Business Project Management - Risk in a Project - Essay Example

?Business Project management Answer Risk in a project is a function of the following: The possibility of an event occurring, with which a particular project risk is associated The costs of the event or consequences and their seriousness over the project life cycle The above two factors are variables and the relationship of these variables with the project risk is denoted as per the following equation given by Pinto (2007). R=P*C Where, ‘R’ is the Risk associated with an event associated with a project and is a measure of the impact it has on the project. ’ P’ is the probability of the event occurring and ‘C’ is the costs to project associated with the event or the consequences of the event. From the above equation, it can also be inferred that the overall impact of all risks associated with a project may be calculated by adding up all the ‘R’ values of all the risks associated with the project. As far as the probability (P) is concerned, being a variable, it varies with different stages of time in the life cycle of a project. For example, the probability of an accident occurring during a building construction project varies at different stages of the lifecycle. This might directly be related to various other factors in turn which themselves vary with the project cycle. For instance, the implementation stage of the project usually is more susceptible to this kind of risk in terms of the probability of occurring (Hillson and Hulett 2004) and thus it might be at different levels. Determination of probability is more a qualitative exercise than a quantitative one. There is no clear cut way or model of determining the probability though the probability might be estimated based on past data (Mind Tools, 2012). The way to do it is to arrive at mathematical models of probability distributions as close to the real probability as possible. It is also important to note that as many factors as can affect the probability of a given event need to be taken into account in order arrive at a realistic estimate of the probability of an event. A simple way to arrive at a probability level for an event is to assign a score on a scale of 1 to 10, wherein 1 represents the least probability and 10 represent the highest probability. The scores should be greater than zero because if its zero, it is not likely to occur and thus not a risk and if its 10 then it becomes a certainty and then too it is not a risk. The costs associated with an event also vary with various stages in the project lifecycle which means a snapshot sum total of all the factors that affect project cost associated with a certain event (Rochester 2012). Looking at the event based project cost in the above example, it might be seen that the cost of an accident might be more when the project is in progress, for instance the construction work is in full swing and the building as well as people working with project are more vulnerable to any mishap. The cost might be less when for example, the work is off on account of a holiday. On a longer time scale, in the above example, the costs associated with an accident just prior to the completion of the building project might be substantially high, since a lot of money and resources have been invested by then. As seen above, the difficulties in arriving at realistic values of ‘P’ and ‘C’ make it important to consider a qualitative mode of assessing the project risk (Wordpress 2009). The project risk matrix as shown below Consequences IV III I II As seen in the figure above, the project risk as expressed in terms of probability is classified as low and high on the vertical axis. The Consequences or costs associated are represented as low or high on the horizontal axis. This represents four typical situations represented by four quadrants, for the project risk situations. The four combinations are as follows: Quadrant 1: Low probability-Low Cost Risk impact Quadrant 2: Low probability- High Cost Risk impact Quadrant 3: High probability-High Cost Risk impact Quadrant 4: High probability-Low cost Risk impact In order to identify the risks associated with an event, we evaluate and classify the event into one of the four categories, based on all the information collected about the event and its relationship with the project. Once the risky events associated with a project are plotted on a matrix, it is possible to compare the risks associated and then devise strategies for their mitigation or minimization of impact. Various analysis techniques like SWOT (Strengths, Weaknesses, Opportunities and Strengths) analysis and PEST (Political, Economic, Social and Technological) analysis could be used to identify the Risks and, the opportunities and underlying costs associated with the project (ALOA 2004). For example, in the construction project example above various possible risky events could be a. An accident involving major loss of life and resources during the execution stage. b. The project being delayed due to sudden Government policy change during the planning stage. c. Rise in prices of the construction material during the completion stage. d. The key personnel resigning, during the execution stage, which seemed likely since the initiation stage, due to ego clashes and political unrest. As per the Risk impact matrix above, the events as mentioned, fall in the following quadrants: a. Quadrant II b. Quadrant I c. Quadrant IV d. Quadrant III As is apparent, this qualitative analysis gives us a better view of the risky events’ level and nature of impact. Once we know the qualitative aspects of the impact, we can further classify and analyze them as per the quantitative approach described above, keeping the impact, probability and consequence equation in mind. In order to minimize and/or mitigate the associated risks, following strategies/approaches based on the above analysis could be followed: It could be assumed that the risky event might just take place and in case it does react according to situation. Another approach could be to try and minimize the impact or cushion the effect of an unfavorable risky event. Furthermore, the costs