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8. Essentials of Project Risk Management

Introduction

In Chapter 2, PRG was defined as the deployment of organisational structures, processes and coordination mechanisms to not only minimise the uncertainties related to negative project risk but also to maximise the benefits of positive project risk. Its scope overlaps with corporate and project governance to gain maximum alignment between projects and organisational risk activities. This chapter presents the processes at the project level regarded as essential to achieving the desired alignment. It begins by describing the nature of projects and the role of risk and reward in the project life cycle. Processes that are critical to effective project risk management are then identified: the project risk management plan, project risk analysis and ranking, the project risk register, implementation of risk responses, and the functioning of the project team.

Understanding Projects

In its simplest form, a project is a temporary endeavour undertaken to produce a unique product or service. It is temporary because it has a definitive beginning and end, and it is unique because a project is a new undertaking, covering unfamiliar ground. Figure 8.1 shows how these two features impact on the characteristics of a project.

Features of projects

Figure 8.1 Features of projects

Example of the Characteristics of a Project

An example of a project is the university sending a team to recruit students at an offshore education trade fair. The project is temporary as it starts when the university staff leave on their travels and ends with their return. It is unique because they attend a particular trade fair, it is undertaken by a specific group of people, and it involves a travel schedule agreed for that trip. All of these elements introduce risks into the project.

PROJECT LIFE CYCLE

When the above project example is examined more closely it can be seen to evolve according to the project life cycle with the following stages (Chapman and Ward 2003).

• Conception. The project is conceived, typically by stakeholders, and the scope and objectives are broadly defined. The university decides to send a delegation to the education trade fair to exploit an opportunity to recruit overseas students into its programmes.

• Design. More details about the project are developed, including costs and benefits. They are established for various travel arrangements and the estimated number of students to be recruited. Decisions are made about the logistics of the trip.

• Plan. This includes the travel schedule, important milestones, and recruitment targets. The attendance at the education trade fair is refined with details about the number and calibre of staff travelling, and the required accommodation arrangements.

• Allocation. Resources are allocated and they indude those from outside. A budget is drawn up covering registration fees, accommodation allowances and possibly a subsidy from government to promote local education on a broader scale at the fair.

• Execution. The project is carried out. The team travels overseas, registers at the fair, meets prospective students and provides them with offers to enrol in the university's programmes.

• Delivery. The product is delivered when the recruited overseas students arrive at the home campus and start their courses.

• Review. A review of the processes is carried out and the project audit is completed. The team meets to discuss its performance and identifies 'what went right' and 'what went wrong'. The audit ensures that the trip met the project's objectives and was completed within the agreed parameters of costs and time.

• Support. Ongoing support is provided to staff on how to engage with overseas students, taking into consideration cultural aspects and matching their backgrounds with suitable courses.

PROJECT RISK AND REWARDS

Risk monitoring and control is required throughout the project's life cycle. This determines the acceptability of the level of project risk in comparison with project expenditure and value. Initially, risks are high because they are not fully defined but, as the project progresses, they gradually reduce as more certainty about them is gained. Eventually, opportunities are realised for positive risks and threats are prevented from negative risks when the project is delivered and project risks have been successfully managed.

The expenditure/value of the project undergoes a similar change but in the opposite direction. The initial financial exposure is relatively small as the project is still in the planning stage. As the project develops, more and more expenditure is incurred and the potential value of the project potential increases. The highest financial exposure is around the crossover of risks and the financial exposure. At this moment the project is nearing completion and risks have been identified, analysed and responses implemented. The crossover is indicated in Figure 8.2.

Project risk and reward profile

Figure 8.2 Project risk and reward profile

 
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