Perfect StormReality and Risk, Reward and Regret

in

Complex Project Environments

PMOZ 2010, Brisbane, 23 – 26 August 2010

Terry McKenna CDipAF MBA MProjMgt PMP

contents

r e f r a m i n g r e a l i t y a m i r r o r o f o u r a s s u m p t i o n s a c c o m m o d a t i n g s t a k e h o l d e r p e r s p e c t i v e s i n p r o j e c t s

c o m p l e x i t y r u l e s p r o j e c t s : i n t h e e y e o f t h e ( p e r f e c t ) s t o r m c o m p l i c a t e d o r c o m p l e x ?

a d i f f e r e n t l o o k a t r i s k r e c o g n i s i n g r i s k r i s k , r e w a r d & r e g r e t

m a n a g i n g r i s k a s s u m p t i o n s a n a l y s i s s e e i n g c o m p l e x i t y : a n a l y s i s o f r i s k i n t e r d e p e n d e n c i e s r i s k c o n t a i n m e n t : s o u r c e a n d s c o p e

2

Environment

Financial Markets

Globalisation

Security

HOT RISK

It’s impossible to ignore the dominant impact of Risk in business and investments....and in a projectised world, projects are at the Epicentre of Risk

So, the challenge is to confront our conventional perspective of projects... 3

“Epistemic Object”

“Eco-System”

“Static”

“Dynamic”

Scope

Project Identity

Envi

ron

men

t Id

enti

tyProjects are

Evolutionary (changing the

Triangle)

Multiple characteristics

Ruled by “Iron Triangle”

Complexity rules

[Project well defined and bounded]

[Project part of a greater

world]4

complicated

Many, but finite, combinations and permutations

or

Component relationships (cause and effect) understood

Ability to accurately model and validate

Component relationships (cause and effect) unclear

Infinite, unknown combinations and permutations

Hypothesis-based models / simulations

complex?

Deductive thinking Inductive thinking

Rule-driven Behaviour-driven

5

Complicated

Complex

Invalidatedassumptions

IncreasedUnderstanding

Complicated system can become ‘complex’ as the assumptions constrain our interpretation...

... Some “complexities” become ‘merely’ complicated as our understanding grows

complicated or complex?

Similarily, Project Management is emerging to cope with complexity... 6

SCRUM (from Software

Engineering) recognizes the

distinction between

‘Complicated’ and

‘Complex’, driven by

degrees of uncertainty

(technology) and ambiguity

(requirements)...

Source: http://lostgarden.com/2006/04/managing-game-design-risk-part-i.html

c o p i n g w i t h complex i t y

7

HOW to Implement Objectives

WH

AT

Ob

ject

ives

a

re t

o b

e A

chie

ved

UnclearClearUnclear

ClearAdapted from CCPM/DMO Complex Project Managers Standard Version 2.0 (2006)

Domain of “Complexity”

in the work of project

management, the CCPM

and DMO recognise that

“complex” projects are

different...

...but is this always ‘complex’ or

merely ‘highly complicated’...

c o p i n g w i t h complex i t y

8

Shenhar and Dvir (2007)

anticipate the need for a

‘new model’ for managing

projects...

...evaluating them on their

performance/characteristics.

c o p i n g w i t h complex i t y

Technology

Co

mp

lexi

ty No

velty

Pace

Lo-Tech

Medium-Tech

High-Tech

Super-High-Tech

Regular

Fast/competitive

Time-critical

Blitz

Shenhar, A.J. & Dvir, D. (2007), Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation, Harvard Business School Press : Boston, MA.

9

Subjective

r e f r a m i n g rea l i t yin a complex world, project “reality” becomes:

Ambiguous

For Risk Managers, the challenge is todetermine the ‘reality’ in the eyes of thestakeholders...

The lack of evidence of something is notconclusive proof of its non-existence...

We need to focus upon recognising risks inthis reality...

