Project Management Institute

Controlling chaos

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Black swans—high-impact, low-probability events—are nearly impossible to predict. But good contingency planning can mitigate the fallout.

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BY SARAH FISTER GALE

ILLUSTRATION BY IAN WHADCOCK

RISK management would be a whole lot easier if everyone knew exactly what the risks were.

Of course, it's not as simple as that. And when the completely unexpected happens, the fallout can derail even the best-planned initiative. These low-probability, high-risk events, such as the rise of the Internet and the 11 September attacks, were originally dubbed “black swans” by risk management author Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable, now in its second edition [Random House Trade Paperbacks, 2010]. They strike without warning and can have a devastating impact on an organizations project portfolio—unless basic parameters for crisis response are part of the risk-management and project planning process.

“You can't always know what will go wrong, but you do have to have the flexibility to respond when something does go wrong,” says Bob Prieto, senior vice president of the industrial and infrastructure group at Fluor Corp., the global engineering, construction and maintenance services firm headquartered in Princeton, New Jersey, USA. “Building resiliency is key.”

Most risk-management processes focus on known events, and that's a problem, adds Pablo Lledó, PMP, CEO of MasConsulting, a project management consultancy to the oil industry based in Mendoza, Argentina. He argues that one of the biggest flaws in the risk management process is relying on past data to predict future events.

Everyone must at least be aware of the possibility of unexpected risks. Then it's time to create the best possible contingency plan. Project teams should make black swans part of every risk-management consideration.

—Pablo Lledó, PMP, MasConsulting, Mendoza, Argentina

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This strategy makes sense for common, easy-to-identify risks such as labor shortages or shipping delays, but it's useless for rare yet earth-shattering events that may only occur once in a project manager's career, Mr. Lledó says.

To protect your projects, have a discussion with team members and executives, he suggests. Everyone must at least be aware of the possibility of unexpected risks. Then it's time to create the best possible contingency plan. Project teams should make black swans part of every risk-management consideration, Mr. Lledó adds.

He accomplishes this by creating a “black swan” category in his risk-management process and has his team identify the worst-case scenarios with regard to cost, schedule, scope and quality.

“In the risk register, we might add how to react if an oil pipeline explodes— even though we do not have any idea what negative risk would cause that impact,” he points out.

Instead, focus on how a team will respond in a crisis.

“We are big on risk identification and contingency planning. But if you ask your project team to plan for an infinite number of scenarios, it can have a declining return on investment,” says Brett Pitts, senior vice president of the Internet services group for the banking company Wells Fargo, San Francisco, California, USA. “It is difficult to try to anticipate mitigation and contingency plans for plagues, famines, wars and environmental disasters. For those types of things, we count more on our robust business continuity planning.”

As part of every project plan, teams identify which elements on the critical path could be affected by a crisis. Mr. Pitts then clearly defines a process of response, including who the key decision-makers are and who is responsible for invoking contingency plans.

Since Wells Fargo acquired Wachovia Bank for US$15.1 billion in late 2008, Mr. Pitts’ department has been running all activities to integrate the two websites, including product and platform selection, system integration strategies and monthly data-conversion projects to transfer customer information from legacy products to the products that customers will be using after being converted.

If a black swan, such as an earthquake where a key data center is housed, swoops in on one of these projects, business continuity plans are invoked. These include adjustments to ongoing operations and technology contingencies.

BIG RISKS    IN THE SMALL DETAILS

Huge risks often hide in the corners of project plans. Seemingly innocuous tasks or events can unexpectedly wreak havoc on a project because they represent an undiagnosed bottleneck on the critical path, warns Bob Prieto, Fluor Corp., Princeton, New Jersey, USA.

Many projects at construction and engineering giant Fluor take place in remote locations and require project leaders to create living quarters for workers. And while the company has yet to experience something along the lines of an outbreak of food poisoning, such an occurrence could end up delaying the entire project, and impacting hiring and retention of workers. “Failure to identify that seemingly minor risk could cause a standstill on the project,” Mr. Prieto says.

