Chapman and Ward HMPOR slide 1 © 2011 John Wiley & Sons Ltd. Chris Chapman and Stephen Ward How to Manage Project Opportunity and Risk Why uncertainty

Chapman and Ward HMPOR slide 1 © 2011 John Wiley & Sons Ltd.

Chris Chapman and Stephen Ward

How to Manage Project Opportunity and Risk

Why uncertainty management

can be a much better approach than risk management


Some introductory comments

• What do you want to take away?• Course structure• Course text• Other reading• Case studies• Participant background variations• Other issues• Questions?


Part one – setting the scene

• An unrestricted view of basic definitions• A broad view of projects• Two key project frameworks• Uncertainty, risk and opportunity relationships• Some key perspectives and concepts• Key motives for uncertainty management• Generic process frameworks


Basic definitions and their nominal/default nature

• Uncertainty – lack of certainty

• Risk – possible unfavourable outcomes

• Opportunity – possible favourable outcomes


Projects (programmes and portfolios)

Turner (1992) provides a useful illustrative definition of a project:

an endeavour in which human, material and financial resources

are organised in a novel way, to undertake a unique scope of work of given specification,

within constraints of cost and time, so as to achieve unitary, beneficial change,

through the delivery of quantified and qualitative objectives.


Project system examples

(a) Chain configuration: stages in a primary project may be managed as a chain of component projects.

(b) Parallel configuration: aspects of a primary project may be managed as a set of parallel component projects.

(c) Project hierarchy: the primary project as a three-level hierarchy of component projects.

component component component

primary project

Time

component project

component project

component project

primary project

Time

Time

tertiary project

tertiary project

secondary project

tertiary projectsecondary project

primary project

component component component


Corporate, operations and project management as three interlocking perspectives


A traditional four stage asset lifecycle example

Basic lifecycle stages

Dominant management aspect

Conceptualisation Operations or corporate management initially, then corporate management

Planning Corporate management initially, then project management

Execution and delivery

Project management

Utilisation Operations management


Conceptualisation decomposed

Stage purposes Steps Labels

Concept, project objectivesand business casedevelopment incorporatestrategy terms

Trigger event Concept captureClarification of project purposeConcept elaborationBusiness case developmentConcept, objectives and business case evaluation in corporate strategy terms

Concept shaping

Governance Consolidate plans and confirm deliverables Concept gateway


Planning decomposed

Design, operations and termination (DOT) strategy development from a design and operations management perspective

Design and operations strategy capture from

corporate strategy Development of lifecycle performance

criteriaIntegrated development of design,

operationsand termination strategy Integrated evaluation of design, operations and termination strategy

DOT shaping

Governance Consolidate plans and confirm deliverables

DOT gateway

Execution and delivery (E&D) strategy development from a project management perspective

Activity and related resource use capture from

corporate strategy and design strategyDevelopment of timing targets and

milestonesStrategic plan development for execution

and delivery Evaluation of execution and delivery

strategy

E&D shaping


Strategy gateway

Detailed design and planning for execution, delivery, operation and termination purposes

Shifting the perspective to implementation Development of detailed design and

planning criteria for implementation purposesDevelopment of detail designs and plansDevelopment of resource allocation and contracting criteriaDetailed design and plan evaluation

Tactics shaping


Tactics gateways


Execution and delivery decomposed

Execution Implementation of actions plans Coordinate, control and monitor progressModification of all targets, commitments and

resourceallocations as neededOngoing execution evaluation

Execution

Delivery Undertake delivery Deliverable modificationManage stakeholder expectations about delivery and operational performance Delivery evaluation

Delivery


Utilisation decomposed

Operation and support(O&S)

Operational utilisation of asset Ongoing development of operations & support

criteriaOngoing development of operations & support Ongoing operations & support evaluation

O&S

Termination Development of detailed plans for transfer of ownership

or replacement or decommissioningTermination executionTermination evaluation

Termination


Key project definition questions – the seven Ws

1. who who are the parties involved?

parties

2. why what do the parties want to

achieve?

motives

3. what what is the deliverable product the parties areinterested in?

design

4. whichway how will all relevant plans in

each lifecycle stage deliver

what is needed?

plans for: relationships and contracts,

business case purposes,

operations, activities

5. wherewithal

what key resources arerequired to achieve

executionof these plans?

resource plans for: operations, activities

6. when when do all relevant events

have to take place?

integration of all plan-based timetables

7. where where will the project takeplace? (in location and allother context terms)

context



whatthe design ofthe product

of the project

who

all project parties ultimately involved

plans for relationships

and contracts

plans foroperations

why

project motives: profit and

other motives

plans forbusiness case

purposes

wherewithal

resource plans for activities

whenintegration of all

plan-based timetables

whichway

plans foractivities

resource plans for operations

where - the location of theproject and all the relevant wider context issues


Key components of uncertainty

• Ambiguity uncertainty• Inherent variability• Event uncertainty• Systemic uncertainty


Most ‘sources of uncertainty’ are composites of two or more of these basic components of uncertainty, decomposition of uncertainty raises key questions about what structure is best suitedto the decomposition task in the particular context involved, and ‘events’ or ‘conditions’ is never the exclusive or universal answer.


Using the performance lens and the knowledge lens

uncertainty

‘the project’

uncertainty about theachievement of objectives

do we wantto continue to developthis project?

opportunityandrisk

all other views ofuncertainty

what else do we need to knowto get to the next stage?

how should weshape our plansto get to the next stage?

what do weneed to doto get to thenext stage?

performance lens

knowledge lens

how does thisproject fit ouroverall strategyand operations plans?


The role of criteria-plan relationship structures

• Plans for activities• Resource plans for activities• Plans for operations• Resource plans for operations• Plans for relationships and contracts• Plans for business case purposes • Integration of all plan-based timetables• The design of the product of the process• All the motives for being involved in the project• All the parties involved with relevant plans


Possible criteria value outcomes: a simple interval estimate example

0

Probability

Outcome value

Density formatportrayal

0 5 10 15 Outcome value

0

1.0

Cumulative probability

0.5

the medianis equal to theexpected value

Cumulative probability format

0 5 6 10 14 15


An illustration of the approximation involved using a density portrayal

Probability

0 5 6 10 14 15

0

Outcome value

presumed reality, although multiple modes may be involved

working assumptions for the model


Targets, commitments and expected values

• Using P10 a default target, and alternatives• Using P90 as a default commitment, and alternatives• Expected values, and alternative ‘best estimates’• Provisions• Contingencies• Range estimates as a default, and point estimate

alternatives• Expected values as an opportunity/risk datum, and

alternatives• A clear opportunity/risk/uncertainty relationship• Clarifying relationships between plans and outcomes


A basic probability-impact grid (PIG)

