risk sink or risk source?
Program Director, UC Berkeley Extension
The topic of opportunity management arises frequently when discussing project risk management. Both topics are complex, and there is no question that they are interrelated. This paper discusses three types of project opportunity management, two that are a source of risk because they tend to increase overall project uncertainty and one that can serve to moderate it. The purpose of the project—the goals and expectations associated with the work—provides the primary focus for project opportunity management. Projects carrying more aggressive goals also represent more overall risk. A second focus of opportunity management for projects involves optimizing plans to better align with the most important project priorities. Tactics such as adding resources to compress schedules can provide an opportunity to meet a tight deadline, but they also generally tend to raise the risk. Projects also contain at least some uncertainty that could potentially benefit the project. This presentation will explore all three types of opportunity management and show how project leaders can better understand and manage overall risk in each of the three cases. Much of this paper is summarized from the third edition of Identifying and Managing Project Risk, by Tom Kendrick.
Project Opportunity Management
Opportunity is a hot topic in project management, especially when discussing risk. Both opportunity management and risk management are complicated, and they are without question interrelated. For projects, there are at least three “types” of opportunity. The first relates to choices made concerning project specifications for the expected project deliverable. The second type of opportunity for projects deals with planning decisions for the work, generally involving trade-offs. A third type of opportunity involves potentially beneficial uncertainties inherent to project activities. All three of these meanings for “opportunity” relate to risk. Though some types of opportunity may reduce overall project risk (be a risk sink), most actually increase overall project risk and serve as sources of potential project problems. This paper will focus on all three types of project opportunities.
The primary meaning of opportunity related to a project involves the value anticipated from the project deliverable. Initial assumptions about results and costs create an expectation of value that exceeds the project's cost. The opportunity implied by this difference may be modest and realistic or wildly optimistic. The greater the overall project opportunity, in general, the more likely it will be that the benefits will be inflated, the costs underestimated, or both. Projects that are big opportunities generally represent very high overall risk.
Initial bottom-up project plans rarely correspond to expected timing, cost or other objectives. To better meet the highest priorities and constraints for the project, project leaders make trade-offs and adjustments to the project plans, seeking a realistic approach to the work that conforms as much as possible to what sponsors, management, and stakeholders have requested. Opportunities for compressing schedules, conserving resources, and optimizing plans generally will result in plausible plans, but often plans with additional (and/or more probable) failure modes and risks.
Uncertain Events Having Potential Benefits
The final sort of opportunity encountered in project planning involves aspects of the work that are inherently uncertain. Some work will be unknown to the team, so estimates cannot be precise. A range of outcomes, some beneficial to the project plans and some adverse, may be possible. For purchased services or items, prices may vary unpredictably over time, and there are many other project parameters that may be difficult to estimate with precision. Adverse variances can be assessed using standard risk measures of loss and likelihood. Similarly, potential savings or other beneficial outcomes that could occur may be similarly assessed based on probability and potential benefits.
Risk and Scoping Choices
One of the main reasons that project risk management is so important originates with the pursuit of project opportunities. Projects are by definition unique undertakings, so the results they are expected to deliver inevitably involve unknowns. The business case for most projects rests on the assumption that the value of the outcome will significantly exceed the project's cost. For uncomplicated, routine projects, there may be very good reasons to accept the starting assumptions regarding performance, deadlines, budgets and other project parameters. In many cases, however, initial project assumptions are based more on wishful thinking than on reliable, analytical analysis.
Aggressive and “Stretch” Goals
As in most arenas, for projects in general there is a high correlation between risk and reward. Generating significant benefits often requires taking on significant risk. The more substantial we expect the returns from a project to be, the more potential issues in achieving them we are likely to run into.
Managing this sort of overall opportunity requires making choices regarding objectives and constraints. The more aggressive the sponsors who originate projects make the “stretch goals,” the less likely projects will be able to achieve those goals, either because of unrealistic expectations for benefits, assumptions resulting in inadequate resources, or both.
Stakeholder Risk Appetites and Thresholds
Organizations in different businesses deal with risk in different ways. Start-ups and speculative businesses such as those engaged in oil exploration have a high tolerance for risk; though the risks of failure are high, the rewards of success are seen as sufficient to make the undertaking worthwhile. More conservative organizations, such as governments or companies providing contract project services on a fee-for-service basis, will be risk averse. They tend to expect consistent success but only modest returns on each project. New project goals should represent opportunities in line with prevailing appetites and tolerance for risk.
