Description
Project management is the discipline of planning, organizing, motivating, and controlling resources to achieve specific goals. A project is a temporary endeavor with a defined beginning and end (usually time-constrained, and often constrained by funding or deliverables), undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value.
Research Reports on Identification and Reduction of Risk in Project Management
Table of Contents
Page Table of Contents.......................................................................................................................1 Figures and tables......................................................................................................................1 Synopsis.....................................................................................................................................2 Methodology..............................................................................................................................2 1 General Introduction................................................................................................................4 1.1 Trend.................................................................................................................................4
Figures and tables
Synopsis
Synopsis
The main goal of this report is to discuss the identification and reduction of risk in project management; the report will approach both the tools and techniques of risk management and its importance. The amount of failure among large, medium and even small projects is such that the topic of risk analysis and management raises a number of questions. Among those, one could ask whether companies are really aware of the different methods and techniques available today; or whether too many projects still lack a well thought out risk assessment due to lack of qualified project managers. Another question could also be whether further research is needed to complement what currently exist. This article does not intend to answer directly all the questions, but rather to review and explain the context, the benefits and the importance of risk management.
Methodology
My research method is based on the review of the literature relevant to the topic. I have investigated throughout various books and the electronic journals “Project Management” and “International Project Management” that provide several articles written on risk analysis over the years. I used many very useful papers from online databases such as EBSCO, Proquest, Lexis-Nexis, or Econlit. The investigation of company websites and other online databases like FAME, Amadeus, Investext or hydra that disclose information and various data about corporations’ projects provided quite interesting figures and statistics. The Financial Times and also the World Wide Web were used on a day-to-day basis. Various results of questionnaires or interviews have already been published. I thought conducting another field research study would not be worth with regard to the period of time I was given for the dissertation. Furthermore, a desk based study encompassing a summary of these results seemed to me a better approach. My dissertation is thus composed of a literature review on the topic of risk identification and reduction, followed by the results of surveys on projects performance, and a
Synopsis discussion about the subject, risk management. Chapter 4, which is the most important chapter of this paper, includes 3 parts. The chapter starts with the explanation of the general concept of risk management, followed by a methodology, and finally an example of risk management. I decided to illustrate the topic with a case study on a project that used another methodology than the one exposed in the chapter. The reason is that I wanted to emphasise the fact that the community of project management provides today sufficient methods, techniques and methodologies that companies can use to secure their projects.
Chapter 1 - General Introduction
Chapter 1
1 General Introduction
Many projects fail for unforeseeable or unavoidable reasons (Chapman and Ward). Yet, many projects fail also for avoidable reasons. One of the most important things all Project Managers have to keep in mind is that every project bears risk. The element of risk, although bearing a few different definitions, ends up with the same meaning for everyone. Any potential threat or chance of negative consequence that may prevent the Project Manager from achieving the objectives can be defined as risk. The PMBOK Guide 2000 gives a more formal definition, which is an uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective (PMBOK Guide, 2000, p127). From start to completion there will always be a chance that some unexpected events may occur, and prevent the outcome from being a full success. These events are the root cause of the risk the project bears (Chapman and Ward), and can be managed in such ways that the project can pursue its goal within the performance triangle. Knowing this, taking pro-active action to control or manage the risk at a very early stage is the key to go through the project life-cycle with a much greater probability of success. As we will see further on in the report, neglecting the risk while embarking of projects will most of the time lead to failure, whatever retrospective fire-fighting action taken at any stage.
1.1 Trend
The fast changing environment and the complexity of projects has increased risk exposure1. In 2001, Foreign Direct Investment (FDI) fell by 51% for inflows and 55% for outflows2. It was the first time after a decade of steady growth in FDI with very large increases in 1999 and 2000. But, an important point relative to global projects is that the decline in FDI was only of 14% in developing countries (WIR 2002). This can be explained by the fact that in many developing countries, rapid economic growth is outstripping infrastructure supply (Gupta and Sravat, 1998). This trend of continuing investment in these particular countries emphasises the importance of risk analysis. Companies need to know where they are going when investing in environment of government instability or lack of transparency in official procedures.