...a ‘mirror of our assumptions’

10

re c o g n i s i n g RISKtraceable origins of the word “risk” give pointers to its two sides:

•early italian:

“risicale”, to dare

•arabic: ,"rizk", to

seek propensityThese two perspectives arecritical to appreciating thediversity of stakeholderinterests when addressingrisk...

11

“risk” is not necessarily the same as “uncertainty”-as...

re c o g n i s i n g RISK

• it is dependent upon level of interest – we don’t care about uncertainty unless it is relevant to us

• risk is measureable, true uncertainty is not (Knight)

In our complexenvironment, how do we filter‘risk’ amongst‘uncertainty’?

12

u n d e rs ta n d i n g RISK“reward” and “regret” are perspectives of a given risk

• there are always ‘winners’ and ‘losers’...

do we understand the risks in relation to projectstakeholders’ willingness to takethem on board?

• “degrees of belief” in probability of future outcomes

• priority: ‘probability’ vs ‘impact’: worried more about the catastrophic ‘black swan’ or the more likely, lower-impact event

• risk “utility” – net gain (reward) or loss (regret)

• for each stakeholder, consider their...

13

r i s k , reward and regre t

“Regret is the amount of self-

insurance we can tolerate...a cut-

off point below which we simply

cannot bear the consequences of

a wrong decision.” Dembo, R.S. & Freeman, A. (1998), The Rules of Risk: A Guide for Investors, John Wiley & Sons : New York, NY; p. 77.

Attitude to reward and regret will be influenced by...Marginal benefit / utility: upside or downside relative tocurrent situation

Risk “portfolio”: consideration of project “liquidity” – arethere sufficient reserves to cover total exposure, i.e.

(P(rN) *I(rN)) 14

We look to trends and

patterns from past

events as portents for

future outcomes.

“The

Commanding

General is

well aware that the

forecasts

are no good.

However, he

needs them

for planning

purposes.”

Arrow (1992)

Bust of Janus, Vatican Museum

But in a complex world, why do we rely so very heavily

upon the past as a reliable predictor to the future?

m a n a g i n g RISK

15

Unknown Unknowns

Known Knowns

Known Unknowns

Unknown Knowns

RISK UNDERSTANDING

RIS

K A

WA

REN

ESS

m a n a g i n g RISK“There are known knowns.

These are things we know that

we know. There are known

unknowns. That is to say, there

are things that we now know we

don’t know. But there are also

unknown unknowns. These are

things we do not know we don’t

know...”

Donald Rumsfeld , February 2002

Perform ‘due diligence’

Treat as Active Issues

Undertake Discovery Process

Active Risk Management

Rumsfeld’s words won him Britain’s “Foot-in-Mouth Award”, but they are an(in)articulation of the importance of riskawareness and understanding...

...situational awareness is vital inknowing what to do....

16

in our ‘conventional’ Risk

Management approaches, we

expect phenomena to behave

‘normally’ over time...

Law of Large Numbers

Independent Observations

Experiments by Sir Francis Galton (1822-

1911) with seed sizes c.1875 demonstrated

nature’s propensity for normal distributions and ‘regression to the mean’.

+1 +2 +3-3 -2 -3

results from a large number oftrials should be close to theexpected value (mean), and willtend to become closer as moretrials are performed.

...but in a Complex Worldwe struggle to find big enough sample(‘same’ event) to achieve real ‘statisticalsignificance’ (p>=0.95) or “moralcertainty”?

‘mean’ indeterminate or moving over time

each ‘observation’ or event isindependent of others.

each ‘observation’ or event of interest isthe culmination of other events and/orinterdependent upon others .

&Regression to

the Mean

m a n a g i n g RISK

17

a s s u m p t i o n s ana lys is...we make assumptions

about future events

Without a crystal ball, assumptions aboutthe future are largely guesswork if wecannot control the circumstances whichunderpin them......