or consequences could be spread over a larger stakeholder base. A more effective approach could be to do a contingency planning and effectively pooling resources and capabilities to compensate for any possible losses owing to risky events. Answer 2 The given project is about inclusion of a new resort in the brochure of a Travel company for next year. Based on the project schedule with task or activity plan, the predecessor activities for each activity and the duration estimates for each are already tabulated in the question given. However, the actual duration for each activity and the respective variance is calculated as follows: The given duration estimates (Sweeney et.al 2009) are denoted as most likely (m), most pessimistic (b) and most optimistic duration estimates (a) The expected or mean time , T(e)=(a+4m+b)/6 The uncertainty in T(e) is denoted by the variance (v) sigma^2=[(b-a)/6)]^2 Wherein sigma or S.D. is the standard deviation The variance and Expected duration values for each activity are tabulated as follows: Activity Label Predecessor activities Optimistic estimate(a) Most likely estimate(m) Pessimistic estimate(b) Expected Duration Variance Identify suitable airlines and airports A   10 12 20 18.33 2.78 Identify possible hotels B   20 30 40 36.67 11.11 Identify local agents to provide transport and excursions C   10 12 15 13.33 0.69 Produce pricing strategy D A, B, C 5 8 10 9.17 0.69 Identify and evaluate competitors E   8 10 10 8.67 0.11 Assess attractiveness of resort and likely demand F D, E 4 8 10 9.33 1 Develop marketing strategy G D, E, F 10 14 16 14.33 1 Write material for brochures H G 10 20 25 23.33 6.25 Before proceeding further, it is advisable to draw a basic activity chart. This helps us easily identify the successor and predecessor activities on the project path and also help to highlight the critical path based on the Activity on Arrow (AOA) durations as mentioned in the table above, wherein the critical path is the longest possible path in which the project can be completed in the shortest duration of time. Thus the critical path is Start-B-D-F-G-H-Finish. Based on the above values for Expected Duration i.e. Te, the Earliest start (ES) and Earliest Finish (EF) Times shall be calculated as follows: As per definition, EF=ES + Duration and ES=EF of predecessor. Also, Largest preceding EF at merge point is the ES of the Successor. Following the Forward pass technique, the ES and EF values are calculated and tabulated as follows: Activity Label Predecessor activities  Duration(Te) ES EF Start  - 0 0 0 A Start  18.33 0 18.33 B Start  36.67 0 36.67 C Start  13.33 0 13.33 D A, B, C 9.17 36.67 45.84 E Start  8.67 0 8.67 F D, E 9.33 45.84 55.17 G D, E, F 14.33 55.17 69.5 H G 23.33 69.5 92.83 Finish G 0 92.83 92.83 The Latest Start (LS) and Latest Finish (LF) values are denoted as: LS=LF-Duration LS of successor=LF of predecessor Smallest succeeding LS at the burst point gives the LF for preceding activity Also, for the Finish, LF=EF as duration is zero. Thus following the backward pass technique, the LS and LF for each activity are calculated and tabulated as follows: Activity Label Successor Activities Duration (Te) LF LS Finish - 0 92.83 92.83 H Finish 23.33 92.83 69.5 G H 14.33 69.5 55.17 F G 9.33 55.17 45.84 E G,F 8.67 45.84 37.17 D F,G 9.17 45.84 36.67 C D 13.33 36.67 23.34 B D 36.67 36.67 0 A D 18.33 36.67 18.34 Start A,B,C, E 0 0 0 The Slack or Float for an activity is calculated as follows: Float=LF-ES-Duration Thus the floats for each activity are calculated as follows: Activity LF ES Duration Slack/Float Start 0 0 0 0 A 36.67 0 18.33 18.34 B 36.67 0 36.67 0 C 36.67 0 13.33 23.34 D 45.84 36.67 9.17 0 E 45.84 0 8.67 37.17 F 55.17 45.84 9.33 0 G 69.5 55.17 14.33 0 H 92.83 69.5 23.33 0 Finish 92.83 92.83 0 0 Since the critical path is the project path wherein the Activity Float for each activity is zero, thus as seen from the above table, the critical path is Start-B-D-F-G-H-Finish. This is the same path as derived above from the definition of critical path. The information arrived at so far can be summarized as follows: Activity ES EF LS LF Duration Slack Variance Start 0 0 0 0 0 0 - A 0 18.33 18.34 36.67 18.33 18.34 2.78 B 0 36.67 0 36.67 36.67 0 11.11 C 0 13.33 23.34 36.67 13.33 23.34 0.69 D 36.67 45.84 36.67 45.84 9.17 0 0.69 E 0 8.67 37.17 45.84 8.67 37.17 0.11 F 45.84 55.17 45.84 55.17 9.33 0 1 G 55.17 69.5 55.17 69.5 14.33 0 1 H 69.5 92.83 69.5 92.83 23.33 0 6.25 Finish 92.83 92.83 92.83 92.83 0 0 - The above information shall help us in planning the project for implementation. It helps us make the following observations about the project, which will help us implement the project in a more effective and efficient manner: The project shall take 92.83 days to complete. It is important to note that the activities on the critical path must start and end on time, if they are to be completed within this duration. As seen from the table above, the activity B that is ‘identification of possible hotels’ is least likely to be completed within the estimated duration since it has the highest variance of 11.11. Close on the heels is the activity H that is writing material for brochures. This uncertainty can be compensated for by adopting more systematic methods of identification of hotels. Also, more creative people with greater expertise in writing brochures could be consulted in advance, so as to save time on the same. The following activities provide us with relatively a greater flexibility in terms of completion of activity: Activity A: Identification of suitable airlines, has a high slack of 18.34 days. It is appropriate though since identification of Airlines can be expedited and/or other critical tasks can be completed in the same duration. Activity C: ‘Identification of Local Agents to provide transport and excursions’, has a still greater Slack and provides greater flexibility. This task can take greater time however, the flexibility or margin more than compensates for any possible risks or difficulties at this stage of the project. Activity E: ‘Identification and evaluation of competitors’ has the greater flexibility in terms of project time