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Advanced Risk Management Techniques

Project managers who have many years of experience, especially those who have certifications, may be wondering about steps they need to take to go to the next level. In this article, we conclude a series on advanced technical skills for project managers by examining advanced risk management techniques. Quantitative analysis, Expected Monetary Value, and risk contingency reserve are all discussed in this article. Mastering these skills will help project managers take the next step in their careers.

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305 views

Advanced Risk Management Techniques

Project managers who have many years of experience, especially those who have certifications, may be wondering about steps they need to take to go to the next level. In this article, we conclude a series on advanced technical skills for project managers by examining advanced risk management techniques. Quantitative analysis, Expected Monetary Value, and risk contingency reserve are all discussed in this article. Mastering these skills will help project managers take the next step in their careers.

Uploaded by

RefineM Project Management Consulting
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Advanced Risk Management Techniques

NK Shrivastava and Phillip George, RefineM LLC


Project managers who have many years of experience, especially those who have certifications, may be
wondering about steps they need to take to go to the next level. In this article, we conclude a series on
advanced technical skills for project managers by examining advanced risk management techniques.
Quantitative analysis, Expected Monetary Value, and risk contingency reserve are all discussed in this
article. Mastering these skills will help project managers take the next step in their careers.
Risk management is a critical component of project management and any project manager who wants
to reach the next level in his or her career needs to be as proficient in it as possible. Scope, time, and
cost planning are all important pieces of a project plan, and need to be in place so that stakeholders see
the clear picture of a project outcome. However, risk management, performed effectively, can unearth
reasons why that clear picture may not come out as intended. For this reason, effective risk
management not only aids successful project delivery, but also prevents projects from being derailed by
otherwise unforeseen circumstances.
At a basic level, project managers must be able to build and a populate a risk register with at least
twenty general and specific risks for each project. Risk management can be difficult at first for a team,
but over time, team members will improve at proactively identifying risks. Once risks are identified,
project managers must be able to lead the team through qualitative analysis, to identify expected
probability and impact, and also lead them in identifying basic risk response strategies. For negative
risks, or threats, these include avoiding, mitigating, transferring, and accepting. For positive risks, or
opportunities, these include exploiting, enhancing, sharing, and accepting. Finally, project managers
need to be able to proactively monitor these risks and alert stakeholders to risk triggers so the response
strategies can be deployed.

www.RefineM.com [email protected] 405 N. Jefferson Ave, Springfield, MO 65806 417.763.6762

Building the risk register, identifying risks, performing qualitative analysis, coming up with risk response
strategies, and proactively monitoring for risks are the tasks forming the foundation of basic risk
management. What techniques should project managers master in order to go beyond? In this article,
we recommend two specific advanced risk management techniques. Project managers should master
quantitative analysis techniques, and in particular, Expected Monetary Value (EMV) is a good place to
start. They should also master the use of the risk contingency reserve in order to improve the
predictability of project outcomes. This step involves being able to calculate the risk contingency
reserve, track its use throughout the project, and communicate the risk contingency reserve to the team
and stakeholders. By developing their skill in these techniques, project managers can become more
effective risk managers and help their teams identify the greatest threats and opportunities on projects.
Quantitative Risk Analysis
There are many ways to perform quantitative risk analysis on projects. The Guide to the Project
Management Body of Knowledge (PMBOK Guide) lists several techniques, including the following1:
Sensitivity analysis, which is used to display risks sorted by their potential impact on the
project. Because the sensitivity analysis resembles a funnel cloud, it is often referred to as a
tornado diagram.
Modeling and simulation techniques use advanced analysis to display how risks can
potentially impact project outcomes. One of the most popular examples is Monte Carlo
analysis, where a project model is computed and run in repeated iterations to produce a
histogram of probable project outcomes based on project parameters and risks. By using
Monte Carlo, project managers can see projected outcomes and what is most likely based
on the clustering of outcomes.
Expected Monetary Value (EMV) is a simple technique in contrast to the others. EMV is the
product of the probability of a risks occurrence and the impact of the risks in days or
dollars. For example, if equipment breakdown is a risk on a project that has a 40% chance of
occurrence and the impact would be $10,000, then the EMV is (10000*0.4) = $4,000.
For the purposes of setting up risk contingency reserve, EMV is a good start. EMV is simple to calculate
and, in most cases, should not require teams to provide new information since they should have
provided probability and impact already.

