Risk management expert, Christian B. Smart Ph.D., explains how to effectively solve common problems in project risk management in any industry.
An organization or project that wants to ensure its success should practice sound risk management. According to the Project Management Institute, more than 80% of high-performing organizations apply risk management. The best way for a project to set itself apart from the competition is to find the low-hanging fruit. As most projects do not conduct credible risk management, this is a straightforward way to improve performance. Perfection is not required. The application of some simple tried and true risk management techniques can pay dividends.
In the mid-1990s, the opening of the new Denver airport was delayed 16 months and cost the city an additional $560 million because of problems with a planned automated baggage handling system that was never fully implemented. The cost of the Scottish Parliament built in the early 2000s cost 10 times the initial estimate. The James Webb Space Telescope, NASA’s next-generation successor to the Hubble, currently costs more than 6 times initial estimates, its scheduled has slipped fourteen years, and it is not scheduled to launch until 2021. Regardless of industry, more 80% of projects overrun their initial costs and more than 70% are not completed on time. Average cost growth in project development has been a steady 50% and higher for several decades. One in six programs doubles in cost. These issues are even worse than they appear, as projects often do not meet performance requirements. Projects consistently cost too much, take too long to complete, and underperform.
The reason why projects consistently suffer from cost overruns and schedule delays is that projects are inherently risky and because in general projects do not prepare for risk or consider it in their planning. Despite its importance, many projects treat risk as if it were just another four-letter word. Project managers tend to plan not for the worst case or even the most likely case, but the best possible case. This sets up projects to cost more and take longer than planned. The past can be a useful guide for helping prepare for the future. As Shakespeare wrote in The Tempest, “What’s past is prologue.” While realistic estimates require more than a naive extrapolation from recent history, many project managers do not even take this into account, claiming that their project will be different, despite not changing anything from their usual procedures. This willful ignorance is a recipe for disaster.
The good news is that these issues can be addressed. The discipline of risk management, which is the process of preparing for hazardous events, is well-developed and there are plenty of analysts trained in the proper application of these techniques. The use of rigorous and credible quantitative techniques for measuring and managing risk are well established. Risk measurement and management are imperatives. Cost and schedule estimates are stochastic in nature, and need consideration from the ground up, not just as an add-on to a point estimate, as the use of most-likely assumptions in cost and schedule estimating leads to significant underestimation. Independence and cross-checks are needed to ensure risk analysis is realistic. In addition to project-level risk analysis, organizations need to conduct portfolio-level risk analysis to fully understand the benefits and limits of the diversification in multiple endeavors. A portfolio view is critical to making wise decisions about when to start new projects, as there is a tedency for organizations to try to conduct too many ventures given their budget constraints. Risk management requires that project mitigate potential hazards they can control and setting reserves for potential hazards that they cannot, as well as the wisdom to know the difference.
The adoption of these methods can help ensure projects are prepared for the unknown and aid in their success. When handled properly, risk becomes a resource rather than a nuisance. My new book Solving for Project Risk Management: Understanding the Critical Role of Uncertainty in Project Management, is a resource for learning more about this critical discipline.