Sometimes risks inherent in project work may not be apparent to project stakeholders, especially during initiation. Work to understand the appetite for risk of your key stakeholders, especially the project sponsor. In your interactions, ask questions to uncover clues to their risk tolerance, such as the following:
- Worst case, how much overall would they be willing to invest?
- What are the minimum results that they would find acceptable?
- What concerns do they have about the project?
The Tilted Playing Field
The overall opportunity represented by a project is the reason for doing it, but not all assumed opportunities are credible or realistic. A classic Dilbert cartoon by Scott Adams has the boss in the first panel saying, “I decided to cut your project funding in half but keep the funding the same.” He continues, “It's a brilliant plan. We get all the benefits at half the costs!” After a disparaging remark from Dilbert, the boss concludes, “And why couldn't I rewrite the business case to increase revenue?”
Too many projects begin with assumed opportunities, even very speculative and unlikely opportunities, hardwired into project constraints. When such opportunities are part of a project baseline, it steeply “tilts the playing field” so that all the uncertainty that remains will be on the downside. This results in a long list of risks for project work—many associated with the unrealistic assumptions—and little chance of meeting the project's goals, let alone exceeding them.
Scoping Risk Example
There are many examples of overheated pursuit of excessive opportunity that resulted in high risk and major project problems. One especially severe example is what happened in the mid-1990s during the planning and construction of the Denver International Airport (DIA). Denver had been plagued with delays at its Stapleton Airport for decades, due to its small size and environmental factors. The new planned airport was to deal with all of this with a major increase in overall size. To minimize weather and other effects on traffic, the gates were to be spaced far apart to facilitate traffic flow and attract “hub” flights to the new facility. The distance from passenger check-in to the most distant gate would be about a mile, and overall the airport would require about 17 miles of baggage handling conveyance equipment.
To ensure rapid delivery and transfer of baggage, a new type of high-tech handling system was planned, based on one operating on a much smaller scale in Germany. Much has been written about the way this project played out, but the overall impact of the decision to adopt the attractive-looking but high-risk approach for fully automated, high-speed baggage handling, the lifeblood of an airport, was a disaster. Bags were “eaten,” systems failed (even when operated at low speed) and nothing worked as expected. The overaggressive scoping caused a delay in the opening of DIA from October 1993 to February 1995, 16 months late. The delay cost hundreds of millions of dollars in additional expense and generated a great deal of embarrassment and political fallout.
Unless opportunity management at the project level is realistic, it will present excessive risk and lead to project failure.
Dealing with Risks Related to Project Goals and Expectations
As the project charter and other documents are developed, involve people who understand what is possible, and listen to them. A challenge is fine, and can be motivating, but aspiring to impossible goals or saddling a project with constraints of insufficient time, money, staff or other resources means that all possible variance will be adverse and no one associated with the project will achieve what they want. To quote Australian consultant John Edwards, “You may con a person into committing to an unreasonable deadline, but you cannot bully them into meeting it.”
Risk and Planning Choices
The second type of project opportunity management also involves choices, this time in the planning of project work. Most projects find that initial plans fall short of timing, cost or other stated objectives. In an attempt to meet aspirational goals, project leaders work to optimize the workflow by adopting alternatives that compress plans, conserve money or employ other trade-offs to better align with stakeholder requests. Even when changes are devised to address critical constraints (such as aggressive deadlines), the revisions often require undesirable trade-offs (for example, higher costs or diminished scope), increased risk and new project failure modes. Driving a plan to conform with project constraints will inevitably introduce new (self-inflicted) risks.
Project Priorities and Plan Shortfalls
As preliminary project plans come together, a picture of your project starts to emerge. Even the earliest versions of a project plan will provide insight into whether your project objective is possible or not. Often, planning reveals the unpleasant fact that the project (at least as requested) is impossible or at least over-constrained—bottom-up plans leave at least some part of your project objective unmet. Preliminary analysis might reveal a schedule that extends beyond the deadline, resource requirements that exceed initial budgets or other significant issues. Project planning allows you to see just how much trouble you are in.