Probability

high

low

low medium high

medium

Impact

p1

p2

p0 = 0

p3 = 1

i0 = 0 i1 i2 i3

r2 r3 r4

r1 r2 r3

r3 r4 r5


Sensitivity diagram: Highways Agency example


1. base value estimating uncertainty2. uncertainty associated with previous risk registers3. other uncertainty sources which the HA is held accountable for which have not been considered at a portfolio level

Cost as a % of the base estimate value

1.0

0

0.5

base estimate value

1 2 3

Probability curves show the cumulative effect of:

100 150 200

P90

P50

P10


Extract from Sally’s BCS cost estimate and contract

Item description

Target minimum

Target maximum

Target mid-point

Remove old floor covering and prepare surfaceLay new flooring Provision for cleanup and other

time

4 8 2

12 12 6

8 10 4

Total hours Total cost

14 £ 420

30 £ 900

22 £ 660

Estimated value contract option basis is £ 660 + 10% = £ 726


Decision diagram: three approaches example


Cost

0.5

1.0

0

A CB

P10

P90

P50


Clarity efficiency: ‘efficient frontier’ portrayal

cost (of acquiring clarity)

clarity(insightwhich can be shared)

Key:

a

b3

cd

competent management area

e1

non-feasible area

b2

b1

e2 e3

incompetent management area

a-c efficient boundary target, with a maximum clarity approach c minimum clarity approach bi intermediate approaches c-d inappropriate clarity levels ei

inefficient approaches


Sensitivity diagram: activity level example

5th yearMar NovDec Jan Feb Apr May Jun Jul Aug Sep Oct

Probabilityof achievementby dates indicated

0.2

0.4

0.6

0.8

1

0

0.3

0.5

0.7

0.9

0.1

Base plan completion date

1 2 3 4

56

Notes:1. the curves assume a minimum fabrication period of 20 months2. no work is transferred offsite to improve progress3. no major fire, explosion or other damage

Probability curves show the cumulative effect of the following sources of uncertainty:

1. yard not available, or mobilisation delays2. construction problems / adverse weather3. subcontracted nodes delivery delays

6. delayed award of fabrication contract

4. material delivery delays5. industrial disputes


Risk efficient options: ‘efficient frontier’ portrayal

risk (in terms of all relevant objectives)

expectedreward(profitor a moregeneralcompositeofpositiveobjectives)

a-c efficient boundary target, with a maximum reward approach c minimum reward approach bi intermediate reward approachesc-d inappropriate reward levels ei inefficient approaches

Key:

a

b3

cd

competent management area (opportunity management area)

e1

non-feasible area

b2

b1

e2 e3

incompetent management area


Decision diagram: one risk efficient choice example

Cost

0.5

1.0


0

expected costusing the 1.6 m barge


3.0 m barge curve

1.6 m barge curve


Decision diagram: two risk efficient choices example

Cost

0.5

1.0


0

1.6 m barge curve

3.0 m barge curve

expected cost using the 1.6 m barge



Approximate ‘macro-phase’ alignments for three processes

Association for ProjectManagement (APM): Project Risk Analysis and Management (PRAM) Guide (APM, 2004)

Institution of Civil Engineers (ICE) and the Actuarial Profession (AP): Risk Analysis and Management for Projects (RAMP) (ICE and AP, 2005)

Project Management Institute (PMI): Project Risk Management (PRM) (PMI, 2008), PMI Practice Standard for PRM (PMI, 2009)

Initiate: define the projectInitiate: focus the risk management process

Organise and define RAMP through the investment lifecyclePlan and initiate risk review

Plan risk management

Identify Identify risks Identify risks

Assess: structure ownership estimate evaluate

Evaluate risks Perform qualitative risk analysisPerform quantitative risk analysis

Plan risk event responsesPlan project risk responses

Respond to risksAssess residual risksPlan responses to residual risks

Plan risk responses

Implement responses Communicate strategy and plansImplement strategy and plansControl risks

Monitor and control risks


The basic PUMP process

Seven phase basic PUMP portrayal Basic PUMP portrayal as three macro-phases

define the projectfocus the process

develop the basis for analysis

identify all relevant sources, responses, conditions

structure all uncertaintyclarify ownership

execute the qualitative analysis

quantify some uncertaintyevaluate all the relevant implications

execute the quantitative analysis


Basic PUMP process flowchart

define the project

focus the process

identify sources, responses, conditions

structure all uncertainty

clarify ownership

quantify some uncertainty

evaluate all implications

start

stop

the context is importantin each of the seven phases


Example PUMP bar chart for the first pass

PUMPphase

define

focus

structure

ownership

quantify

evaluate

identify

start of the process

end of the firstcomplete cycle

intense activity ongoing activity intermittent activityKey:


Five key shortcomings of common practice risk management processes

1.A focus phase equivalent which is not used as a flexible basis for adjusting the process to the context of a particular project, or used to modifying the process as the project lifecycle progresses, beginning with concept shaping and ending with project termination.

2.A focus phase equivalent which is unclear about the motives for the process in relation to the various interested parties, or the links between motives for analysis of uncertainty, opportunity and risk and the models selected.

3.A define phase equivalent which is too detailed in terms of activities, and which fails to address all seven Ws, the project lifecycle, and linking financial cash flow models in a balanced manner.

4.An identify phase equivalent which is limited to event based uncertainty, which cannot cope effectively with composite uncertainties, and which fails to structure sources of uncertainty and associated risk and responses usefully, often generating excessively long and detailed ‘risk registers’ that address minor issues in excessive detail.

5.Absence of a structure phase equivalent, with little evidence of robustness testing or effective structuring decisions, including the lack of a significant search for common or general responses and a failure to identify significant linkages and interdependences between important sources of uncertainty.


Five more key shortcomings of common practice risk management processes

1.Lack of an explicit ownership phase equivalent, with resulting inadequate attention to the implications of contractual arrangements for motivating parties to manage uncertainty, including inappropriate use of simple contracts.

2.A quantify phase equivalent which is costly but not cost effective, ineffectively linked to earlier qualitative analysis, resulting in biased estimates that are usually highly conditional on scope assumptions and other assumptions which are lost sight of.

3.An evaluate phase equivalent which combines different sources of uncertainty without capturing crucial dependence or without providing the insight to clarify how revisiting earlier analysis can clarify uncertainty where appropriate, develop effective responses where appropriate, facilitate crucial choices to achieve risk efficiency and balance, or demonstrate the robustness of those choices when necessary.

4.Absence of an effective iterative process structure which embeds all seven PUMP phases and a failure to distinguish planned iterations which involve limited costs, successive applications of an iterative process as a project lifecycle progresses, and unplanned iterations to deal with surprises which are costly.

5.Lack of a clear and shared understanding of all relevant objectives, measurable or not, with an orderly process for considering all relevant tradeoffs in opportunity efficiency terms.


