May 2005CSC
Excellence In Risk Management
Traditional
Project
Risk
Management
Time
Cost Quality
+ =
Optimized
Value
Fit for
Purpose
Continuous
ImprovementBreakthrough
Thinking
“Pick any Two”
Project Management Mantras
=+
CSC Works with the Project Team to maximize the Project value by
testing strategies to find the optimum.
May 2005CSC
Excellence In Risk Management
Risk Management provides accountability for corporate governance and maximizes shareholder value.
• Strategic Options are quantified and compared on a value basis.
• Budgets and performance targets are set at appropriate confidence
levels.
• Contingency and Mitigation plans are identified and explored.
• All sources of risk and opportunity are identified.
• The most important risks and their impacts are communicated.
Modern Day Applications of Risk Analysis
May 2005CSC
Excellence In Risk Management
CSC has developed a Risk and Decision Analysis Process that has
been applied to a variety of decisions that are made in an uncertain
environment.
• Asset Portfolio selection & management.
• Strategic examination and selection of project development alternatives.
• Full cycle economic risk analysis for defined projects with sensitivity and
mitigation alternatives examined.
• Tactical planning for project execution including contingency planning for
potential or occurring events.
• Corporate strategic planning and business case development.
• Merger and acquisition target identification.
• Merger and acquisition pricing, return analysis and integration planning.
• Project and venture team performance analysis.
May 2005CSC
Excellence In Risk Management
Strategic / Tactical Alternatives
Range Estimating
Qualitative Analysis
Outside the Box Risks
Conditioning Variables (Corporate, Regulatory, Market)
External / Event Driven Risk
Integrated Modeling (Cost & Schedule)
A properly conducted risk analysis builds on the early tools used for qualitative analysis
(KT, SWOT), and range estimating to include all the risk & opportunity impacts on a
project or decision.
Full Cycle Analysis (Revenue, Production, OPEX, Finance)
Co
mp
rehen
sive R
isk E
nv
elop
e for d
ecision
mak
ing
May 2005CSC
Excellence In Risk Management
Full
None
Planning Definition Execution Start Up
Ab
ilit
y to
in
flu
ence
th
e o
utc
om
es
Under any execution strategy, the ability to influence the outcome is significantly
reduced as the project advances.
Risk Management
Closure
The earlier a risk analysis is done, the greater the benefits that can be achieved.
May 2005CSC
Excellence In Risk Management
Planning Definition Execution Start Up
Ab
ilit
y to
in
flu
ence
th
e o
utc
om
es
Full
None
In addition, the sooner mitigation strategies are applied, the lower their overall cost
Risk Management
Closure
Early mitigation steps are generally more effective and require less cost.
Co
st o
f M
itig
ati
on
Ste
ps
High
Low
May 2005CSC
Excellence In Risk Management
Cold Eyes Review
Team Involvement
Project Team Involvement
Operations Team Involvement
Risk Contractor
Involvement
Risk Management Process
An effective Risk Management plan must re-evaluate the risks on the project
and their impacts throughout the project life cycle. Each phase of the risk
analysis involves a different focus and a different mix of disciplines.
Strategic
Planning
Project
Definition
Project
Financing
Mid-
Construction
Project
Start Up
Year 1
Full
Operations
Project
Execution
Corporate Planning
Involvement
StrategicTactical
May 2005CSC
Excellence In Risk Management
CSC’s Risk Analysis Process proceeds in a systematic sequence
1Frame
TheProblem
2Develop
AnalysisBasis
3Evaluate
TheRisks
4Interpret
TheResults
Risk
Management
Recycle to Focus on
Most Important Risks
DevelopAlternativeStrategies.
Identify allImportant Sources ofUncertainty.
Model how underlyinguncertaintiesinteract to influence outcomeson the Project.
Identify the Experts in eachof the uncertainvariables.
Assess the impact and theprobability ofoccurrence foreach uncertainvariable.
Calculate the uncertainty inthe key resultmeasures.
Quantify therisk & return for each scenario.
Analyze anddocument theresults.
Identifypreemptiveactions.
Developcontingencyplans.
Recommendedactions.
5
May 2005CSC
Excellence In Risk Management
“Framing the problem” is often the most difficult but
most valuable step in the process
• Project scope, basic assumptions, and cost & schedule milestones
are identified.
• Strategic alternatives and logical development paths are identified, and
decision criteria are defined.
• All project decisions (both made and not made), and the logical
links between decisions, are identified.
• All risk issues and their potential impact areas for the project are identified.
• Three graphical techniques are used during the framing step.
• The Strategy Table - clearly lays out the strategic alternatives to be analyzed.
• The Influence Diagram - illustrates relationships between the variables and the key results.
• The Decision Map - illustrates all the decisions that need to be made and their timing.
