Use a risk breakdown structure (RBS) to understand your risks
Introducing the Risk Breakdown Structure (RBS)
The risk management process aims to identify and assess risks in order to enable the risks to be understood clearly and managed effectively. The key step linking identification/assessment of risks with their management is understanding. This is, however, the area where the project manager or risk practitioner gets least help from current guidelines or practice standards. There are many commonly used techniques for risk identification (see, for example, the risk management chapter of A Guide to the Project Management Body of Knowledge (PMBOK® Guide, Project Management Institute, 2000). These identification techniques, however, tend to produce an unstructured list of risks that often does not directly assist the project manager in knowing where to focus risk management attention. Qualitative assessment can help to prioritize identified risks by estimating probability and impacts, exposing the most significant risks; but this deals with risks one at a time and does not consider possible patterns of risk exposure, and so also does not provide an overall understanding of the risk faced by the project as a whole.
In order to understand which areas of the project might require special attention, and whether there are any recurring risk themes, or concentrations of risk on a project, it would be helpful if there were a simple way of describing the structure of project risk exposure.
In any situation where a lot of data is produced, structuring is an essential strategy to ensure that the necessary information is generated and understood. The most obvious demonstration of the value of structuring within project management is the Work Breakdown Structure (WBS), which is recognized as a major tool for the project manager because it provides a means to structure the work to be done to accomplish project objectives. The Project Management Institute defines a WBS as “A deliverable-oriented grouping of project elements that organizes and defines the total work scope of the project. Each descending level represents an increasingly detailed definition of the project work” (Project Management Institute, 2000, 2001). The aim of the WBS is to present project work in hierarchical, manageable and definable packages to provide a basis for project planning, communication, reporting, and accountability.
In the same way, risk data can be organized and structured to provide a standard presentation of project risks that facilitates understanding, communication and management. Several attempts have been made previously to organize various aspects of project risk, mostly concentrating on the sources from which risk arises. However, most of these are simple linear lists of potential sources of risk, providing a set of headings under which risks can be arranged (sometimes called a risk taxonomy). Examples include a generic risk taxonomy (Carter et al., 1994), and specific versions for construction projects (Akintoye & MacLeod, 1997), large projects (Jaafari, 2001), and international development projects (Kwak, 2001), as well as lists of risk categories or risk types in international standards and guidelines (for example, Godfrey, 1996; AS/NZS 4360:1999; BS6079-1:2000; IEC62198:2001).
A simple list of risk sources does not provide the richness of the WBS since it only presents a single level of organization. A better solution to the structuring problem for risk management would be to adopt the full hierarchical approach used in the WBS, with as many levels as are required to provide the necessary understanding of risk exposure to allow effective management. Such a hierarchical structure of risk sources should be known as a Risk Breakdown Structure (RBS). Following the pattern of the WBS definition above, the RBS is defined here as “A source-oriented grouping of project risks that organizes and defines the total risk exposure of the project. Each descending level represents an increasingly detailed definition of sources of risk to the project.” The RBS is therefore a hierarchical structure of potential risk sources. The value of the WBS lies in its ability to scope and define the work to be done on the project; similarly the RBS can be an invaluable aid to understanding the risks faced by the project. Just as the WBS forms the basis for many aspects of the project management process, so the RBS can be used to structure and guide the risk management process.
Examples of RBS Structures
Some authors and practitioners have gone further in structuring risk than simply listing types of risk faced by a project. These have produced hierarchical structures under various names to describe sources of risk, or risk categories or types, though these are usually focused on a particular project type or application area. Examples include the “risk taxonomy” for software development projects from the Software Engineering Institute (Dorofee et al., 1996), a “risk identification list” for an extra high voltage transmission line construction project (Tummala & Burchett, 1999), a “risk identification breakdown structure” for construction projects (Chapman, 2001), and a “risk-based taxonomy” for large engineering projects (Miller & Lessard, 2001). Each of these structures contains three or four hierarchical levels to describe the types of risk faced by the project in question. Exhibits 1 and 2 present two of these examples.
A more general approach was taken in the Universal Risk Project undertaken jointly by the Risk Management Specific Interest Group of the Project Management Institute (PMI Risk SIG) and the Risk Management Working Group of the International Council On Systems Engineering (INCOSE RMWG), which produced a structured list of “universal risk areas” that might apply to any type of project in any sector of industrial, government or commercial activity (Hall & Hulett, 2002). This structure is summarized in Exhibit 3.
This author has also produced specific RBS structures for consultancy clients in various industries with different project types, including defense software development, energy supply, pharmaceutical vaccine development, construction management, general engineering, and telecommunications.
Each of these RBS structures is different, reflecting the range of possible sources of risk exposure for projects in various sectors and industries. It is therefore necessary for any organization wishing to use the RBS as an aid to its risk management to develop its own tailored RBS. The more generic versions mentioned above might be used as a starting point, but these are unlikely to include the full scope of possible risks to every project, so they must be modified accordingly. An organization may wish to produce a single generic RBS covering all its projects, or there may be several different RBS structures applying to particular project types. Large projects may require their own specific RBS.
How to Use the RBS
Once an organization or project has defined its RBS, it can be used in a variety of ways. Some of these facilitate the risk management process on a particular project, while others are relevant across projects. The main uses and benefits of the RBS are outlined in the following paragraphs.
