Approaches to Analyzing the Project Environment - Essay Example

Table of contents Introduction 2 Analysing the project environment 2 Approaches to analyzing the Project Environment 3 Descriptive Model 3 Hierarchical Model 4 Actor/Factor Model 4 Degree of Control Model 5 The Input-Output Model 6 Risk Identification 6 Risk Identification techniques used to identify risks 7 Risk assessment 8 Risk Management 9 The Risk Management Plan 10 Risk Control 10 Risk Response Planning 10 Risk Transfer 11 Risk Avoidance 11 Risk Reduction 12 Risk retention 12 Residual risks and secondary risks 13 Risk Response Plan 13 Risk Reporting 13 Conclusion 14 Sources 15 Compare and contrast the approaches that are available for analysing the project environment. How would a project manager use the outputs of this analysis Introduction Project Risk Management is a management technique that focuses on the identification and control of probabilistic occurrences that which have a potential to cause harm to a project. Different people will have different views of the impact of a particular risk, and a small risk for one person may seem enormous to another stakeholder. Consequently, it becomes invaluable to study the project environment and understand the entities that will contribute to the risk. Risk Analysis is a formal framework that helps assess the risks that the project manager or the organisation faces. A good risk analysis aids in the decision-making process to take action to minimize disruptions to plans. It will also help to formulate strategies and to decide whether the strategies devised to control risk are cost-effective. Analysing the project environment A top priority for any Project Manager will be to make a complete list of the variables that can affect project performance. S/he must then try to anticipate which (if any) may lead to project failure. It is important to understand that these factors may not be clear and/or obvious; careful analysis of the full context within which the project is being undertaken (its "environment") is required. What is the purpose of analyzing the environment Identify relevant actors and factors Determine the degree of dependency of the project on each actor or factor Estimate the risk associated with each relevant actor or factor Assess the degree of management control or influence over the actor or factor Identify actors or factors that need special attention Develop strategies for increasing control or influence including formal and informal linkages Develop a plan to cope with potential problems caused by actors and factors Priority must be given to those especially characterized by medium or high dependency, medium or high risk, and medium or low control. The project environment may be defined as "the whole set of institutions, people and natural systems which surround the project and interact with it". The purpose of any analysis of the project environment is primarily to identify a list of factors that may have an impact on the successful conclusion of a project. They be classified contrastingly as follows (Bryant and White, 1982) - Stable/turbulent - Uniform/diverse - Clustered/random - Resource-munificent/resource-scarce Approaches to analyzing the Project Environment Descriptive Model Use of the Descriptive Model is helpful for the Manager who wishes to categorise the range of dimensions within the project environment. An appropriate set of dimensions comprises: - The natural environment - The built environment - The financial environment - The social environment - The political environment It may be seen that these link to the capitals of the sustainable livelihoods framework, though there are also important differences. Hierarchical Model If the analysis has involved making judgments not just about what is important in the project environment but also at what level then the Hierarchical Model is appropriate. This divides the project environment into local, regional and national (or international) factors, each of which may need different responses. Hierarchical models provide a way of examining differences across different parameters. They pool the information across the different groups without assuming they belong to the same population. This is advantageous in that, the same assumptions are not adopted across the entire population, because that may not be applicable to practical situations at all times. Hierarchical models allow us to examine the extent to which there are discrepancies across the different populations away from the normal, but at the same time allow us to borrow across the full strength of the sample. Actor/Factor Model Evaluations of completed projects reveal that many of the problems are the result of actors and factors that reside in the external environment and that are outside the direct control of the project manager. In developing countries, for example, such problems include shortages of materials, such as cement, or the slow release of funds by ministries of finance. In the above case study, it would be the advent of heavy rains, which are beyond the control of the project manager. The important role of a project managers would call for due diligence initially and constant monitoring of the external environment to foresee and determine which actors and factors can affect their projects. This alertness needs to continue throughout the project. Continuous alertness to potential risks will help develop plans to mitigate problems that might interfere with the project's success. The project environment is differentiated in the Actor/Factor Model. The project stakeholders ("the actors") are distinguished from all the inanimate components of the environment ("the factors"). It is noteworthy that human beings undoubtedly constitute the riskiest part of the environment because their responses are impossible to predict with accuracy. Considerable effort is put into approaches such as stakeholder analysis, to guide project planners and managers in their interactions with stakeholders. Degree of Control Model The rationale behind the Degree of Control Model is that certain variables in the project environment will be more or less controllable by the project team. The use of this model raises important and interesting issues about the extent to which the project team can control, influence or simply understand (appreciate) the project environment. The Input-Output Model Projects may be viewed as systems existing within larger systems (context or environment). The systems model is a useful conceptual tool for planning and managing projects because it makes project dependencies and the relationships between inputs and outputs relatively clear. Supplies, labour, and funding are inputs that the project obtains from the external environment. Facilities and accounting services are inputs that the parent organization provides. Price stability, dry weather, and civil harmony are factors in the general environment that may affect the