Chapter 1 - General Introduction
In addition to huge FDI, the globalisation of markets, the rush towards mergers and acquisitions and cross-border joint ventures experienced by Tans-National Companies (TNC), are making the business environment much more challenging than ever before. The size of these giant TNCs that compete on a global market and the pace of change of their organisations are complicating the problem of managing projects. To stay competitive in such an environment, the firms launch multi-billion euro projects with tight timescales, more demanding customers and reduced budgets, leading to considerable increase in the risk and uncertainty (Bruce Carte et al, 1996). In fact, one of the effects of globalisation is greater opportunities for construction companies in market share expansion abroad, and increase in profits. However, almost 15% of the top 225 global contractors have faced losses on their international projects (Han and Diekman, 2001). The main cause of these losses can be attributed to lack in the assessment and evaluation of the impact of non-financial risks (Dailami et al., 1999, Ho and Liu, 2002, Zhi, 1995)3 in developing countries. Before being introduced in Project Management, risk analysis and risk management were first discussed and used in the insurance industry in the USA in the 1940s (Raftery, 1994)4. At that time, risk and uncertainty were taken as two different factors; for these insurance people, risk could be insurable as the probability of occurrence of an event could be statistically assessed. On the other hand this was not possible for uncertainty as they saw it as any event for which probability of occurrence could not be computed (K. Oien, 2002). However, in this paper the terms risk and uncertainty will be used interchangeably (Husby et al, 1999) although Chapman and Ward argued that uncertainty can imply threat in the sense of ‘potential adverse effects’, as well as opportunity in the sense of ‘potential welcome effects’. And thus, effective risk management is the control of the threats while managing appropriately the opportunities towards the project performance (Chapman and Ward, 1997). Risk management has been the subject of quite a large range of articles, text-books with frameworks and other practical methods over the years. Chapter 2 gives an overview of the state of knowledge in this area. The chapter discuss the work of some of the most popular authors and the strengths and limitations of the different points of view. We will also see the definition of risk by different authors, since some of them distinguishing risk and uncertainty while others do not.
Chapter 1 - General Introduction Chapter 3 deals with the purpose of risk management. The question as to whether the whole process is effective in practice or if it only helps identifying the risks (Stephen Ward, 1999) is of critical importance, with regard to the statistics on projects failure shown in this chapter. The chapter will also question the relevancy of the different surveys and statistics made on project successfulness. So far the literature has not been very clear about what makes a successful project5. The vast majority of questionnaires are sent to project managers or researchers in project management; the chapter will discuss the argument of success criteria in order to assess the appropriateness of the views of other parties, such as end customers, contractors or the large community. Finally, the chapter may conclude if and why it is vital to conduct a deep risk assessment of the risks prior to set to a project, especially if one wants the back up of donors and sponsors. The goal of chapter 4 is to explain how to identify and reduce the risk as efficiently as possible in project management. We will first discuss risk management in general, and then review some methods and techniques. There are various formal methodologies and frameworks proposed by different authors for the identification and reduction of risk; in this chapter, I will present one of them and will refer to some others each time a comparison will seem useful or whenever mentioning complementary works would seem of importance. Before concluding on risk management, we will see the application of a methodology through a case study. The conclusion will not only remind the general purpose of the document. We will also determine what has changed in Project Management since the introduction of the different methods of risk management. There will also be a view about could be done in future research to help Project Managers in the topic.
Chapter 1 - General Introduction
References
Error: Reference source not found
1
Dr. Alexandre G. Rodrigues “Managing and Modelling Project Risk Dynamics – A System
Dynamics-based Framework” – Presented at the Fourth European Project Management Conference, PMI Europe 2001, London UK, 6-7 June 2001
2 3
World Investment Report (WIR) 2002 McCowa, A, Mohamed, S, “Evaluation of Build-Operate-Transfer (BOT) Project Opportunities in OIEN, K. – “Uncertainty Management in Projects; Theory and methods ”, Dept. of Production and
Developing Countries”, Griffith University, Queensland, Australia
4
Quality Engineering. The Norwegian University of Science and Technology, N-7491 Trondheim, Norway
5
Rae, T. and Eden, C “On Project Success and Failure in Major Engineering Projects”, a submission to
the European academy of management (EURAM 2002)
doc_574345411.doc
Project management is the discipline of planning, organizing, motivating, and controlling resources to achieve specific goals. A project is a temporary endeavor with a defined beginning and end (usually time-constrained, and often constrained by funding or deliverables), undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value.