Part one review, questions and discussion


Part two – the basic PUMP process

• Assume the project is in the execution and delivery strategy shaping stage most of the time

• Assume a client perspective most of the time

• Assume a high clarity approach most of the time


The process as a programme of projects

• Each phase is a project – use the Gantt chart• The programme is a portfolio of 7 projects• The portfolio needs holistic management• Everything we know about good project and

programme/portfolio management can be brought to bear on managing the process

• This includes uncertainty management• Portfolio/programme/project uncertainty management

distinctions are a question of degree for present purpose, a process ‘driver’


Process ‘drivers’ and linked assumptions

When looking at each phase in detail, what is

involved is a function of process ‘drivers’, so

we have to make assumptions for discussion

purposes. Some key process drivers (and

the related assumptions) are:

- strategy / tactical level of the project (strategic)

- perspective and motives (client wanting insight)

- learning curve position (low down)- decisions of interest (shaping strategic plans for

execution and delivery as per the assumed stage)


The ‘qualitative analysis’ part of the process in detail, considering it phase by phase, starting with the ‘basis of analysis’ part of the process


Define the project

• This phase involves problem structuring ‘craft skills’, a key aspect of the modelling skills required by the person in charge of leading and shaping the process, the ‘process manager’

• All ‘process staff’ require interpersonal skills• The importance of using a simple strategic level activity

(task) structure aligned with the nature of the risks involved• The need to move from a task orientation to an objectives

orientation• The role of the 12 stage nominal project lifecycle• The role of the 7 Ws framework and the plan-criteria

relationship structure



whatthe design ofthe product

of the project

who

all project parties ultimately involved

plans for relationships

and contracts

plans foroperations

why

project motives: profit and

other motives

plans forbusiness case

purposes

wherewithal

resource plans for activities

whenintegration of all

plan-based timetables

whichway

plans foractivities

resource plans for operations

where - the location of theproject and all the relevant wider context issues


Define phase specific tasks

the project parties

the project design

the project objectives

the wherewithal plans

the project timing

the project lifecycle

deliverables fit for purpose?

no

yes

complete the focus

phase

elaborate and resolve

start the

process

consolidate

the whichway plans

the project context


Four common tasks for all phases

• document – record in text, tables and diagrams, with a view to ease of understanding for all parties involved

• verify – ensure all providers of information agree as far as possible, and important differences of opinion are highlighted

• assess – evaluate the analysis to date in context to ensure it is ‘fit for purpose’

• report – release verified documents and present findings as appropriate


A simple BCS example to compare with the offshore North Sea examples used to illustrate the define phase earlier


Focus the process

• This phase involves ‘process design’ craft skills, a crucial aspect of modelling skills needed by the ‘process manager’

• Understanding what these ‘process design’ craft skills involve is a core requirement for those aspiring to manage the process

• It is also crucial for decision takers – who have to trust their judgement when selecting advisors – to ensure that they have a clear idea what they are looking for in terms of ‘process design’ skills

• A useful place to start to understand what is involved is an overview of the task structure for this phase


Focus phase specific tasks

clarify the process partiesclarify the process objectives

top-down uncertainty appreciation

consolidate the process strategy

needsdevelopment

unacceptable

start the process

scope the process

clarify the process lifecycle clarify the process context

needsdevelopment

select a process approach

determine resources required

determine timing

plan the process

unacceptable

assess the process

scope

satisfactory

assess the process

plan

satisfactory

stop theproject

to theIdentify phase


Some of the objectives which may be relevant

• Risk efficiency• Clarity efficiency• Opportunity efficiency• Opportunity management as the dominant goal• Culture change• Targets, expectations and commitments distinguished• Contingencies and provisions clarified and given clear

owners• Bottom up communication encouraged, with a shared

‘big picture’ perspective• Creativity and satisfaction (fun) used as effective

objectives


Key concerns which are often not addressed

• What subset of these objectives is appropriate for this particular application of the generic process

• How should the process be shaped to this subset of appropriate objectives

• What are the other important drivers, like value at risk, project novelty, project complexity, time and resources available, learning curve position, lifecycle position, decisions of interest, and strategy/task level focus

• Which of the 7 Ws is the focus, and how do the objectives of immediate interest relate to the plans which are most relevant

• What are the most important questions which need addressing first


Simple predesigned processeslike the BCS example, evolving complex processes like the BP offshore North Sea examples, and the implications for a range of intermediate contexts, with examples like the Highways Agency and National Power


Identify all relevant sources, responses & conditions

• This phase is relatively straightforward if it is not confused with common practice event uncertainty identification processes

• A basic understanding of modelling issues is needed (the minimum - maximum clarity spectrum needs to be understood, for example) and a clear understanding of clarity efficient uncertainty decomposition is crucial

• A basic concern is the level of detail required and the way the depth of decomposition required needs to be developed on successive passes

• A useful place to start to understand what is involved is an overview of the task structure for this phase


Identify phase specific tasks

clarify the immediate priorities

decompose the next priority source if this is appropriate clarify the relevant primary responses

clarify the relevant secondary sources and responses


no

yes

to the structure

phase

from earlier phases

search and classify

clarify the immediate needfor more breadth or depth

clarify the relevant conditions


Offshore project examples of immediate priorities,the composite nature of relevant sources of uncertainty,secondary sources of uncertainty, and sources best treated as conditions


A table of generic response types

Type of response Method of handling uncertainty

Modify objectives Reduce or raise performance targets expressed as constraints, changing tradeoffs between multiple objectives

Avoid Plan to avoid specified sources of uncertainty

Influence probability Change the probability of potential variations

Modify consequences Modify the possible consequences of variations

Transfer consequences Transfer consequences to another party via contract provisions or insurance

Develop contingency plans

Set aside resources or make other plans to provide a reactive ability to cope

Keep options open Delay choices and commitments, choosing versatile options

Monitor Collect and update data about all sources of uncertainty

Accept Acknowledge and accept uncertainty, doing nothing about it

Remain unaware Ignore uncertainty, taking no action to identify or manage it

Optimise all the above Explicitly recognise the value of selecting an optimal combination


Some illustrations of process variants in the identify phase, building on earlier offshore project examples, including common shortcomings and simple contexts when minimum decomposition of all relevant uncertainty is the key, as in the Highways Agency example


The checklist approach – source reinterpretation

Source of uncertainty Impact Likelihood Exposure

Definition of project

Concept and design

Financing arrangements

Logistics

Local conditions

Resource estimates

Industrial relations

Communications

Project organization


Typical uncertainty management issues in the lifecycle stages of immediate interest, and other prompt lists for sources of uncertainty

Execution anddelivery (E&D) strategy shaping stage

Identifying and allowing for regulatory constraints Concurrency of activities required Capturing dependency relationships Errors and omissions

Tactics shaping stage Adequate accuracy of resource estimates Estimating resources required Defining responsibilities (number and scope of contracts) Defining contractual terms and conditions Selecting capable participants (tendering procedures and bid

selection)

Execution stage

Exercising adequate coordination and control Determining the level and scope of control systems Ensuring effective communication between participants Provision of appropriate organizational arrangements Ensuring effective leadership Ensuring continuity in personnel and responsibilities Responding effectively to sources which are realized

