Risks: Do you really manage them?

 

“Weigh the strengths of the task, yourselves, Opponents, and allies before acting” – The Thirukkural

  Last week, I got a call from one of my pals. He requested that I wake him up at 3 AM the following morning so that he may catch his 6 AM flight for his business trip to New Delhi. Most of you will assume that I am an early bird right away. But that is not the case. I used to stay up till three in the morning since I have a sleep disorder condition. My friend took advantage of my problem and turned it into his opportunity. But, as I was afraid to take on this responsibility, I asked him to set an alarm in his mobile. He claimed to have already done so and that as a second alert, he had considered asking for my assistance.

 I came to understand that he handled the risk management. He could not afford to miss the trip because it was so crucial for his business. He therefore created a primary risk plan by setting an alarm for three in the morning and a secondary risk plan by requesting me to call him.

 

In relation to our topic, no project can go according to schedule. It may come across certain unforeseen events which may either cause a huge impact or even fail it. If these unforeseen events can be predicted during the Planning stage itself, they can be suitably addressed in the Project Management Plan thereby increasing the probability of the Project’s success. In other words, the risks are to be foreseen and documented before the execution ever begins. Since there is a means to cope with the risk if it actually materialises, it is necessary to be conscious of what risk event is likely to occur in the near future and plan responses to it.

 

The Project may have one or more risks which are to be identified in the Planning stage itself. Identifying the risks is a structured process and not an act of thinking randomly. Some of us make the mistake of identifying an unfavorable event which is certain to happen. Things which are certain to happen cannot be termed as risks. They are known issues and the Project Plan should have already taken them into account. A risk event is something which may or may not happen. If it happens it shall cause delay in execution of certain activities of the project leading to Schedule slippage OR Cost overruns OR both. Only then can it be referred to as a risk. The Project leads and the team are responsible during the planning stage to identify as many risks possible.

Picture of a huge building under Construction

We will see an example. ABC is a Construction Company which is planning for a construction project in a different nation. Due to the host nation's lack of steel production, the project's steel needs must be imported from other nations.

 

1.   ABC receives information that the host Government has plans to increase the import duty of Steel by 5%. The Government has begun talks with the industry for the divergent views. The industry representatives has also represented to the Government to defer the decision by another one year so that the ongoing constructions are not badly impacted. The decision may be carried out by the government in the Budget Speech, which occurs three months later, or it may be postponed for an additional year. If the import duty is raised, ABC will suffer greatly as the cost of its Project will rise by $500,000.

 2. ABC has learned that a key resource and his team have not declared their availability for the project's execution phase. If they are not going to make it for the project, ABC  will have to spend an additional $300,000 for hiring a team from a different nation causing a schedule of 15 days.

  3.      ABC had ordered for new Computers from Taiwan with latest Hardware & Software, for the Project team. Due to semi-conductor chip shortage, the Vendor informs that he needs additional delivery time of 2 months.

 

ABC assesses each of the three aforementioned conditions as follows.

1.      Because Steel is a necessary component of ABC's construction project, the information it got was crucial. If the import duty is raised, it will have a significant impact because the cost of the Project will rise by $500,000. According to ABC, there is a 30% chance that the event will occur.

2.      ABC rates the occurrence as risky with a 50% chance.

3.      This event poses no risk. The vendor has previously declared his inability to deliver the computers on time.

 

ABC makes a Risk budget to address the above risks as follows.

ABC adds up the last two columns which work out to $300,000 and 8 days respectively. The Company assigns this amount as the Risk budget which will be utilized in case the risks materialise. If they do not, the risk budget will then become a reserve. As Sl no.3 above is not a risk but an issue, ABC adds the time and cost impact directly to the estimates.

This article merely serves as a general overview of how risks are handled in large projects. Project Managers undertake the following strategies to handle risks.

•  Avoid them (by developing alternatives)
•  Mitigate (by lessening the impact – as in the above example where a Risk budget is made)
• Transfer (by purchasing insurance mostly for force majeure causes like weather, storm, floods etc. and for logistic delays. The cost risk is transferred, whereas the schedule risk is to be faced)
• Accept (Facing the risks – For known minor risks)

 In certain Government establishments, there is no provision to make a separate Risk Budget in their estimate. So, this amount is padded to the other items in the estimate.

 My junior told me during a project planning phase that the sponsor was highly stringent and would not approve the project if he thought the planned cost was higher. She advised against displaying the risk budget because doing so would raise costs and might elicit negative feedback. I asked her if the tight sponsor would approve additional funds if the risk actually materialised during the project's execution. No way, she retorted. Then, I questioned her about how we would pay for the higher costs. She became aware of the Risk and danger of leaving the risk budget out of the project plan. I assured her that, regardless of the Sponsor's characteristics, it is always advisable to adhere to the standard practices.

 “The prudent see danger and take cover; but the simple keep going and pay the penalty” says the Bible.

 See you in the next post, bye.