project. Now let us look at outputs. The project provides its parent organization with reports that are a kind of output, but the project's most important outputs go into the general environment. Both inputs and outputs involve actors and factors. Actors are people, organizations, or institutions in the environment that can influence the project or are influenced by it. The Input-Output Model is best suited to systems/operations/businesses. It encourages users to think about what risks may lead to the failure by a system/business to produce the benefits hoped for, and identify the source of those risks. Risk Identification Risks can be identified using past experience, common sense, expert evidence and/or statistical analysis and simulations. Whatever the methodology used to assess the environment, the whole purpose is to identify the outputs or the risks associated with the project environment and try to plan for the known ones as well as the other unannounced ones that may occur during the process. The models discussed above provide just such a systematic way of analysing the environment, and therefore a coherent and logical way of identifying potential risks for the project. Risk is a concept used to express uncertainty about events and/or their outcomes that could have a material effect on the goals of the organization. Risk identification should occur over a series of steps, and should involve all project team members, stakeholders, experts and anyone one else that may be closely associated with the project. Risks may occur in but not be confined to budgets and funding, scope or requirement changes, schedules, technical issues, personnel issues and legal issues to name just a few. Risk Identification techniques used to identify risks Brainstorming usually involves all associated people in the project to discuss, sparking off ideas that cumulatively help in the process. Delphi techniques though similar to brainstorming, contribute by filling up questionnaires, from different locations. The responses are organized, reviewed, and further sent back for reassessment. A lot of bias is prevented since the participants are not influenced by each other's views. Interviewing involves question and answer sessions that give feedback from the project team, and these people may have executed similar projects and have first hand knowledge that may be invaluable. Checklists are created based on historical experiences and when projects to be executed are similar are very useful. Nevertheless, sole dependence on them may be detrimental. Assumptions analysis is a matter of identifying and documenting the assumptions made regarding the project and then using them as jumping-off point to identify further risks. Diagramming techniques include flowcharts and graphs that are visual and help easy grasp of risks. Whatever the method used, early identification of risks are important and this needs to be done at the Planning stage itself. It should never be skipped. Risk assessment Risk Assessment in a project is the most difficult phase of all to carry out and more the accuracy, the greater is the success of the project. Risk is a combination of uncertainty and constraint. Constraints are usually difficult to remove. Finding the right resources for the project to be completed is critical and is often a high risk, since human behaviour is the most unpredictable and difficult to assess. In the assessment process, it is critical to make the best educated guesses possible in order to prioritize appropriately the implementation of the risk management plan. The greatest challenge of risk assessment is that if risks are improperly assessed and prioritized, time can be wasted in dealing with risks of losses that are not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources that could be used more profitably. Unlikely events do occur, but if the risk is unlikely enough to occur, it may be better to simply retain the risk, and deal with the result if the loss does in fact occur. When information is so poor that managers are unable to assign probability of the risk occurring, this is called uncertainty and then the most uncertain project environment exists. (Lawler, Mohrman, Ledford, 1992) In the process of Risk Assessment, more alertness is needed in those areas of the project with the most rigorous constraints and the highest uncertainty. Clearly the manager will be more concerned with the high probability - high impact risks, whilst the low probability - low impact risks may not warrant as much attention since they do not affect the project as much as the former. Though there are many ways of doing risk assessment, the most widely used is the most widely accepted formula for risk quantification is- Rate of occurrence multiplied by the impact of the event equals risk. Risk Management The presence of a risk will change the progress of a project and needs to be monitored throughout a project. Although a risk assessment is done in the beginning of the project, as we get close to the risk, a thorough reassessment needs to be done on the original assumptions, since they may require some fine-tuning due to changed circumstances. Stakeholder risk tolerance will determine to what extent the risk mitigation needs to be done. While a stakeholder may be tolerant to a 20% increase in costs, another stakeholder may consider it very high and beyond budgetary compliance and hence the extent to which this risk needs to be managed will be more for such a stakeholder. Proactive risk management does not necessarily mean avoiding projects that could incur a high level of risk. Practical situations are often high risk and the business environment dictates the undertaking of these projects. Formal risk management gives the project manager sufficient tools to execute such projects with full awareness of all the things that could go wrong, and the chance to do the best he can to make that those factors will not prevent the ultimate success of the project. The Risk Management Plan This determines what plans are to be made to manage the risks associated with the project. This is an output of the risk identifying process. The risk management plan details how risk management processes will be implemented monitored and controlled throughout the life of the project. It details risk response details on a high level. With an unbiased risk analysis, the budget for risk management needs to be included in this as well. Risk management timings, processes, criteria for risk thresholds are part of this as well. In conclusion, as a part of knowledge management, this will be maintained and updated, reported to the project team and documented for future reference. Risk Control Once all risk events are graded, the project team agrees how to manage the risks to minimise the effects if the risk event happened. Each identified risk event should be owned by an individual project team member and the amount of effort and resources allocated should