Delivery stage

Adequate testing Adequate training Managing stakeholder expectations Obtaining licences to operate


Structure all uncertainty

The need to test the robustness of working assumptions in the search for clarity efficiency is central to this phase, requiring basic modelling skills and a clear understanding of the range of possible approaches available

It is also coupled to concerns like:

- we need to order sources of uncertainty

- we need to order responses

- we need to identify general responses

- we need to understand dependencies


Structure phase specific tasksfrom the

identify phase

review other plans and Ws and associated sources

identify general responses and order responses examine links between sources and responses develop diagrams and review associated models

review key plan components and associated sources

other selectiverestructuring

explore interactions

developorderings

refine classifications


to the ownershi

p phase

yes

no


Portion of a source-response diagram for an offshore project platform fabrication activity

start-up problems

yard not available

productivity variations

industrial disputes

mobilize and accept a short delay

long delay

find analternative yard

none available

accept along delay


Linking this portrayal to some alternatives

• The three ‘yard not available’ scenarios and a traditional probability-impact grid (PIG) equivalent

• A traditional decision tree equivalent• A traditional fault tree or event tree equivalent• Systems dynamics, inference diagrams and other

feedback loop portrayals


Cognitive mapping portrayal of feedback loops

Reproduced by permission of the Operational Research Society

Lack of system freeze

Tight time scale

Enforced work on unfrozen items

Increased rework

Increased delay

More limited resources

Increased cross-relationbetween parallel activities

More parallel activities

Increase in activity durations

More work to do

Design changes

Approved delays


The valuable role of diagrams when source-response structures are complex, other complex structure tools and models, and simple structures when this is clarity efficient


Clarify ownership

• the nature of this phase is highly dependant upon the position in terms of iterative cycles

• three examples to illustrate the range:

- corporate contracting stance early on

- work packaging at a mid point

- named parties towards the end


Ownership phase specific tasks

strategy fit for purpose?

plans fit for purpose?

overall fit for purpose?

from the structure

phase

scope the contracting strategy

to the quantify phase

clarify the objectives of the contracting strategyidentify owners for the sources of uncertainty and responsesuncertainty appreciation and contract design

plan/re-plan the contracts

select a contract approachselect contract terms

contract timing

stop the project

no

yes

no

no

yes

yesmaybe


The ‘quantitative’ part of the process


Estimating probabilities group exercise

Assume everyone in the room puts their date of birth on a piece of paper, all the pieces of paper are put into a hat, and one piece of paper is selected at random. Assume no communication is allowed, and everyone agrees to tell the truth. What is the probability the paper selected indicates a birth date in June?

Several exercises will be involved. Make brief notes for each.


Some key estimate phase issues

• The estimate phase and the evaluate phase are very closely coupled, in the sense that the approach to one tends to assume an approach to the other, and in terms of the iterative looping structure

• A wide variety of different approaches are advocated• Understanding the rational of the alternatives is

important, as is understanding what the alternatives deliver (or not)


Some further important estimate phase issues

• Sizing identified sources of uncertainty is the starting point• Later refinement may be about decomposing the structure

of the uncertainty to resolve ambiguity, and searching for appropriate data

• Still later the defence of key decisions may become the issue

• Data may be available, but usually it is not, and ‘there is no such thing as a directly relevant objective estimate’

• Getting comfortable with subjectivity and coping with no data is important


Alternative approaches to estimating

• ‘Traditional quantitative approaches’ as used by many leading edge organisations for many decades, based on specific distribution shapes most of the time, but based on rectangular histograms some of the time, and probability (decision) trees some of the time

• The discrete or continuous variable divide• The use of ‘qualitative’ probability-impact grids (PIGs)

with a range of alternative labels, sometimes as a ‘first pass’, as used by those organisations adopting ‘common practice’, still promoted by many professional bodies

• The ‘simple scenario’ response• The ‘minimalist’ response• The integration of these approaches


The triangular distribution

Probability

L M Costlowerbound

most likely value

upperbound

Expected value = (L + M + U) / 3

U


Common probability distribution alternatives

• Beta distributions as adopted for PERT• Normal• Log Normal• Exponential• Poisson• Uniform


Tabular format for a common interval approach

_________________________________________

Value Probability Product_____________________________________________ 5 0.15 0.75 6 0.35 2.10 7 0.25 1.75 8 0.15 1.20

9 0.10 0.90 Expected value (mean) 6.70____________________________________________


Probability tree interpretation of this example

5

6

7

8

9

0.15

0.35

0.25

0.15

0.10


Rectangular histogram density format interpretation

most likely value(most probable

class mark)

Outcome value

Probability

3 4 5 6 7 8 9 10

0.05

0.15

0.25

0.35

0

0.10

0.20

0.30

expected value (point of balance)


Cumulative probability format (piecewise linear)

1.0

Outcome value

0

3 4 5 6 7 8 9 10

0.2

0.4

0.6

median (50%) value


0.8


Tabular format for a three interval estimate

__________________________________________

Value Probability Product

_____________________________________________ 10 0.3 3.0 15 0.5 7.5 20 0.2 4.0 _____________________________________________ Expected value (mean) 14.5

___________________________


Continuous variable portrayal with three intervals


1.0

Lay days per month in April

0.3

05 7.5 10 12.5 15 17.5 20 22.5

0.8

Piece-wise linear cumulative format

Probability

Lay days per month in April

area=0.5

0

0.1

5 7.5 10 12.5 15 17.5 20 22.5

area=0.2 area=0.3

Rectangular density format


The effect of adding more classes

Days First-cut using three classes

Second-cut using five classes

5 0.10

10 0.3 0.20

15 0.5 0.50

20 0.2 0.15

25 0.05

Expected value 14.5 14.25


Quantify phase specific tasks


to the evaluate

phase

refine and restructure this source

assess the next priority

source

from the ownership

phase

extend the ordering

of the sources

yes

no

at least one more source

clarify associated conditions

size this source

selective refining and restructuring

ofsources

no more sources

start ordering the sources


Simple estimate portrayal for design change approval

0 3 9 15

0

Probability

Outcome value




Two scenario portrayal for design change approval

0 5 10 15 20 25

0

Probability

Outcome value




The rationale for a multiple scenario approach

• A simple form of uncertainty decomposition, refining the structure used to understand uncertainty, quite different to refining an estimate of uncertainty within a given structure

• Can be extended to three or more scenarios

- normal variability

- abnormal outcomes (10 year return period)

- extreme outcomes (100 year return period)

- very extreme, etc


The rationale for a common interval approach

• Simple• Clear and transparent approximation• The degree of approximation to any assumed

distribution shape can be adjusted by adding more intervals

• No distribution function assumptions are required, but any plausible distribution function and its assumptions can be used as a starting point

• Complex shapes with no appropriate function can be accommodated

• Multiple scenarios, decision trees and conditional probabilities are easily accommodated


Current use of probability-impact grids (PIGs) with numeric bounds and risk index values