available with us. All the other activities are critical and will need a closer monitoring corrective action if required. In order to further minimize the project time, the activities on the critical path may be reviewed and a few of them might be shortened or eliminated altogether. For example in this case, the activities, B, D, F, G and H can be reviewed. A review of these activities reveals that the task B in particular can be merged with the Task A and thus time can be gained on the same. Also, in order to shorten the project time, duration of tasks on the critical path may be removed. This will help us focus on more important tasks. Also, it is important to note that the Slack and the variance together prove to be crucial indicators of project success. The knowledge of slack time for specific activities gives us the freedom to acquire all the requisite resources for successful and timely completion of the project activity. Answer 3 Project Closure, is a significant step in the project lifecycle. This is where all the benefits of the project tasks and project efforts can be accumulated, evaluated and cashed in. For the same reason, it is important to take care of it as a process and pursue it systematically. A project has to close by default, whether it is a natural closure or it is an early termination of the project due to certain inevitable circumstances, it is important to find out ways to maximize the benefits from a natural closure and minimize the risks and consequences of an early termination. It is possible to do this by identifying and executing the steps involved in planning for a smooth closure and reaping the project benefits as a results. However, prior to that it is important to find whether it’s a natural or forced closure. In case the project has been completed and has achieved its goals, then the project closure objectives should be: The execution of finishing tasks like report writing and presentation of results in an accurate and time bound manner. Handing over the results to the stakeholders or promoters of the project Achieving the requisite acceptance and support for the results of the project Communicating the benefits to stakeholders/promoters and gaining the requisite acceptance and support from them for the project Reaping the benefits from the project and the acceptance gained from the stakeholders. Reviewing and evaluating the project performance Dismantling the project specific capabilities, wherein the resources are engaged Disbanding the project team As the above steps are being taken, it is also important to judge and take care of the fact that project managers and staff involved in the process, also proceed in a manner appropriate to attain the objectives of appropriate project closure. The project team members need to take care of the following pitfalls while striving to achieve the above objectives: The errors that have a predictable pattern and lead to project bottlenecks are sometimes perceived and treated as random events and thus the project team should take care to prevent such judgmental errors. Also, in certain cases the project team might sometimes misinterpret simple risky events as non risky in certain situations. This leads to failure in learning appropriate lessons from the project and thus hinders proper project closure. Also, the stakeholders get a distorted picture of the project performance and this is detrimental to project goals. In the construction project example, the project shall be closed while taking care of the following points: Project manager might oversee the project objectives as mentioned above are being taken care of. While reviewing the project the team must keep in mind that risky events like rise in prices of the crucial and scarce construction material near to the completion stage might be perceived as a low risk event and thus might be ignored. This might lead to the project being stalled. While the project team needs to take care of the project goals while project closes naturally, the team needs to take into account certain factors that might indicate a need for early termination of a project. The project performance is measured against project goals and a possibility of terminating the project early might be considered. However, at this stage, the costs or consequences of early termination should be considered and arrangements made to compensate for any possible losses. A project review as part of the project termination might lead to reasons which might be categorized as follows: The positive perception about the project team and its members might somehow be eroded within the organization. The image of the organization might be degraded from an external point of view. Decision might be due as to taking up the responsibility for tasks already completed Review of the communication of the decision to terminate the project and find the reasons for failure The above reasons shall be looked upon and compared to the costs of moving ahead with the project. For example in the construction project mentioned above, the project might have to be closed if the Government decides that the land where the construction is being planned needs to be taken over in national and security interests. The project management might have to decide whether the compensation provided by the Government for the same shall be enough to continue the project in a different location. While doing so, the case for continuing might be weighed against the possible project termination reasons. References ALOA (2004) PEST analysis. Accessed on April 27, 2012. Hillson D. and Hulett D.(2004) Assessing Risk Probability : Alternative Approaches . Accessed on April 25, 2012. Mind tools (2012) Risk Analysis: evaluating and Managing Risks. Accessed on April 26, 2012 Pinto J. K. (2007) Project Management: Achieving Competitive Advantage and MS project. Prentice Hall Rochster (2012) Estimating Probability Distributions. Accessed on April 27, 2012 Sweeney D.J. et.al (2009) Quantitative Methods for Business. Cengage Learning Word Press (2009) Cox’s Right Matrix Theorem and its implications for project risk management. Accessed on April 26, 2012 Read More