Low

HighC

RIT

ICA

LITY

TIME

L

con

tro

llab

ility

assumptions should be evaluated in terms of

• sensitivity: how sensitive our project is to a change in the assumption

• stability: how stable will the assumption be over time

D

C

B

A

A B C D

STA

BIL

ITY

SENSITIVITY

www.de-risk.com

resulting risks should be evaluated in terms of

• criticality: is the risk a ‘show-stopper’?

• controllability: how effectively can we control the risk

• urgency: time-sensitivity of the risk 18

Organisational Interfaces

Delivery Approach

Governance / Engagement

Delivery Capability

c o n ta i n i n g RISK

RISK SOURCE

RIS

K S

CO

PE

ExternalInternal

Syst

emic

Spec

ific

Risks can be assessed and

contained through

understanding their

scope and

source, relative to the

project boundaries

however, in a complex world, withfuzzy boundaries, therelationships, or inter-dependencies, between risks needto be assessed...

19

Probability Impact Timing Proximity

Probability Amplifier – Increase in P(c)

results in increase in P(e).

Impact Accentuator – Increase in I(c) results in increase in sensitivity of P(e).

Amplifier – Increase in I(c)

results in increase in I(e). Accentuator – Increase in I(c) increases sensitivity of I(e).

Accentuator – Increase in I(c) results in increase in sensitivity of T(e).

Timing Proximity

Amplifier – Increase in T(c)

results in increase in P(e). Amplifier – Increase in T(c)

results in increase in I(e). Accelerator – Increase in T(c) results in increase in I(e).

Occurrence Amplifier – Occurrence of Risk(c) results in increase in P(e).

Amplifier – Occurrence of Risk(c) results in increase in I(e).

Accelerator– Occurrence of Risk(c) results in increase in T(e).

Ch

ange

to

Cau

sal R

isk (

c)

Impacts upon Effected Risk(e)

Causal Risk(c) Influence Explanation of Impacts upon Effected Risk(e)

Amplifier A change in Risk(c) has an amplifying effect upon Risk(e).

Accentuator A change in Risk(c) increases the sensitivity of characteristic(s) of Risk(e) - draws attention to the probability or impact of the Effected Risk(e)

Accelerator A change in or occurrence of Risk(c) accelerates the timing of eventuation of Risk(e)

A R I d : a s s e s s m e n t o f r i s k i n t e r - d e p e n d e n c i e s

Assessment of RiskInter-dependencies(ARId) is a techniquewhich focuses uponunderstanding howchanges in risks have apotentially cascadingeffect upon other risks

20

A R I d : a s s e s s m e n t o f r i s k i n t e r d e p e n d e n c i e s

ARId exampleapplied to thetechnologyportfolio of Asia-Pacific financialinstitution

21

re-cap

r e f r a m i n g r e a l i t y

c o m p l e x i t y r u l e s

a d i f f e r e n t l o o k a t r i s k

m a n a g i n g r i s k

complexity has many expressions, reflected in financial, environmental, technological, and political environments

projects often find themselves in the eye of the Perfect Storm

project management is evolving rapidly in response to the challenge of dealing with complexity

re-thinking ‘reality’ in terms of being ambiguous and subjective

this impacts how we address risks

uncertainty is not (necessarily) the same as risk

duality of risk – reward and regret

understanding stakeholders’ risk attitudes

knowing what we know and don’t know, and responding accordingly

assumptions analysis - beyond the crystal ball

seeing complexity: analysis of risk interdependencies

risk containment: source and scope 22

Indebted tod. apgark. baxterp. l. bernsteinr.s. dembo & a. freemana. shenhar & d. dvirn.t. taleb

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Phone: +61 (0)414 654 459

E-mail: terrym@startprojectmanagement.com

Perfect Storm: Reality and Risk, Reward and Regret

In Complex Project Environments

Terry McKenna CDipAF MBA MProjMgt PMP