Probability

high

low

low medium high

medium

Impact

p1

p2

p0 = 0

p3 = 1

i0 = 0 i1 i2 i3

r2 r3 r4

r1 r2 r3

r3 r4 r5


Reinterpretation of PIGs in more powerful terms

Impact0 … etc with a complete scale for outcome values

Probability

1.0

0

source number 2 – very uncertain probability, but predictable impact

source number 1 – uncertain probability and impact

source number 3 – reliable probability estimateavailable, but very uncertain impact

source number 4 is notshown because its probability is 1, so it does not lend itself tothis portrayal, and it isomitted in conventionalrisk management usingprobability-impact grids

completescale from0 to 1.0


Estimate phase approach overall implications

• There is no satisfactory way to combine ‘qualitative estimates’ – a ‘weak quantitative analysis’ interpretation of PIGs is needed – and all sources need attention

• Combining first pass quantified individual sources of uncertainty is the starting point

• Looping back after the evaluate phase, changing the proposed project plans to make effective use of all available insights and achieve overall corporate risk efficiency is the end point

• In between, managing the process to achieve simplicity efficiency at the most appropriate level of effort is the goal, adding more estimation detail on aspect of this

• This phase and the closely coupled evaluate phase are at the core of the iterative process


Evaluate phase specific tasks


from the quantify

phase

diagnose the implications

interim or

gateway report

portray the effect

to the define phase

no – restructureor extend

global yes

combine the subset of sources

select an appropriate subset of sources

specify dependence

local yes


Sensitivity diagrams as a key evaluate phase tool: activity level offshore project example used earlier

5th yearMar NovDec Jan Feb Apr May Jun Jul Aug Sep Oct

Probabilityof achievementby dates indicated

0.2

0.4

0.6

0.8

1

0

0.3

0.5

0.7

0.9

0.1

Base plan completion date

1 2 3 4

56

Notes:1. the curves assume a minimum fabrication period of 20 months2. no work is transferred offsite to improve progress3. no major fire, explosion or other damage

Probability curves show the cumulative effect of the following sources of uncertainty:

1. yard not available, or mobilisation delays2. construction problems / adverse weather3. subcontracted nodes delivery delays

6. delayed award of fabrication contract

4. material delivery delays5. industrial disputes


Sensitivity diagrams as a key evaluate phase tool: offshore project intermediate level output example

5th year2nd year 3rd year 4th year

Award of designcontract (1)

1 23 4

56

Fabrication complete

(6)

Probabilityof achievementbydatesindicated

0.2

0.4

0.6

0.8

1.0

0

0.3

0.5

0.7

0.9

0.1

Award of fabrication contract (2)

and major material orders (3)

Steel (4) and other (5)

deliveries complete

Offshore installationcomplete (7)

7


Sensitivity diagrams as a key evaluate phase tool: addition of items A, B and C as in the BCS example

Cost

Cumulativeprobability

0.2

0.4

0.6

0.8

1.0

0

A A + B A + B + C

P90

P10


Using decision diagrams to evaluate risk efficient choices: one risk efficient choice example

Cost

0.5

1.0


0



3.0 m barge curve

1.6 m barge curve


Using decision diagrams to evaluate risk-reward tradeoffs: two risk efficient choices example

Cost

0.5

1.0


0

1.6 m barge curve

3.0 m barge curve




Using decision diagrams to evaluate other criteria tradeoffs: the photocopier example

Cost

0.5

1.0

0

A CB

P10

P90

P50



Managing opportunity efficiency as an overall objective, with risk efficiency in relation to each objective, plus clarity efficiency,plus optimal tradeoffs between all objectives, whether or not objectives are measurable.

Optimal tradeoffs between all objectives is the goal, and it is crucial to systematically seek this goal.


Build comprehensively from the bottom-up, moving the bottom down selectively, then present selectively top-down

• Understand specific sources of uncertainty, responses and conditions at the bottom level, moving the bottom down where this seems worth while

• Understand the role of dependence as uncertainty accumulates and decomposition is refined

• Understand composite uncertainty and general responses at higher levels

• Manage the uncertainty plus any associated opportunity and risk as the build-up evolves

• Present the ‘bottom line’ first• Explain where it came from working top-down• Make sure conditions and non-quantified objectives do not get

overlooked, emphasising the key ones• Focus all presentations on what matters most


Approaches to combining uncertainty

• Methods based on moments (mean-variance approaches in particular)

• Methods based on discrete probabilities (as used in decision analysis and other probability tree models)

• Methods based on simulation (Monte Carlo simulation in particular)

The norm is using simulation without a gradual build up of intermediate results – no ‘sensitivity diagrams’ are the obvious symptom – but simulation can be used for any approach to any decomposition structure, and simulation is a reasonable default assumption


Approaches to dependence to be aware of

• Assuming independence as a default position is the norm

• Assuming perfect positive correlation as a simple form of complete dependence as a default is the recommended clarity efficient starting position

• Intermediate correlation and percentage dependence provides a simple compromise

• Conditional specifications start to provide the insight needed to understand simple and complex forms of statistical dependence

• Causal structures provide a practical maximum insight approach sometimes, but they may not be clarity efficient


Part two review, questions and discussion


Part three – the generic process in all lifecycle stages

• Start by considering roles for PUMPs in the strategy shaping stages, and the way the 7Ws plan-criteria relationship structure focus shifts

• Consider the strategy gateway as a performance uncertainty management process (PUMP) which is very different to the basic PUMP

• Then consider earlier lifecycle strategy shaping PUMPs and associated gateway PUMPs, working back towards the concept stage

• Follow with the later lifecycle stage PUMPs, working forward to the termination stage

• The overall strategy gateway as a watershed


Roles for PUMPs in the strategy shaping stages

Lifecycle stage Stage purposes Roles for the associated PUMP

Concept shaping Concept, project objectives and business case development in corporate strategy terms

Confirm the initial concept from a corporate perspective Identify stakeholders and their expectations Identify appropriate performance objectivesProvide unbiased initial estimates of business case

outcomesEvaluate the concept and business case in corporate

strategy terms

Concept gateway Consolidation Governance

Consolidate the base and contingency plans Confirm expectations about the deliverables

DOT shaping Design, operations and termination (DOT) strategy development from a design and operations management perspective

Confirm the design basis from a design and operations perspective

Develop lifecycle operations performance criteriaAssess the feasibility of the design strategyAssess the likely costs and benefits of design changes Evaluate the operations and termination strategyTest the reliability of designs and their operations

effectiveness

DOT gateway Consolidation Governance

Consolidate the base and contingency plansConfirm expectations about the deliverables

E&D shaping Execution and delivery (E&D) strategy development from a project management perspective

Confirm the execution basis from an execution perspectiveEstimate the resources required at a strategic levelIdentify and allow for regulatory constraints Assess contracting strategy at an overview levelAssess the feasibility of plans Assess the likely duration of execution Assess the likely cost of execution and delivery Determine the appropriate milestones Determine the appropriate levels of contingency fundsAssess the effect of changes to plans