Research Reports on Identification and Reduction of Risk in Project Management
Table of Contents
Page Table of Contents.......................................................................................................................1 Figures and tables......................................................................................................................1 Synopsis.....................................................................................................................................2 Methodology..............................................................................................................................2 1 General Introduction................................................................................................................4 1.1 Trend.................................................................................................................................4
Figures and tables
Synopsis
Synopsis
The main goal of this report is to discuss the identification and reduction of risk in project management; the report will approach both the tools and techniques of risk management and its importance. The amount of failure among large, medium and even small projects is such that the topic of risk analysis and management raises a number of questions. Among those, one could ask whether companies are really aware of the different methods and techniques available today; or whether too many projects still lack a well thought out risk assessment due to lack of qualified project managers. Another question could also be whether further research is needed to complement what currently exist. This article does not intend to answer directly all the questions, but rather to review and explain the context, the benefits and the importance of risk management.
Methodology
My research method is based on the review of the literature relevant to the topic. I have investigated throughout various books and the electronic journals “Project Management” and “International Project Management” that provide several articles written on risk analysis over the years. I used many very useful papers from online databases such as EBSCO, Proquest, Lexis-Nexis, or Econlit. The investigation of company websites and other online databases like FAME, Amadeus, Investext or hydra that disclose information and various data about corporations’ projects provided quite interesting figures and statistics. The Financial Times and also the World Wide Web were used on a day-to-day basis. Various results of questionnaires or interviews have already been published. I thought conducting another field research study would not be worth with regard to the period of time I was given for the dissertation. Furthermore, a desk based study encompassing a summary of these results seemed to me a better approach. My dissertation is thus composed of a literature review on the topic of risk identification and reduction, followed by the results of surveys on projects performance, and a
Synopsis discussion about the subject, risk management. Chapter 4, which is the most important chapter of this paper, includes 3 parts. The chapter starts with the explanation of the general concept of risk management, followed by a methodology, and finally an example of risk management. I decided to illustrate the topic with a case study on a project that used another methodology than the one exposed in the chapter. The reason is that I wanted to emphasise the fact that the community of project management provides today sufficient methods, techniques and methodologies that companies can use to secure their projects.
Chapter 1 - General Introduction
Chapter 1
1 General Introduction
Many projects fail for unforeseeable or unavoidable reasons (Chapman and Ward). Yet, many projects fail also for avoidable reasons. One of the most important things all Project Managers have to keep in mind is that every project bears risk. The element of risk, although bearing a few different definitions, ends up with the same meaning for everyone. Any potential threat or chance of negative consequence that may prevent the Project Manager from achieving the objectives can be defined as risk. The PMBOK Guide 2000 gives a more formal definition, which is an uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective (PMBOK Guide, 2000, p127). From start to completion there will always be a chance that some unexpected events may occur, and prevent the outcome from being a full success. These events are the root cause of the risk the project bears (Chapman and Ward), and can be managed in such ways that the project can pursue its goal within the performance triangle. Knowing this, taking pro-active action to control or manage the risk at a very early stage is the key to go through the project life-cycle with a much greater probability of success. As we will see further on in the report, neglecting the risk while embarking of projects will most of the time lead to failure, whatever retrospective fire-fighting action taken at any stage.
1.1 Trend
The fast changing environment and the complexity of projects has increased risk exposure1. In 2001, Foreign Direct Investment (FDI) fell by 51% for inflows and 55% for outflows2. It was the first time after a decade of steady growth in FDI with very large increases in 1999 and 2000. But, an important point relative to global projects is that the decline in FDI was only of 14% in developing countries (WIR 2002). This can be explained by the fact that in many developing countries, rapid economic growth is outstripping infrastructure supply (Gupta and Sravat, 1998). This trend of continuing investment in these particular countries emphasises the importance of risk analysis. Companies need to know where they are going when investing in environment of government instability or lack of transparency in official procedures.