be proportional to the risk exposure. Risk Response Planning Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories: (Dorfman, 1997) - Transfer - Avoidance - Mitigation - Acceptance Risk Transfer The idea behind 'risk transference" is to transfer the risk and the consequences of that risk to a third party. This shifts the onus away from the management and onto another party. Typical examples will include contracting jobs and hedging. Insurance is one type of risk transfer that uses contracts. Warranties, guarantees and performance bonds are other forms of risk transfers. However, transference of risks will often involve higher cost structures, since no one will absorb the extra risks free. This will definitely influence the project budget and hence a careful cost-benefit analysis is needed before this is executed. In addition, contracting a job may involve just swapping one risk for another. This also creates dependencies on the contractor which, when not honoured may influence project completion. Risk transfer, will include careful weighing of options and deciding which side of the risk coin the organisation is comfortable being. Risk Avoidance Risk avoidance involves avoiding the risks altogether or eliminating the cause of the risk event. With risk avoidance, we essentially eradicate the risk by eliminating its cause. It just means that any activity with a risk is not performed at all. Examples of this would include, not flying for fear that the airplane may crash, or not travelling during peak holiday season, because we may be held up by the traffic. Avoidance may seem a great solution and universally capable of being applied to all risks but in practical situations, all tasks will carry an element of risk, either high or low. Avoiding risks means, we also lose an opportunity to the potential gain of accepting the task and mitigating the risk to complete it. Therefore, avoidance is not often an option, except when the risk is almost sure to occur and the impact on the project is extremely high. Risk Reduction Risk reduction or mitigation is the more used method that reduces the severity of the risk thereby reducing the severity of the impact on the project. The purpose of mitigation is to reduce the probability that a risk will occur and to reduce the impact of the risk on the outcome of the project to an acceptable and workable level. Good risk management planning will result in risk reduction to produce the desired outcome. Risk retention Risk retention involves accepting the consequences of the risk should it occur. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. Similarly, large risks that have a low risk of occurring are accepted as well like a natural disaster like an earthquake or massive flooding. Acceptance may be active or passive. Passive is acceptance is going with the flow when the risk occurs without a preconceived plan. Active acceptance occurs when there is a plan but it is not executed until the risk occurs. Residual risks and secondary risks A residual risk is a leftover risk so to speak. After a risk has been mitigated, some minor risk may remain. A plan is put in place to handle this as well. Secondary risks are risks that come because of risk response. Risk Response Plan Risk Response Plan embodies the actions to be taken should the identified risks occur. It should include all the identified risks, descriptions of the risks and the areas in which they occur. This will also document the department or the team member who is responsible for the day-to-day operations of risk management of a particular risk. This is an empowering tool for the project manager to make a success of the project delivery by proactively planning strategies to reducing risk, delegating responsibility, and implementing accountability. This allows for a variety of strategies, the most common of which is mitigation, as well as provides tools to examine the risk impact of alternative strategies, map out risk steps, and assign tasks to various team members. All responses also document the time and cost required to implement the response. The contingency plans are part of the risk response plan as well. Risk Reporting In the follow-up and reporting of risk management, wide ranges of parameters are reported aligning to the company as well as stakeholders needs. There are several types of reports that may be included, like risk matrices, time-phased views of risk scores, project risk summaries, and one-page risk reports. All these form an important part not the current project, but serve as a knowledge base for the execution of future projects as well and add enormous experience to the project manager in handling the next project and assessing its risks. Conclusion In conclusion, risks exist on all projects. Risk planning is an important part of the planning process. Project risk management seeks to anticipate and address uncertainties that threaten the goals and timetables of a project. Just identification of risks can prevent a major bottleneck. Risks that are easily identified and have planned responses are more unlikely to interfere with the project progress. While any project accepts a certain level of risk, regular and rigorous risk analysis and risk management techniques serve to defuse problems before they arise. Risks that have been carelessly overlooked may end up costing the organization millions of dollars causing schedule delays or sever backlogs. The project manager is responsible for the project deliverables and putting in a sincere risk management plan in place after a sound analysis of the project environment, empowers him to do a successful project delivery. A successful risk management plan serves as insurance from being in the unenviable position of explaining to his bosses, why the project overshot on budget and schedule. This will also aid increasing his ability to avoid or minimize previous problems on future projects and carve a more successful career path in the organisation. Sources Heldman, Kim PMP Project management Professional Study Guide Sybex Inc London, San Francisco Dorfman, Mark S. (1997). Introduction to Risk Management and Insurance (sixth ed.) Prentice Hall. ISBN 0137521065 Meredith, Jack R and Mantel, Samuel Jr Project Management- A Managerial Approach John Wiley & sons, Inc. Fourth edition ISBN 0-471-43462-0 Lock D., 2003, Project Management, 8th edition, Gower, Chapter 24 Bryant C and White L.G.1982, Managing Development in the Third World, Westview Lawler, Mohrman, Ledford 1992 TQM- Practices and Results in Fortune 1000 Companies San Francisco, Jossey-Bass Risk Management Wikipedia.org Retrieved from website http://en.wikipedia.org/wiki/Risk_management on 9th Jan 2006 Youker, Robert Actors and Factors Retrieved from website http://www.asapm.org/asapmag/a_af.htm on 9th Jan 2006 Weigers, Karl E Know your enemy- Software risk management Retrieved from Website http://www.processimpact.com/articles/risk_mgmt.html on 9th Jan 2006 Read More