Strategy gateway Consolidation Governance

Consolidate the base and contingency plansConfirm expectations about the deliverables


Overall strategy gateway specific tasks

to the next lifecycle

stage

from the evaluate

phase

deliverablesfit for

purpose?

maybe

gateway yes

no

consolidate and explain the strategy

stop the

project

support and convince

to the define phase

commitment plans

contingency plans

base plans

PUMP report


Gateway processes viewed from anuncertainty management perspective and the governance issues which need to be addressed


Adapting the basic PUMP to the design, operations and termination (DOT) shaping stage

• The PetroCanada liquefied natural gas storage example and the Yukon River pipeline crossing example

• Terminology changes• Modelling concerns which stay the same• Interaction with different people with different

perspectives and agendas• Safety as a special case, and the questions raised by

tradeoffs between fatalities and cost• Integration with the formation and shaping of operations

strategy


Adapting the basic PUMP to the concept stage

• UK Nirex example (nuclear waste disposal), and simpler examples

• Terminology changes• Modelling concerns which stay the same• Interaction with different people with different

perspectives and agendas• Integration with the formation and shaping of corporate

strategy• The relationship between constraints imposed by

broader strategic goals and multiple criteria tradeoffs • Whole lifecycle issues


Overall project evaluation involvesthe whole project lifecycle and the use of decision frameworks based on NPV (Net Present Value) or closely related variants like IRR (Internal Rate of Return)


A very simple initial example

Based on a paper published to illustrate a parametric

approach to discounting (Chapman and Cooper,1983)

The basic example context: insulating the walls of a

house in the UK in the early 1980s

The more complex underlying example context: the

State of Alaska considering a major hydro-electric

facility development or the incremental development

of coal-fired electric power


The perceived differential cash flow

X0 X1 X2 … Xt … Xn

-C F F F F+S

where money of the day (eg 1981£) is used for

C the capital cost

F the fuel cost saving per annum

S the scrap value at the planning horizon

n the number of years in the planning horizon


The need to inflate, escalate and discount

It a general inflation factor for period t

Et an escalation factor for F

At an appreciation factor for S

Dt a real discount factor


Net Present Value (NPV = V) basic definition

V = - C

+ the sum over t = 1…n of the F It Et / It Dt

+ S In An / In Dn

General inflation cancels out, so we can work in

‘real terms’ with respect to ‘economic desirability’

‘Financial feasibility’ requires attention to general

inflation patterns


Composition of parameters

R = the sum over t = 1…n of the Et / Dt

T = S An / Dn

N = C – T

V = F R – N

The purpose of composition


NPV based tests

‘V greater than zero?’ is the basic test

If V is set equal to 0, equivalent tests include:

D greater than ‘correct D’?

n greater than the expected planning horizon?

N greater than F R ?

F less than N / R ?

The purpose of alternative frameworks


Embedding this model in a simple process

step 1 estimate n 5 years

2 R E / D = 1.1

R = 6.72

3 N C = £400

S = £250

A = 1.025

T = £283

N = £117

Alternative insulation types as an example

component decision embedded in step 3


The simple process continued, steps 4 and 5

step 4 estimate F = £40

then V = F R – N

= 40 x 6.72 – 117

= 152

step 5 tabulate V as n varies over a

plausible range, and determine

the value of n which flips the

decision given the expected

value of all other parameters


Key composite parameters as a function of n

n T N R N/R V1 256 144 1.10 130.9 -1002 263 137 2.31 49.3 -45 3 269 131 3.64 36.0 15 *4 276 124 5.11 24.3 805 283 117 6.72 17.4 1526 290 110 8.49 13.0 2307 297 103 10.44 9.9 3158 305 95 12.58 7.6 4089 312 88 14.94 5.9 51010 320 80 17.53 4.6 621


The simple process continued, steps 6 - 9

step 6 generalise step 5 to determine the flip

point values of all other parameters

eg n = 2.8 (via diagram, often useful)

T = £131

F = £17.5

step 7 identify key parameters

step 8 choose a suitable framework

step 9 illustrate with scenarios


The more complex underlying example

State of Alaska decision - hydro verses coal

The perceived differential cash flow involves

the same notation symbols but:

C is the capital cost of hydro less coal

F is the fuel and other operating costs saving

S is the ‘scrap’ value after 40 years of the hydro facility assuming zero for the coal facility

Scrap value focus for evaluation (NTV)


Disposal of nuclear waste example

UK Nirex context

C0 = £2500 million

Cn = £5000 millionS = £135 millionr = 1 / (1 + D/100)D = 6%n = 50 years

The changes in notation (r/D and S in particular)


The perceived differential cash flow

X0 X1 X2 … Xt … Xn

C0 -S -S -S -S-Cn

V = £100 million (advantage for deferral)

V = N – S R

N = C0 – T

T = Cn r

R = the sum over t = 1…n of the rt


Key composite parameters as a function of D

D T N R N/R N/R-S V

0 5000 -2500 50.00 -50 -185 -9250

2 1860 640 31.42 20 -115 -3600

4 710 1790 21.48 83 -52 -1100

6 270 2230 15.76 141 6 100 *

8 110 2390 12.23 195 40 740


Flip values and swings for key parameters

Parameter Expected value Flip value Swing %

D 6 5.7 -5

S 135 141 +4.4

C0 2500 2397 -4.1

Cn 5000 6907 +38


Integrating probabilistic analysis

• a minimum clarity approach for the first pass• further uncertainty clarification for various reasons

eg Cn

C0 and C0 / Cn relationship

S

D


Responding to the ‘real options’ critique

• The value (cost or benefit) of delay• The value of information • The value of responding to threats and opportunities• The value of flexibility (general responses)• The need to address all ‘real options’ critiques of NPV

as ‘actual options’ via decision analysis in an uncertainty management framework using a creative approach to option generation


Responding to ‘Green Book’ discussions

• HM Treasury advice on the ‘correct’ discount rate: 10%, 6%, 3.5% declining in stages to 1% by year 300

• Conflicting theoretical basis for these rates• Discount hurdle rate decision rule or a decision

process• Proposed resolution for the public sector• Anticipated implications for PFI (PPP)• Anticipated implications for the private sector (plc and

other structures)


Traffic light view of the proposed process

review t = 0

submit project

review t = 1…n

bond tests

return tests

legacy tests

risk tests

option tests

further tests

implement project implement portfolioreject project

amberred

red

red

red

red

red

amber

amber

amber

amber

amber

review for t = 0 review for t = 1, 2, …

submit project


Corporate strategy formation issues

• There are lots of different perspectives for ‘strategic management’

• The concern here is understanding ‘bottom-up’ and ‘top-down’ approaches to strategy formation and shaping, their integration, and the way they relate to operations strategy and programme/portfolio strategy, building on earlier aspects of our discussions