An important goal of plan analysis is to eliminate, or at least minimize, the differences between the project objective and your plans. The standard triangle diagram for examining project trade-offs is one way to show these differences, as in Exhibit 1. The plan, represented by the gray triangle, is quite a bit larger than the objective, shown as the black triangle.
Exhibit 1: Objective versus plan.
For this project, bottom-up planning suggests that the deliverable is probably feasible. Because bottom-up project planning begins with a scope-oriented work breakdown structure (WBS), this is fairly uncommon. However, the initial schedule and resource plans fall wherever the WBS leads them—often at significant variance with the original project objective. The draft plan here requires both more time and higher costs (for people, equipment, services, etc.) than desired by stakeholders.
Fortunately, all project constraints are not created equal. Some parts of the objective are more important than others, and knowing the relative priorities of project parameters can guide your efforts in improving your plans. In the simplest form, project priorities tend to boil down to the old saying, “Good, fast, cheap: Pick two.” Every project has at least one degree of freedom, or at least one parameter that matters less than the others. Which of these three main parameters is most flexible will vary from project to project. You can get a sense of which aspects dominate the others through verifying a prioritization such as the table in Exhibit 2, or by devising scenarios where each parameter falls short of the stated goals by a little and having stakeholders compare them pairwise (“Which would be worse, being $1,000 over budget, or a week late?”) to let you know which they would most like to avoid.
Exhibit 2: Project priority matrix.
Armed with plans, objectives, and rank-ordered priorities, you are ready to explore plan variations that will better align with goals. In the case of Exhibit 2, you would seek a project plan that delivers as much of the scope as you can achieve while meeting the deadline and holding spending to roughly the expected budget. Other prioritizations are possible, but this one is typical for high-tech, modern projects.
Trade-offs Based on Priorities
For the example in Exhibit 1, the initial plan failed to meet the deadline and also was over budget. Doing some “what if” analysis, you may discover a way to use a top-notch group of consultants (with a credible track record) to perform more work in parallel, shortening the overall project. This approach will not be inexpensive; it makes the budget problem even bigger, and results in the shift shown in Exhibit 3. Here, the schedule has been compressed, bringing it in line with the objective, but the resources required for the project, which already exceeded the objective, are even further out of line with the project expectations.
Exhibit 3: Plan trade-offs.
For projects where resources are the lowest priority, this tactic may be a good alternative. However, for projects with the priorities in Exhibit 2 this is probably not the best plan. It may be better to re-evaluate the specifications and propose a plan that achieves its deadline within budget but falls slightly short on scope. Some projects may find some of the requested requirements are “wants,” and not actually needed. Other projects may propose delivering the most valuable functionality on time, and delivering the rest in a follow-on project somewhat later. The analysis for such a scope reduction might result in a shift similar to what is seen in Exhibit 4.
Exhibit 4: Seeking the “best” plan.
In this case, changes proposed to the initial plan affect all three of the project parameters, with the most significant difference between the objective and the plan being some reduction in the feature set for the deliverable.
The overall objective of this exercise is to use “what if” analysis to explore the “state space” of possible projects, seeking the best alternatives to the initial plan. This analysis can reveal when it might be desirable, or even necessary, to revisit the project objective and change the project definition. For particularly ill-conceived (or too aggressively scoped) projects, the analysis may fail to turn up any options resembling the original objective. For such projects, you will need to negotiate a major change to the objective, abandon the project, or at least consider updating your résumé.
There may be many other variations you could consider, including modifying even the parameters that carry the highest priorities. Plan review and optimization may uncover a much better approach to the work than that offered by your first-draft plan.
Understanding Risk Consequences of Planning Trade-offs
Optimizing a plan can provide alternatives that better align with objectives, and may look a lot better. However attractive they may appear, such changes also generally come with increased risk that you will need to understand and manage. For example, the schedule compression shown for the project variant in Exhibit 3 will have a Gantt chart that looks very different from the original plan represented in Exhibit 1.
Using the “project compressor tool,” whether by crashing activities by providing more resources, reassigning contributors from less time-constrained work, delaying the start of noncritical tasks or other tactics will convert a project schedule from one with a fairly well-defined single critical path to one with several—each of which represents a project failure mode. Even activities that retain some flexibility in their timing will have less, so the overall project will be harder to manage and more likely to run into problems and issues.
Other tactics to pound plans into rough compliance with top-down objectives represent similar changes carrying additional risk. Plan optimization, in general, like aggressive scoping, is often a significant source of additional project risk.
