Risk and Uncertainty in Project Management - Coursework Example

Risk and Uncertainty in Project Management and/or ID # Teacher Inherent in any activity in business or in life there is always present some degree of risk and uncertainty. Coping with these concepts in strategic ways is an important part of a well-run organisation or project as well as a life well lived. These two factors have come under more concern over the past several decades and any business plan or project undertaken must have these two items well scrutinised if they are to succeed. The concept of a ‘sure thing’ often flies in the face of reason and the speaker of that phrase has truly not considered all of the possibilities inherit in their proposal. It is the possibilities that risk and uncertainty are most concerned about, the ‘what ifs’ that if not addressed early on in any project or plan will come back to haunt the project leader and possibly doom the plan to failure. This paper will discuss the ‘what ifs’ of risk and uncertainty. They will first be defined in both their general and business meanings, addressing both common sense and some not so common sense definitions. The question of why risk and uncertainty are present in all projects to varying degrees will be raised. Then an overview will be present of the tools, concepts and techniques used to mange risk and address uncertainty will be discussed as well as one business tool in particular that copes with both of these issues. The pro’s and con’s of this tool will be evaluated and recommendations drawn. What are risk and uncertainty? Uncertainty can be rather miasmic concept at times and certainly carries with it the component of risk.. Generally stated uncertainty is doubt, the opposite of certainty or the sure thing. Initially in the business world the term uncertainty was synonymous with the term risk. That has since changed and the view of uncertainty has expanded and been enhanced. In his seminal book of 1921, ‘Risk, Uncertainty and Profit,’ F.H. Knight began to realise that true uncertainty is not as quantifiable as true risk. Uncertainty is more qualitative and almost intuitive quality about it. The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character;… There are other ambiguities in the term ‘risk’ as well, … but this is the most important. It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term ‘uncertainty’ to cases of the non-quantitative type. It is this ‘true’ uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition. (Knight 26) This was the beginning of the divergence between risk and uncertainty and it has evolved even further. However there is on aspect of uncertainty that is quantifiable and that is along the axis of time. Insofar as the more time that goes by, the more information on the environment that is available to economic agents, Henry (1974) demonstrated that the time at which a decision is taken is not irrelevant to these agents, since, by putting off a decision, they reduce the degree of uncertainty about the future and ultimately can make more pertinent choices. (Sauner-Leroy 2004) So as time goes by, more information is garnered and the risk is minimal. There may be some acceptable level of taking a wait and see attitude when it comes to uncertainty. Risk, on the other hand, has a certain mathematical preciseness in many cases: Risk, as has been stated, is a quantifiable measurement that can be taken into account in any project. In general there are two important concepts to risk, one is the obvious reference to danger and peril that must be understood, and the other is the factor of the laws of probability. Calculating for risk is similar to the actuarial table that insurance companies keep or likewise found in the mathematics of gambling; risk can be measured by researching the history of other similar factors and calculating the risk involved or suing mathematical precision to evaluate an outcome. There is a third characteristic of risk that is always present. It is perhaps the reason for it being given such an important place in any business analysis: ‘The essence of risk, no matter what the domain, can be succinctly captured by the following definition: Risk is the possibility of suffering loss’ (Dorofee, Walker, Alberts, Higuera, Murphy, & Williams 1996). Risk and uncertainty are inherent in any project due to the vast amounts of variables both large and small that are present in any activity. From the macro level of corporate structure and the regulatory influences involved as well as other environmental and social factors, to the micro level dealing with individuals with a wide range of concerns and difficulties that may arise. (Martinez and Artz 2006) These concerns can be in both an individuals’ health and in their ability to function as part of the project. One individual can often increase risk to the project substantially by either being unable to perform their duties due to medical reasons or simply by not being up to the challenge. However, a good risk manager should be able to foresee the latter and mitigate it, but the former is often much harder to deal with unless there is a certain amount of redundancy built in to both the personnel side and the technical side. Even the simplest projects have many variables, all with associated risk and uncertainty. (Banerji 2002) This is the reason a good project manager will avail him or herself of one of many available tools and techniques that help to mitigate risk and deal with these components. The personal and personnel factors are one of the areas where uncertainty and risk may lie. When a project is undertaken the amount of risk aversion that the project manager has will directly impact the nature and success of the project. Depending on the project itself the level of risk acceptable by the board must be directly reflected in the amount of risk aversion by its project leader and the associated staff involved. From an academic point of view, both