Taking a contractor’s perspective

• Bidding for work as a context• The Transcon case as an example• Background to the development of this case• The case information• The way the case is usually addressed• The basis for some key ideas to take away


The ‘watershed’ aspect of the strategy gateway

• The argument for understanding execution and delivery strategy shaping and its gateway first

• The argument for implementing PUMPs from the outset of the concept stage

• The integration implications• The implications of a failure to integrate• Moving on to the rest of the lifecycle assuming

integration – strategy implementation• Escalating expenditure issues and contractual

implications• Using PUMPs now dependent on earlier PUMPs


Roles for PUMPs in the tactics shaping and gateway stages

Lifecycle stage Stage purposes Roles for the associated PUMP

Tactics shaping Detailed design and planningfor execution,delivery, operation and termination purposes

Help to shift the perspective to implementationConsolidate the strategic plans for implementation

purposesDevelop detailed designs and plansDevelop resource allocation and contracting criteriaEstimate the resources required at a more detailed levelAssess the contracting strategy at a more detailed levelEvaluate alternative procurement strategies Define contractual terms and conditions Determine appropriate risk sharing arrangements Assess the implications of contract conditions Assess and compare competitive tenders Determine the appropriate target costs and bid prices for

contracts Evaluate detailed designs and plans

Tactics gateways

Consolidation Governance

Consolidate the base and contingency plansConfirm the deliverables


An overview of tactics shaping and gateways

formulate the tactics

overall strategy approved

base and contingency plans

tactics shaping PUMPs

commitment plansaction

plans

deliverablesfit for

purpose? tactics planning team yes

deliverables

fit forpurpose?

maybe

tactics gateway yes

no stop the

project

support and convince

to an appropriate

define phase

to thenext lifecycle

stage

no


Tactics shaping and the tactical/strategic plans relationship

• We have been concerned with shaping the strategy of the project earlier, and now want to implement it

• Strategy implementation requires detailed plans, and developing detailed plans involves another lifecycle stage

• Detailed plans are a waste of effort until an appropriate strategy has been developed

• Detailed plans beyond a limited time horizon are a waste of effort• The tactics shaping stage is about appropriate detailed planning,

to prepare for strategy implementation, after gaining approval for the strategy

• Multiple gateways may be involved• Prior testing for ‘the devil in the detail’


Roles for PUMPs in the execution and later stages

Execution Execution Support the execution of the plansCoordinate, control and monitor progressModify all targets, commitments and resource allocations as

neededRevise estimates of cost on completion or completion timeProvide ongoing execution evaluationAssess the implications of changes to designs or plans Support responding to crises and disasters

Delivery Delivery Support the delivery of the asset created by the projectIdentify issues impacting delivery Assess the feasibility of delivery schedules Assess the feasibility of meeting performance criteria Assess the availability of commissioning facilitiesAssess the reliability of testing equipment Assess the resources needed to modify the delivered asset

O&S Operation and support(O&S)

Support the operation of the asset created by the projectAssess the effectiveness of uncertainty management strategies Provide ongoing uncertainty management of all relevant

concernsUpdate assessments of asset performanceSupport the design and planning of maintenance Assess appropriate levels of resources required Support responding to crises and disasters

Termination Termination

Assess options for replacement, decommissioning, or transferIdentify the extent of future liabilitiesSupport the termination of the asset


An overview of the execution and delivery stages

from the tactics gateways

to the next lifecycle

stage

manage crises and be prepared to

respondto disasters

manage planned execution and delivery

actions

roll execution and delivery action plans

forward

monitor and control

enlightened governanceuntil these stages are complete


Execution and delivery stages

• Earlier stages obtained approval for strategic plans, developed appropriately detailed action plans, and obtained approval for these action plans

• The project can now be executed, which requires ongoing management in ‘cutting metal’ or ‘writing code’ terms

• ‘The talking ends, the action begins’ in terms of emphasis, although a lot of ongoing planning with related communication issues remains essential

• The ‘enlightened governance’ requirement, and selective re-planning as required


Operations and support and prior tactics shaping from the strategy approval gateway

to the next

lifecycle stage


respondto disasters

manage planned actions

roll action plans forward

monitor and control

enlightened governanceuntil this stage is complete

tactics shaping for operations

and support


The termination stage and prior tactics shaping from the strategy approval gateway

end ofthe

project


respondto disasters

manage planned actions

roll action plans forward

monitor and control

enlightened governanceuntil this stage is complete

tactics shaping for termination


Some alternative generic process descriptions

• PRAM 2004 (APM) and forthcoming

• RAMP 2005 (ICE AND IoA) and forthcoming

• PMBOK chapter 11 2008 (PMI) and forthcoming


The role of generic processes in the development of processes for particular organizations and particular contexts


Part three summary, questions and discussion


Part four – key corporate implications

• Start by considering developing corporate capability as a project in the ‘programme’ sense

• Then look at contracts and governance as frameworks for enlightened relationship management

• Conclude with a corporate capability perspective


Some key implementation issues to get started

• Selling the idea to all concerned• Choosing a demonstration project• Context as a process design issue• Planning the introduction as a project/programme• Starting by being clear about initial and long term

objectives, and the evolution planned• Integrating risk and opportunity management across

the organization• Being clear about the skills needed, skills and

knowledge development, and role of consultants• Governance


Selling a ‘best practice’ perspective

• choosing the best ‘brand’ label• benefits as objectives• a clear understanding of the possibilities• processes tailored to deliver what is required


Objectives which may be relevant

• Opportunity management • Clarity, risk and opportunity efficiency• Culture change• Targets, expectations and commitments distinguished• Bottom up communication encouraged, with a shared

‘big picture’ perspective• Creativity and satisfaction (fun) used as effective

objectives• Corporate learning and knowledge management• Linking projects, strategy and operations


Expected, commitment and target values, and associated provision and contingency

stretch target value

commitment value

expected value

Duration, cost, …

Probability

a density portrayal is convenientfor understanding what is involved

trigger target value

provisioncontingency


Stretch targets as goals are crucial

• targets should stretch people• targets may have little chance of achievement,

but targets must be plausible


Properly defined commitments and trigger target values are crucial

• separating contingencies and provisions• understanding asymmetric penalties• being clear about the ownership of risk• the need for contractual flexibility and trust• the need for Balanced Incentive And Risk Sharing

(BIARS) contracts


Using the concept of risk efficiency is crucial

• Risk efficiency involves a maximum level of expected performance for an appropriate level of downside risk

• Ensuring choices are risk efficient can be seen as one of the core purpose of risk management

• Along with clarity efficiency it provides a foundation for opportunity efficiency

• Decision diagrams are a key tool when uncertainty about key measurable objectives is important


Decision diagrams: the one risk efficient choice example showing how complex choice comparisons can become reasonably straightforward illustrates an important idea

the 3.0m barge involvesa lower expected cost andless risk – which makes it a risk efficient choice