Risk identification aid. The upper levels of the RBS can be used as a prompt list to ensure complete coverage during the risk identification phase. This is accomplished by using the RBS to structure whichever risk identification method is being used. For example, a risk identification workshop or brainstorm might work through the various elements of the RBS, perhaps at the first or second levels, encouraging participants to identify risks under each of the RBS areas. Similarly, the RBS major areas can be used to structure risk identification interviews, providing an agenda for discussion between the facilitator and interviewees.
A risk identification checklist can also be developed based on the RBS, by taking each of the lowest RBS levels and identifying a number of generic risks in each area based on previous experience. Future projects can then determine whether each generic risk applies, answering “Yes,” “No,” “Don't know,” or “Not applicable.”
In addition, the RBS can be used to structure lists of risks identified by other methods, by mapping identified risks into the lowest levels of the RBS. This reveals possible gaps or blind spots in risk identification, and exposes any double counting or duplication. It can determine whether the risk identification method has considered all potential sources of risk, and indicate whether additional risk identification activity is required.
Using the RBS to structure the risk identification task provides assurance that all common sources of risk to the project objectives have been explored, assuming that the RBS is complete. The danger that this assumption is incorrect can easily be overcome by including a short additional risk identification effort for “Other risks” not covered by the RBS.
Risk assessment. Identified risks can be categorized by their source by allocating them to the various elements of the RBS. This then allows areas of concentration of risk within the RBS to be identified, indicating which are the most significant sources of risk to the project. This can be determined by simply counting how many risks are in each RBS area. However a simple total number of risks can be misleading, since it fails to take account of the relative severity of risks. Thus one RBS area might contain many risks that are of minor severity, whereas another might include fewer major risks. A better measure of risk concentration within the RBS is therefore a “risk score” of some sort, based on the scale or size of each individual risk. A common method is the P-I Score, where numerical scores are associated with rankings of probability (P) or impact (I), then multiplied to give a combined value reflecting both factors. The risk management chapter of the PMBOK® Guide describes one such scoring scheme based on probability and impact (Project Management Institute, 2000). Concentration of risks within the RBS areas can then be assessed by comparing the total “risk score” for those risks within each area. This is likely to give a more meaningful perspective than a simple total count of risks, indicating which RBS areas are giving rise to more risk to the project.
Categorizing risks according to the RBS provides a number of additional insights into the assessment of risk exposure on the project, which would not be available from a simple list of risks, even if the list were prioritized. These include:
• Understanding the type of risk exposure on the project
• Exposing the most significant sources of risk to the project
• Revealing root causes of risk, via affinity analysis
• Indicating areas of dependency or correlation between risks
• Focusing risk response development on high-risk areas
• Allowing generic responses to be developed for root causes or dependent groups of risks.
Comparison of projects or tenders. Risk exposure on different projects or competing tenders can be directly compared since the RBS presents a common framework. The RBS allows risks identified on each project or tender to be structured in the same way, permitting direct comparison. In the case of tender evaluation, risks can be identified for competing tenders and then structured using a common RBS. Instead of trying to compare unstructured lists of risks for each tender, the amount and types of risk associated with each option are presented in a consistent format, allowing the relative risk exposure to be considered when the preferred tender is being selected. Similarly the risk exposure of individual projects within a related program or portfolio can be compared using a common RBS to allow them to be prioritized or ranked on the basis of their associated risk exposure, or to permit construction of a risk-balanced portfolio.
Risk reporting. The RBS can be used to roll-up risk information on an individual project to a higher level for reporting to senior management, as well as drilling down into the detail required to report on project team actions. Reports to senior management may include total numbers of risks or total risk score in each higher-level RBS area, perhaps with metrics or trend analysis presented graphically. Project teams can also be notified of risks within their part of the project, by selecting relevant RBS areas for each team member.
The RBS can also be used to provide cross-project or multiproject reports to senior management, since it provides a consistent language for risk reporting, removing or reducing the potential for misunderstanding or ambiguity between projects. Risks within the same RBS area can be directly compared across projects since it means the same for all projects. This can be further enhanced by using an RBS-based numbering scheme to identify risks.
Lessons learned for future projects. One of the most difficult tasks in the post-project review is to structure the information so that it can be referenced and used by future projects. Many organizations lose the benefits of such reviews since the information is not held in an accessible format. The RBS can provide a common format for analyzing risk-related information from each post-project review. An RBS-based analysis will reveal risks that occur frequently, allowing generic risks to be identified and recorded for future reference, together with effective responses. If routine analysis of post-project reviews indicates that a particular risk is occurring repeatedly, then preventative responses can be developed and implemented. Risk identification checklists can also be updated and maintained to include common or generic risks exposed by an RBS-based analysis of post-project review data.
Conclusion and Summary
Successful and effective risk management requires a clear understanding of the risks faced by the project and business. This involves more than simply listing identified risks and characterizing them by their probability of occurrence and impact on objectives. The large amount of risk data produced during the risk process must be structured to aid its comprehension and interpretation, and to allow it to be used as a basis for action. A hierarchical Risk Breakdown Structure (RBS) framework similar to the WBS provides a number of benefits, by decomposing potential sources of risk into layers of increasing detail. The RBS is a powerful aid to risk identification, assessment and reporting, and the ability to roll-up or drill-down to the appropriate level provides new insights into overall risk exposure on the project. A common language and terminology facilitates cross-project reporting and lessons learned. The RBS has the potential to become the most valuable single tool in assisting the project manager to understand and manage risks to his project. The approach outlined in this paper shows how to use the RBS to gain these benefits.
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Proceedings of the Project Management Institute Annual Seminars & Symposium
October 3–10, 2002 • San Antonio, Texas, USA