uncertainty and risk aversion--two concepts which until a recent period rather largely had been ignored--appear to be important elements to take into account for the analysis of the productive investment decision. The degree of uncertainty of the environment, as well as the degree of risk aversion of the decision-maker, indeed are presented as two factors that can exert a restrictive influence on this decision. (Sauner-Leroy 2004) In this area it takes a certain amount of sound judgement when putting people in place on a project and to monitor and maintain that supervision so that if the parameters of the issue change, which they often do, people and systems must be flexible and adjusted to conform to the new constraints. ‘Get the right people on the bus, the wrong people off the bus and the right people in the right seats and then figure out where to drive it’ (Collins 2001: 31). In this arena there are many excellent guides for managers and project leaders to help with any change process. One as previously quoted from is Good To Great: Why Some Companies Make The Leap And Others Dont by Collins and a host of others that provide the supervisor with many excellent strategies to help the manager minimise risk as well as risk aversion as necessary. Another is Kotter’s who certainly realises that risk is change and the fear of change, even for the better, often comes from the top down: A paralysed senior management often comes from having too many managers and not enough leaders. Managements mandate is to minimise risk and to keep the current system operating. Change, by definition, requires creating a new system, which in turn always demands leadership (Kotter 1995: 59) The sector that has now taken on the lion’s share of this burden to mitigate risk and uncertainty, has been software and technology companies. Computers and their programmers have the ability to quickly compare thousands of bits of information, interrelate them and come up with streamlining and corrective strategies, taking much of the uncertainty out of business and help mitigate risk exposure. In the business arena, IT was expected to raise productivity while reducing risk. In particular, the use of IT systems for supply chain management reduced uncertainty and cut the risk of demand surprises along the supply chain. As a result, firms could afford to carry lower levels of inventory and thus become more efficient, without worrying as much about sharp inventory corrections triggered by unexpected demand shifts flowing up the supply chain. (Banerji 2002) Here is where the next generation of management risk has taken place. While there are many individual software and hardware tools that can be used by individual departments, there is one tool that has the ability to manage and juggle multiple facets of a project, or a business at one time. Enterprise Resource Planning (ERP) tools are among the most sophisticated and all encompassing tools that allow a manger to view every aspect of a project from a multitude of different dimensions and angles. This is the tool which this paper will focus on in detail and analyse its effectiveness. One of the most impressive features of an ERP is its ability to act as an active conduit for information across the organisation. It does this in real time and allows all members of the project or company access to the most up to date data and progress being made from all departments and members. Its next and probably most important feature is its ability to integrate various departments and systems across a company and to also link them to any specific project or projects involved. By allowing full integration of all available resources, ERP it is becoming an essential tool for project management and for business on the whole. (Jones 2005) Being cutting edge itself, ERP usually allows for full functionality with many of the latest data transfer system currently available such as Electronic Data Interchange (EDI), Internet, Intranet, Video conferencing, etc. It also allows full use of banking tools like Electronic Fund Transfer (EFT), E-Commerce etc. An ERP system can also streamline inventory management as well. By keeping a close watch on material it can avoid shortages, which would delay work in progress. It also has the flexibility of adapting to changing parameters and to continue to meet the long term requirements of a project. By integrating accounting with the project management team it allows budgets to be instantly monitored so that overages are quickly caught and addressed, rather than finding a shortfall too late in the game. Consequently, an ERP system can help to reduce uncertainty by making information more quickly available to all parities involved and assist them in adapting to any changes on a moment to moment basis. This can certainly be advantageous in multinational corporations or with projects whose stakeholders are not geographically local. (Tong and Reuer 2007) It also helps to reduce risk by creating a more well tuned and better defined plan, monitoring available resources and keeping all parties connected so there are no miscommunications or breakdowns of supply channels. Now this all may sound great, but as with any tool it is fabulous as long as it works. Implementation of an ERP system can be a daunting task in and of itself and in some cases greatly increase the risk factor itself. One of the difficulties encountered is that many companies are maintaining old and outdated systems, but they are familiar with them and they work around the quirks. The plus of an ERP system is that: ERPs force agencies not just to update their obsolete systems, but also their antiquated processes. Almost literally, everything about how an organization works changes when ERPs are put in place. Modernizing processes by leveraging technology can have a tremendous impact on an organizations ability to more efficiently and effectively service its mission and its customers. (Yi 2002) But