Cost

0.5

1.0


0



3.0 m barge curve 1.6 m barge

curve


Using decision diagrams to evaluate risk-reward tradeoffs: the example involving two risk efficient choices used earlier illustrates taking more risk may be worth while sometimes

Cost

0.5

1.0


0

1.6 m barge curve

3.0 m barge curve



there is a trade-offbetween expectedcost and risk - the 3.0 m barge involvesless risk but more expected cost


Using decision diagrams in very simple forms can be useful: the photocopier example illustrates this in terms of contract cost risk, and this example also illustrates how to consider secondary criteria which may not be quantifiable directly

Cost

0.5

1.0

0

A CB

P10

P90

P50

Probability


Understanding risk efficiency at a corporate level as well as at a project level is crucial

• Understanding the basic implications• Using it to make decisions simpler• Using it as a engine of culture change to replace

a ‘blame culture’ with an ‘opportunity culture’


Returning to our list of implementation issues

• Choosing a demonstration project• Context as a process design issue• Planning the introduction as a project/programme• Starting by being clear about initial and long term

objectives, and the evolution planned• Integrating risk and opportunity management across

the organization• Being clear about the skills needed, skills and

knowledge development, and role of consultants• Governance


Contracts and governance as frameworks for

enlightened relationship management


Some pathways for uncertainty management development

• Current uncertainty management activity may not be evenly developed

• Some possible development options: - focus on building uncertainty management into one unit or process - launch a company-wide initiative - concentrate on a wider use of a limited process - target quick or large wins


Risk management maturity models: Deloach (2000) example

Description

Maturity Level

1 Initial 2 Repeatable 3 Defined 4 Managed 5 Optimising

Capability (Ad hoc/chaotic)

No institutionalised processes

Reliance on the

competence of individuals

(Intuitive)Processes

establishedand

repeatingReliance onindividuals

reduced

(Qualitative/quantitative)

Policies, processes

and standards

defined and uniformly applied

across the organization

(Quantitative)Risks

measured and

managed quantitative

ly, and aggregated enterprise

wide Risk/reward

tradeoffs considered

(Continuous feedback)

Emphasis on taking and

exploiting risk Knowledge accumulated and shared

Hillson (1997) and Hopkinson (2011) are example alternatives


Some common issues

• Limited definitions of levels of maturity• Benchmarking of existing practice against maturity

levels• Identification of weakest links to focus development

efforts• How to move from one level to the next


Aspects of uncertainty management capability: descriptors

1. The focus of attention

Threats, opportunities and threats, or uncertainty.

2. Application contexts

UM applied to operations, projects, programmes, or strategies.

3. The nature and quality of processes employed

The degree of formality, level of documentation, the scope of processes, the nature of steps involved, the tools and techniques employed, the extent and quality of quantification.


Aspects of uncertainty management capability: facilitators

1. Supporting uncertainty management infrastructureGuiding principles, objectives and scope of UM, policies (operating rules), allocation of responsibilities for UM, formal processes for administration of UM applications, information systems, resources applied to UM.

2. Supporting organisational capabilitiesAdministrative structures, communication, information systems, knowledge management, organisation learning.

3. Organisation cultureAttitude to risk and uncertainty, tolerance of mistakes, level of trust, openness, etc.

4. Human resource capability for risk managementKnowledge and experience of UM methodology and techniques, perceived roles and responsibilities, motivation to undertake UM, motivation to develop UM expertise


Facilitating infrastructure

• Guiding principles• Objectives and scope for uncertainty management• The strategy for use and development • Assignment of formal roles• Policies and guidelines for uncertainty management

application• Nature of decision support and information systems


Some guiding principles

The strategic perspective• Which business areas to operate in • What risks are central/inherent to this business• Shareholder expectations about corporate risk taking

Risk tolerance• How much is the firm willing to lose?• What resources are available to support potential

losses?• Is the firm getting sufficient return for the risks being

taken?


The organisation’s risk ‘philosophy’ ?

• Exposure to risk is necessary for success• Risk is uncertainty about performance: it includes

‘upside’ as well as ’downside’ variability • ‘A stitch in time saves nine’• Risk is not something to be avoided, but represents

the source of opportunities • Uncertainty needs to be understood so that

opportunities can be seized effectively• Everyone retains some responsibility for managing risk• Risk management is an opportunity for creative

thinking and having fun


Policies and guidelines for a best practice approach to uncertainty management application

• The purpose of uncertainty management • What form uncertainty management should take• Who should do it• How uncertainty management should be carried out,

supported, and monitored• When uncertainty management should be undertaken• What resources should be applied


Example uncertainty management policy statement issues

The level and nature of risk which is acceptable for particular business activities or programmes

with context conditions and a risk-reward tradeoffs basisResponsibilities for the management of particular sources of uncertainty and

associated financing arrangementsRoles and responsibilities for carrying out various uncertainty management

activitiesMechanisms for monitoring and reviewing uncertainty management activitiesMechanisms for monitoring and reviewing uncertainty management principles,

policies, and guidelinesRules for reporting significant uncertainty, opportunity and risk higher up the

hierarchyThe nature of PUMPs and other uncertainty management processes in various

contextsUse of standard documentation for analysis and reportingUse of particular sensitivity analysis tools and techniques for ranking and

evaluating sources of uncertaintyUse of particular tools for making decisions between available option choicesTreatment of interdependencies between sources of uncertainty in a range of ways

for different levels of clarityGuidance on achieving clarity efficiency and overall opportunity efficiency


Corporate benefits of a best practice uncertainty management approach

more profit

win more contracts

competitiveadvantage

keener pricing

lower costs

ability to manage issues

more realisticquantification of uncertainty

corporate knowledge base

documentation of sources and responses

appreciationof uncertainty

better quality opportunityand risk management

improved designof projects

reduce costof tendering

avoid ‘disaster’contracts


Corporate benefits of a best practice uncertainty management culture

more profit

higher quality staff

fewer ‘disasters’ more opportunities

more smiles

less wasted effort uncertainty as

opportunities

enlightened gambles

effective planning horizons

enlightened caution

enlightened controls

more ‘pleasure’ +

more trustmore opennessbetter communicationmore congruent objectivesmore lateral thinkingmore creativitymore constructive insubordinationbetter ‘bonding’better teamwork and partneringmore ‘empowerment’more training, less directingbetter ‘management of expectations’better use of diverse experiencesgood management recognised

less ‘pain’

less wasted effortless frustrationfewer crisesless confrontationfewer witch-huntsbad luck recognised

more smiles =


The way forward

• Enormous potential for improving organisational performance? Current risk management activity is limited.

• Start by recognising dimensions for development.• Consider the full range of objectives, and linkage

management.• Major obstacles to development?• Need for a strategy to develop uncertainty

management capability.


Part four summary, questions and discussion

Documents

Chapman and Ward HMPOR slide 1 © 2011 John Wiley & Sons Ltd. Chris Chapman and Stephen Ward How to Manage Project Opportunity and Risk Why uncertainty