On the topic of risk, one alternative planning idea that will generally reduce risk is to propose a series of shorter projects, having significantly reduced scope, budgets and timing. Adopting agile methods, when appropriate, can deliver value sooner (at least for the highest-priority features), provide opportunity for feedback and course corrections and remove risk—overall in many cases, but at a minimum within smaller projects.
Seeking Superior Projects
While on the subject of “what if” plan analysis, it may seem inappropriate to explore opportunities that could make a plan that is already out of sync with the overall goals even worse. There are good reasons for doing this, though, and they relate directly to both opportunity and risk management. During planning, it is a good idea to ask what similar, but superior, projects might be possible. Realizing halfway through the work that you could have achieved a more valuable result is not useful. It's too late at that point to do anything about it.
The sponsors, stakeholders and others who initiate projects may not be in the best position to see what is possible. During planning, you may come upon new technologies, methods or other possibilities that would result in a superior project. Adopting a better opportunity in such a case might also result in a more interesting, more motivating project that can enhance teamwork and provide development opportunities valued by contributors. Mostly, however, it helps ensure that you are not working on the wrong project.
It is also usually the case that the best course is to change the subject when you know you are going to lose an argument. Finding a better project can be a great way to do this and avoid being compelled to take on an over-constrained project that you know will not go well. An alternative to consider in the case shown in Exhibit 5 might be a project with a superior deliverable (such as having more general use, higher performance, better technology, reliability, functionality or other advantages), with timing and cost roughly in line with your initial planning.
Exhibit 5: An opportunistic plan.
All three parameters here exceed the original top-down goals, but the superior scope may provide more than adequate justification for the change. The main motivation for exploring opportunity-based alternatives is to increase the business value of the project.
Planning Risk Example
To pull a project completion date in to meet a deadline, the engineering development team plans to use a new simulator to test and debug circuits before building them. Setting up the simulator will be a new task, but as planned it is off the critical path. The expectation is that this will reduce the time estimated for fixing defects (which is time critical) by 10 days. The costs for this will be US$5,000 for the simulator and US$3,000 for an outside consultant to assist in setting up the simulation. There are expected advantages to this beyond the two weeks of schedule reduction. The additional new toy excites the engineering team and subsequent projects should be able to leverage the investment to improve their schedules as well. There will also be new risks:
- The setup may take longer than expected and delay the design work, making it critical and slipping the project.
- The consultant might be incompetent or the cost more than estimated.
- The time saved in fixing design defects could be less than 10 days, perhaps even zero.
- Work in parallel with testing, formerly noncritical, is now on the critical path, adding a new chance for slippage.
Dealing with “Self-inflicted” Risk
As the shape of a plan you intend to baseline comes into focus, carefully examine all the changes you intend to make to “improve” it. Be skeptical of assumptions about changes that increase the complexity of the work or density of the plan. Take note of all new schedule exposures created when compressing schedules from activities where underestimates will slip the project deadlines. Also note cases where increased cost, effort or other resource usage could have a significant impact on the overall budget, and make note of any other new exposures. Note the consequences in your risk register for any plan alternatives you are seriously considering. You will need to either plan responses for all significant new risks, or back the “improvements” out of your plans to avoid them.
“Positive Risk” Having Potential Benefits
The third type of project opportunity (and the one highlighted in Chapter 11 of A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Fifth Edition) involves beneficial uncertainties associated with planned activities. Because of the aggressive objectives and “best case” scenarios used to set objectives for most projects, uncertainties concerning the work tend to skew heavily toward adverse consequences. Nonetheless, there could be at least a few potentially beneficial uncertainties intrinsic to your projects. These opportunities may reduce overall project risk, and serve as risk “sinks.”
Event Uncertainty Carrying Upside as Well as Downside
The best way to capture most project estimates is with ranges. It is difficult or impossible to determine most project cost, effort, duration or other estimates with precision, so range, three-point or other techniques that provide “error bars” around your expectations will always be more representative of what you really know. Realistic range estimates tend to have very little variance on the beneficial side. Most “best case” estimates are mostly wishful thinking, and very few will actually happen on most projects due to Parkinson's Law (“Work expands to fill the time available.”) and other factors. Some, however, will probably contain some variance in your favor. Even these, however, will continue to also have a downside, because they also still retain their “worst case” scenarios.
