called source selection
 Involves: Evaluating proposals or bids from sellers, Choosing the best one, Negotiating the contract, Awarding the contract

Administering the Contract
 Ensures that the seller’s performance meets contractual requirements
 Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts
 It is critical that project managers and team members watch for constructive change orders, which are oral or written acts or omissions by someone with actual or apparent authority that can be construed to have the same effect as a written change order

Suggestions for Change Control in Contracts
 Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved
 Evaluation of any change should include an impact analysis; how will the change affect the scope, time, cost, and quality of the goods or services being provided?
 Changes must be documented in writing; project team members should also document all important meetings and telephone phone calls

Tools to Assist in Contract Closure
 Procurement audits identify lessons learned in the procurement process
 A records management system provides the ability to easily organize, find, and archive procurement-related documents