1 Project Management Institute (2013). Guide to the Project Management Body of Knowledge (PMBOK Guide), Fifth Edition. Newtown Square,
PA: Project Management Institute.

www.RefineM.com [email protected] 405 N. Jefferson Ave, Springfield, MO 65806 417.763.6762

Figure 1 shows a sample risk register with probability, impact, and the resulting EMV. In this example,
ten basic risks have been identified, with a total EMV of 10 days and $23,000.
Id

Risk Description

1 Website changes may break other parts of the website, resulting in


extra work.
2 Marketing materials may need to be changed for sponsorships
renewed after the cutoff date.
3 Registration shortfall may be between 50 and 100, resulting in losses.
4 Registration shortfall may be over 100, resulting in losses.
5 Marketing materials may have misprints, resulting in delays and added
cost for replacements.
6 Contract minimums in the venue contract may not be met, resulting in
attrition cost.
7 Key resources may leave the organization, causing training cost and
loss of knowledge.
8 Sponsors may not renew their agreements, resulting in lost revenue.
9 Venue damage or changes may require change of venue, resulting in
andand
added
cost. absences may affect the schedule, resulting
10 delays
Vacations
unplanned
in delays.
Overall Impact

Probability
(%)
25%

Impact
Impact
(Delays in (Loss in
# of days)
$)

EMV
(Delay)

EMV ($)

20 $4,000

$1,000

50%

8 $1,000

$500

70%

0 $7,000

$4,900

50%
50%

0 $15,000
10 $5,000

0
5

$7,500
$2,500

10%

0 $5,000

$500

10%

20 $5,000

$500

30%
20%
30%

0 $10,000
15 $10,000
0 $2,000

0
3
0

$3,000
$2,000
$600

10 $23,000

Figure 1. Expected Monetary Value (EMV) applied to a risk register


Risk Contingency Reserve
With EMV data for all risks, the risk contingency reserve can be developed based on the sum of total
contingency reserve for each risk along with organization-wide best practices on cost and time
management. Once calculated, the contingency reserves are added to either budget or schedule
depending on the unit calculated. The project finish date adjusted for contingency reserve becomes the
No Later Than date, while the budget adjusted for contingency reserve becomes the Not To Exceed
budget.
The risk contingency reserve, once calculated and added, forms a critical component of the project plan.
It provides the project team and stakeholders a representation of how far off the plan the project can go
without being in jeopardy. The vast majority of projects do not go according to plan, so it is important to
use the risk contingency reserve to illustrate how far off-track a project can go.
One limitation of contingency reserve is that it is not as useful when there are only a few defined risks or
all the risks have a high probability of occurring. Because risk contingency reserve is based on EMV, it is
certain that some will be used as risks occur, but the risk contingency reserve will not adequately cover
all project risks should they occur. For example, even though the EMV for risk ID #1 in Figure 1 is $1,000,
if the risk occurs, the total cost will likely meet or come close to $4,000. If all the risks occurred, then the
contingency reserve would be overrun because it is based off EMV, not impact.

www.RefineM.com [email protected] 405 N. Jefferson Ave, Springfield, MO 65806 417.763.6762

Communicating the Contingency Reserve


The first step in deploying the contingency reserve is to get signoff for it on the schedule and budget. It
is also important to communicate the risk contingency reserve as the Not to Exceed budget and No
Later Than date and not as the new project budget or finish date.
Plotting contingency reserve against the schedule or budget is a good way to keep track of both. Charts
such as the ones in Figures 2 and 3 can become part of frequent status reports, showing the progress of
the project through the amount of contingency reserve used. As the contingency reserve is used,
available contingency reserve decreases and the project budget increases.

Risk Exposure Over Time


$50,000
$40,000
$30,000
$20,000
$10,000
$0
Jan-14

Feb-14

Mar-14

Apr-14

May-14

Contingency Reserve

Figure 2. Risk Exposure Over Time

Project Budget Over Time


100,000.00
90,000.00
80,000.00
70,000.00
60,000.00

50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
Jan-14

Feb-14

Mar-14

Apr-14

May-14

Figure 3. Project Budget Over Time

www.RefineM.com [email protected] 405 N. Jefferson Ave, Springfield, MO 65806 417.763.6762

Conclusion
In this article, we have examined how project managers can use advanced techniques to take their risk
management to the next level. While many quantitative analysis techniques exist, EMV is a simple way
to get started. Once project managers are familiar with EMV, they can use it to start building risk
contingency reserves for their projects. They can then use risk contingency reserves to communicate a
range of realistic outcomes for projects. By using risk management to illustrate potential deviations from
the project plan, project managers improve risk management practices in their organizations and
expand their own credibility.
Like all advanced techniques, utilizing advanced risk management techniques takes some time and
effort to set up, meaning that some justification may be required to free up the resources. The benefits,
however, are worth the effort. We have seen advanced risk management techniques improve project
delivery capability in numerous organizations, and argue that the time and effort to set up these
techniques is well worth it.
For more about the advanced techniques discussed in this article, visit RefineMs blog. We also offer
consulting and training on risk management and other project management topics.
References
1. Project Management Institute (2013). Guide to the Project Management Body of Knowledge
(PMBOK Guide). Newtown Square, PA: Project Management Institute.

www.RefineM.com [email protected] 405 N. Jefferson Ave, Springfield, MO 65806 417.763.6762

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