Most project teams are good at identifying big, obvious risks, he says, but they don't invest enough time exploring the low-probability risks that arise from the interrelationships between tasks. “It's the white spaces in-between projects where black swans hide,” he says.

The project team has an immediate response scenario already defined as well. The first step is to convene a meeting with pre-determined stakeholders, including regional executives from the impacted market and senior leaders from the bank's Internet services group. “We have a game plan already in place the moment we walk into that discussion,” Mr. Pitts says.

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In a black swan crisis-aversion meeting, the project leader identifies risks, outlines how significant events could affect the initiative and determines:

WHY BLACK SWANS?

“As rare as a black swan” originated in a Latin expression later popularized in 16th-century England. At the time, it was used to describe something nonexistent—as the British believed that all swans were white. Then, in 1697, a Dutch expedition discovered black swans in Australia, and the term came to mean something once thought to be impossible. It's now used in the business world to describe a high-impact, hard-to-predict event.

  • Which steps on the critical path would be impacted
  • The implications for overall project and portfolio success, and
  • Which business-critical issues require immediate attention.

The project manager then offers possible solutions with pros and cons for each scenario. Finally, the leadership team makes a decision about how the organization will proceed.

Having such a plan in place stream-lines the response process during a catastrophe. “In crisis situations, you want to minimize improvisation as much as possible,” Mr. Pitts says.

It also prevents project professionals from getting sidetracked in the midst of a panic. In the event of a black swan, project teams often find themselves discombobulated, responding to questions and concerns from dozens of executives and employees who are not part of the official decision-making team. And if the incident isn't resolved quickly, rumors and fears can spiral out of control, making the problem that much more difficult to solve.

“When you have a crisis contingency plan,” Mr. Pitts says, “it's easier to filter out the noise and focus on what it takes to move confidently forward toward a solution.”

There are other tools and strategies in a project professional's arsenal that can help prevent black swan events from derailing initiatives—if they are used correctly.

“The problem is not the risk-management tools used, but in how they are applied,” notes José Eduardo Motta Garcia, PMP, portfolio, program and project manager at Itaú Unibanco Holding S.A., a bank in Sao Paulo, Brazil.

“There is a tendency to simplify processes and eliminate steps often considered unnecessary or cumbersome.”

 

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We are big on risk identification and contingency planning. But if you ask your project team to plan for an infinite number of scenarios, it can have a declining return on investment.

—Brett Pitts, Wells Fargo, San Francisco, California, USA

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imgTIP Encourage your team to think about the impact of black swan events, says José Eduardo Motta Garcia, PMP, Itaú Unibanco Holding S.A., Sao Paulo, Brazil. “Project teams tend to inhibit those who think of the non-obvious risks, considering them out of reality.” he says. “But this is a blunder. A risk identification with no constraints and a contingency plan well implemented are the key to increasing the effectiveness of risk management.”

 

He points to his own experience with a black swan, and how effective up-front risk management helped mitigate its impact. In February 2010, Mr. Motta Garcia was working with a colleague on the rollout of a large IT project. One of the deployments was in Santiago, Chile, where a massive earthquake destroyed infrastructure and killed more than 700 people.

“The project was strongly affected in time and cost, but there was a redundancy being implemented in Argentina, which made possible the continuation of the project,” he says. Having that just-in-case backup plan in place substantially reduced the impact to the overall rollout.

Contingency planning is one of the most-effective strategies for mitigating the risk of the unknown. “Because there is no way to prevent such events, the default response is always to have a contingency elsewhere,” Mr. Motta Garcia says.

Monitoring the marketplace can also give project teams a head start in dealing with crises before they arise. In financial services, for example, black swans are usually related to economic downturns, Mr. Motta Garcia notes. “Financial crises may be caused by several factors, and in many cases they are unpredictable,” he says. “But we are able to reduce the unexpected by continuously monitoring the market and taking corrective actions in the project in response to changes in the economic scenario.”

No one can predict the magnitude of the risks that come with black swan events. Contingency planning, though, can help provide a bird's-eye view at the organizational and project level. PM

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This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

APRIL 2011 PM NETWORK

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