the attitude of both senior management (as previously mentioned) and staff is that if it is not broken, why fix it. However, they may not be far wrong. In attempting a changeover of this magnitude, many businesses have fallen short of success right from the beginning. The current success rates for businesses that have chosen ERP implementation are less than 50 percent. (Yi 2002) This is most often due to poor planning at the early stages and lack of initial reengineering of existing systems and process to cope with the changeover. It also has a great deal to do with Return on Investment (ROI) for implenetation. The cost may far outweigh the benefit of such a strategy in many situations. Four case studies of construction enterprises that adopted ERP were investigated. Firms A, C and D used clean slate re-engineering which had high probability of failure according to previous research [2]. However, their ERP systems were instead successfully implemented and benefits were derived. These firms were found to have successfully mitigated the risks that were associated with ERP. This study found that the main benefits of ERP to construction enterprises are integration of business processes, automated generation of reports to assist in decision making, and achievement of competitive advantage. This is important to construction enterprises, because the construction industry is known to be fragmented and having competitive advantage helps these firms to win more projects. The problems faced by construction enterprises in implementing ERP include insufficient training of employees and short software testing period. It is recommended that firms do not rush into implementing ERP [5], and be mindful that it may be easier to change the software than change the human being (as was the case in Firm B). (Chia and Ling 2003) Firm B used software that was ‘off the shelf’ and had the daunting task of trying to adapt to the software rather than have the ability to change it. Their efforts did finally succeed but it was certainly at a higher cost to their employees’ morale in the end. One of the most recently bandied about words in the business world is, ‘transparency.’ Since the collapse of many major corporations within the last decade, a complete and open attitude by the finance department and other sections of business has been an absolute must. This transparency also means that each department, each member, must be apprised of the progress of a project and the decisions of the other stakeholder in order to make informed decisions themselves. ERP systems are ideal for this contingency and effectively break down barriers between departments and team members, offering the ultimate in transparency and communication. They can give real time information and because they are interconnected with all aspect of the project or business they can also very reliable reduce both risk and most importantly, uncertainty about what other divisions or member are up to. The reduction in risk can be exponential depending on the complexity of the project involved. However, it is also this complexity that can be the downfall of attempting to use an ERP system. As stated earlier the major reason ERP strategies fail is due to poor planning prior to and during the implementation stage. By not addressing all the concerns inherent in any project or business the risk may be too great to utilise this particular risk management tool. One of the first assessments that should be taken into account is the comparative size of the business or project as compared to the cost and complexity of the ERP system used. At the moment here are several levels of ERP tools available for small, medium, large and multinational corporations. It is of the utmost important to pick the correct tool for the need required. Otherwise it is like try to thread a needle with boxing gloves on, there will certainly be a mismatch which can result in a disastrous application of the ERP. Therefore, before even attempting to implement an ERP, it is important that the particular system match the business or project it is to be used for. Here, one size certainly does not fit all. After the correct decision has hopefully been made then the implementation phase must start. There must be a human logical progression between the current systems that are in place and the new systems that the ERP will utilise. Too much of a change from the legacy systems can often lead to disastrous consequences, there must be bridges built between the new and old if one is ever to cross this river of change. List of References Banerji, Anirvan. 2002. ‘The Resurrection of Risk.’ Challenge 45:6-11. Chia, Sun Yue, and Yean Yng Ling. Florence. 2003. ‘Implementation of Enterprise Resource Planning in Firms Operating in the Construction Industry.’ Architectural Science Review 46:323-330 Collins, J. 2001. Good to great: Why some companies make the leap and others dont. New York: HarperCollins Publishers Inc. Jones, Geoffrey. 2005. Multinationals and Global Capitalism: From the Nineteenth to the Twenty-First Century. Oxford: Oxford University Press. Kotter, John P. 1995. ‘Leading change: Why transformation efforts fail.’ Harvard Business Review, 73: 59. Knight, F. H. 1921. ‘Risk, Uncertainty and Profit.’ Chicago: Houghton Mifflin Company. Martinez, Richard J., and Artz. Kendall. 2006. ‘An Examination of Firm Slack and Risk-Taking in Regulated and Deregulated Airlines.’ Journal of Managerial Issues 18:11-19. Sauner-Leroy, Jacques-Bernard. 2004. ‘Managers and Productive Investment Decisions: The Impact of Uncertainty and Risk Aversion.’ Journal of Small Business Management 42:1-5. Tong, Tony W., and Reuer. Jeffrey J.. 2007. ‘Real Options in Multinational Corporations: Organizational Challenges and Risk Implications.’ Journal of International Business Studies 38:215-222. Yi, Hyong. 2002. ‘ERPs: The Promise and the Peril.’ The Public Manager 31:55-61. 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