Maximizing Benefits and Minimizing Losses
For project uncertainties with both upside (opportunity) and downside (threat) risk, work to develop credible estimates describing both risks. When assessing uncertain opportunities, develop an unambiguous scenario that supports the estimated gain. For most projects, there are far fewer uncertain opportunities than threats, and the consequences represented by threats and opportunities are far from symmetric.
In addition, it may not be to your advantage to make upside uncertainties visible to your stakeholders. If you manage them quietly, you can take credit if they occur. If your stakeholders are aware of them, the most likely recognition you will get will be complaints if the benefits fail to materialize. It's often said, “Success has many fathers, while failure is an orphan.” Whenever things work out better than expected, everyone in sight will claim credit. When things go badly (or fail to go well), the project team will be left standing alone.
Benefiting from uncertain project opportunities involves embracing “positive risk” situations. The tactics are similar to those used for threats, but they are reversed (you want to realize the consequences, not minimize them). In responding to beneficial uncertainties, you would exploit rather than avoid them, enhance rather than mitigate them, and share rather than transfer them. As with the other types of opportunity management, these responses generally involve choices. Choices and decisions, including those involving uncertain opportunities, may require trade-offs and affect other aspects of your project.
Potentially Beneficial Risk Example
An example of an uncertain opportunity might involve purchasing something needed by the project that occasionally goes on sale. Once you identify the possibility of buying the item at a reduced price, managing this “risk” requires you to consider ways to take advantage of a possible lower price. (Of course, prices that can go down can also rise, as anyone who watches the fares for air travel these days knows well.)
One possibility might involve re-planning the project to exploit the opportunity. You could investigate planned upcoming sales and schedule your purchase around it. Even in the absence of an announced sale, you can enhance your plan by making a lower-priced purchase more likely. You could time your purchases by researching history to find the dates for last year's sales on the theory that that is when such a sale would be most likely this year. And sometimes the strategy involves strength in numbers. Uncertain opportunities may be improved if shared. Cost reductions for purchased items comparable to a sale might be available if you can find others with similar needs and make purchases together to take advantage of favorable quantity pricing.
Managing Uncertain Opportunities
Spend time when identifying project risks to assess any uncertainties that could affect your work positively, and include the beneficial consequences (as well as any potentially adverse ones) when listing them in your risk register. When you find useful opportunity situations among your project risks, adjust your plans to make realizing the benefits more certain.
Opportunity and Risk Management
Managing project opportunities includes (at least) setting goals for projects based on compelling business cases, adjusting project plans to align with overall objectives and working to realize potential benefits that might or might not occur. In all three cases, risk is a significant part of the picture.
Setting Credible Goals
Project objectives are set based on business cases that stress opportunities, often very tenuous ones, over reality. Ideally, project business cases should be based on credible expectations of value and realistic estimates, not wishful thinking and wildly optimistic guesses.
Effective project management must detect and push back on outlandish assumptions and constraints that will result in failed, underperforming projects.
Creating Realistic Plans
As project planning proceeds, project teams develop options for adjusting the work to pull in schedules and make other changes to better align with overall goals. Although many of these ideas are reasonable and should become part of the project plans, many inject significant risk into the work. As you work to optimize plans to meet top-down objectives, capture all associated or new risks. Assess and respond to any significant exposures associated with optimized plans, and ensure that you are not creating a plausible-looking but ultimately doomed plan.
Managing Uncertain Opportunities
When identifying project uncertainties, scan for possible upside benefits. Be skeptical of what you find, but when there are actions you can incorporate into your plans to benefit from uncertainties, take advantage of them.
Project opportunity management is central to good project management. Pushing it too far, however, can increase project risk significantly, because increasing the opportunity of an undertaking often results in a corresponding increase in overall risk. To ensure project success, work to align reasonable opportunity with appropriate levels of risk.
Kendrick, T. (2015). Identifying and managing project risk (3rd ed.). New York, NY: AMACOM.
Project Management Institute. (2013). A guide to the project management body of knowledge (PMBOK® guide) – Fifth edition. Newtown Square, PA: Author.
© 2015, Tom Kendrick
Originally published as a part of the 2015 PMI Global Congress Proceedings – Orlando, Florida, USA
This standard focuses on the “what” of risk management, including: core principles; fundamentals; and life cycle.