Chapter 1 - General Introduction
In addition to huge FDI, the globalisation of markets, the rush towards mergers and acquisitions and cross-border joint ventures experienced by Tans-National Companies (TNC), are making the business environment much more challenging than ever before. The size of these giant TNCs that compete on a global market and the pace of change of their organisations are complicating the problem of managing projects. To stay competitive in such an environment, the firms launch multi-billion euro projects with tight timescales, more demanding customers and reduced budgets, leading to considerable increase in the risk and uncertainty (Bruce Carte et al, 1996). In fact, one of the effects of globalisation is greater opportunities for construction companies in market share expansion abroad, and increase in profits. However, almost 15% of the top 225 global contractors have faced losses on their international projects (Han and Diekman, 2001). The main cause of these losses can be attributed to lack in the assessment and evaluation of the impact of non-financial risks (Dailami et al., 1999, Ho and Liu, 2002, Zhi, 1995)3 in developing countries. Before being introduced in Project Management, risk analysis and risk management were first discussed and used in the insurance industry in the USA in the 1940s (Raftery, 1994)4. At that time, risk and uncertainty were taken as two different factors; for these insurance people, risk could be insurable as the probability of occurrence of an event could be statistically assessed. On the other hand this was not possible for uncertainty as they saw it as any event for which probability of occurrence could not be computed (K. Oien, 2002). However, in this paper the terms risk and uncertainty will be used interchangeably (Husby et al, 1999) although Chapman and Ward argued that uncertainty can imply threat in the sense of ‘potential adverse effects’, as well as opportunity in the sense of ‘potential welcome effects’. And thus, effective risk management is the control of the threats while managing appropriately the opportunities towards the project performance (Chapman and Ward, 1997). Risk management has been the subject of quite a large range of articles, text-books with frameworks and other practical methods over the years. Chapter 2 gives an overview of the state of knowledge in this area. The chapter discuss the work of some of the most popular authors and the strengths and limitations of the different points of view. We will also see the definition of risk by different authors, since some of them distinguishing risk and uncertainty while others do not.
Chapter 1 - General Introduction Chapter 3 deals with the purpose of risk management. The question as to whether the whole process is effective in practice or if it only helps identifying the risks (Stephen Ward, 1999) is of critical importance, with regard to the statistics on projects failure shown in this chapter. The chapter will also question the relevancy of the different surveys and statistics made on project successfulness. So far the literature has not been very clear about what makes a successful project5. The vast majority of questionnaires are sent to project managers or researchers in project management; the chapter will discuss the argument of success criteria in order to assess the appropriateness of the views of other parties, such as end customers, contractors or the large community. Finally, the chapter may conclude if and why it is vital to conduct a deep risk assessment of the risks prior to set to a project, especially if one wants the back up of donors and sponsors. The goal of chapter 4 is to explain how to identify and reduce the risk as efficiently as possible in project management. We will first discuss risk management in general, and then review some methods and techniques. There are various formal methodologies and frameworks proposed by different authors for the identification and reduction of risk; in this chapter, I will present one of them and will refer to some others each time a comparison will seem useful or whenever mentioning complementary works would seem of importance. Before concluding on risk management, we will see the application of a methodology through a case study. The conclusion will not only remind the general purpose of the document. We will also determine what has changed in Project Management since the introduction of the different methods of risk management. There will also be a view about could be done in future research to help Project Managers in the topic.
Chapter 1 - General Introduction
References
Error: Reference source not found
1
Dr. Alexandre G. Rodrigues “Managing and Modelling Project Risk Dynamics – A System
Dynamics-based Framework” – Presented at the Fourth European Project Management Conference, PMI Europe 2001, London UK, 6-7 June 2001
2 3
World Investment Report (WIR) 2002 McCowa, A, Mohamed, S, “Evaluation of Build-Operate-Transfer (BOT) Project Opportunities in OIEN, K. – “Uncertainty Management in Projects; Theory and methods ”, Dept. of Production and
Developing Countries”, Griffith University, Queensland, Australia
4
Quality Engineering. The Norwegian University of Science and Technology, N-7491 Trondheim, Norway
5
Rae, T. and Eden, C “On Project Success and Failure in Major Engineering Projects”, a submission to
the European academy of management (EURAM 2002)
doc_574345411.doc