PROJECT RISK MANAGEMENT

Project Risk Management

Project Risk Management

A common issue in most projects is: 'do we know what we are trying to achieve in clearly defined terms, which link objectives to planned activities?' It is important to understand why this situation arises and to respond effectively in any project context. A convenient starting point is consideration of the project definition process portrayed in Figure 1.1. There are six basic questions that need to be addressed:

1. who who are the parties ultimately involved? (parties);

2. why what do the parties want to achieve? (motives);

3. what what is it the parties are interested in? (design);

4. whichway how is it to be done? (activities);

5. wherewithal what resources are required? (resources);

6. when when does it have to be done? (timetable).

For convenience we refer to these question areas as 'the six Ws', using the designations in parentheses as well as the W labels for clarity when appropriate. While somewhat contrived, this terminology helps to remind us of the need to consider all six aspects of a project, reinforced by the Rudyard Kipling quote used to open this.

However, risk-assessment techniques reflecting an ex ante strategic approach are only occasionally mentioned in the strategic management literature. One technique was suggested by Cardozo and Wind (1985), who showed that risk-return portfolio analysis, as originally developed in economics and finance, could be used for assessing risk in product-line portfolios. Another technique was suggested by Baird and Thomas (1985), who presented an ex ante contingency model of strategic risk taking in which environment, industry, organization, decision-maker, and problem characteristics are seen as potential influences on corporate risk bearing. Baird and Howard (1990) concluded that the three core ex ante risk elements are variance of future income (adopted from financial analysts' conceptions), size of loss, and probability of loss.

Bromiley (1991) tackled risk from a different angle by measuring it as the ex ante uncertainty of a firm's earnings stream, which depends on the previous year's performance, industry performance, expectations, aspirations, slack, and risk. Finally, Eylon (1988), discussing the seven deadly sins of strategic risk analysis, determined the first three sins as follows:

1. numbers: ignoring risk analysis completely;

2. using a single hurdle rate to evaluate all business units, strategies, and acquisitions; and

3. adding “extra points” to the hurdle rate just to be safe.

He warned his readers of the dangerous consequences of ignoring the risk ...