May 2005CSC
Excellence In Risk Management
Project Strategy Table
Base Plan
Sensitivity
Alternate
Project
Size
Cogen Water
Source
OperationsLogistics
Building
Schedule
None
Phased
4 x 25
Start
@ 100
Step
25 + 75
1 - 80 MW
2 - 60 MW
No Cogen
Ground
Water
River
Water
Plant
Water
Pre-
Build
None
Support
50 kb/d
Support
100 kb/d
Access
Direct
Route
Indirect
Route
OperatingPhilosophy
Site
Control
Plant
Control
Central
Control
Drive w/
Camp
Fly w/o
Camp
Drive w/o
Camp
Match
Cash
Flow
Fast Track
Expand
1 Year
Early
May 2005CSC
Excellence In Risk Management
The Influence Diagram shows how the risks influence each other and their impact
on the project. Correlations between variables must be properly captured.
Conditioning
Variables
Impact
Variables
Results
CapitalCost
CapitalCost
MaterialRates
MaterialRates
OrganizationalPerformance
OrganizationalPerformance
RegulatoryEnvironment
RegulatoryEnvironment
CompetingProjects
CompetingProjects
ProductivityRates
ProductivityRates
RegulatoryDelays
RegulatoryDelays
OperatingCosts
OperatingCosts
LabourAvailability
LabourAvailability
ScopeChanges
ScopeChanges
WeatherDelays
WeatherDelays
ContractorRates
ContractorRates
ContractorDefault
ContractorDefault
OperatingRevenue
OperatingRevenue
ScheduleSchedule
NPVNPV
May 2005CSC
Excellence In Risk Management
CSC’s Risk Analysis Process proceeds in a systematic sequence
1Frame
TheProblem
2Develop
AnalysisBasis
3Evaluate
TheRisks
4Interpret
TheResults
Risk
Management
Recycle to Focus on
Most Important Risks
DevelopAlternativeStrategies.
Identify allImportant Sources ofUncertainty.
Model how underlyinguncertaintiesinteract to influence outcomeson the Project.
Identify the Experts in eachof the uncertainvariables.
Assess the impact and theprobability ofoccurrence foreach uncertainvariable.
Calculate the uncertainty inthe key resultmeasures.
Quantify therisk & return for each scenario.
Analyze anddocument theresults.
Identifypreemptiveactions.
Developcontingencyplans.
Recommendedactions.
5
May 2005CSC
Excellence In Risk Management
ProbabilityDistributions
Tornado DiagramsStep Diagrams
Interview Issues Model and Test Options
Scheduled, Formal ReviewsUpdated Model Results
(Probabilities, Tornados, Steps)
Management Risk Reporting
Base Design
& Operating Plans
Contingency Plans
Risk
Monitoring System
Project Targets Immediate Risk
Control Measures
Risk Analysis
Risk Analysis is the centerpiece of a Risk Management Process
There are four key outputs from a comprehensive Risk Analysis
May 2005CSC
Excellence In Risk Management
The probability distribution illustrates the full
range of project uncertainty and is used to set the
project targets at appropriate confidence levels.
*Expected
Value
10/90 Range
CAPEX, Schedule, OPEX, etc.
90%
50%
10%
Note:1. Each point on the curve is a result from
a single Monte Carlo trial. The expected
value represents the average value of all
the trials.
2. The slope of the 10/90 range represents
the uncertainty, the flatter the curve, the
more uncertainty.
3. The curve below the expected value
indicates upside opportunity, the
portion above shows the downside risk.
Pro
ba
bil
ity
Project Targets
P80 (?) Confidence Level
Upside
Opportunity
Downside
Risk
May 2005CSC
Excellence In Risk Management
*
Project Production (or NPV, ROCE, ROR)
90%
50%
10%
Pro
ba
bil
ity
Upside
Opportunity
Downside
Risk
Probability distributions illustrate opportunity and risk trade-
offs, and can be used to select the best project option.
Option B
Expected
Value
Option A
Project Targets
Option B has slightly more risk
with a much greater upside
opportunity.
May 2005CSC
Excellence In Risk Management
-60 -40 -20 0 20 40 60Start Date
EV = 20-Dec-07
Days
The tornado diagram identifies and ranks the key project
risks and is a tool that helps the project team to focus on the
most important drivers.
Road Preparation Duration 3 6
Labour Productivity Delays -1.25 1.75
Plant Pad Preparation Duration 3 6
Labour Unrest Delays 0 2.3
Execution Organization Performance Best Worst
Regulatory Duration 11.3 16.5
Competing Project Environment Low Heated
Start-up & Commissioning Duration (Early Steam) 1.5 2.4
Terms of Reference - Duration 3 4
Regulatory Environment Relaxed Stringent
Terms of Reference - Application Date 1-Aug-02 1-Oct-02
Labour Availability Delays 0 1.4
OTSG Manufacture & Delivery Duration 12 16
Weather Delays 0 0.5
Long Lead Equipment Delays -1 2
Immediate Risk Control Measures
May 2
005
CS
CExcellence In Risk Management
15-A
ug
-07
1-S
ep-0
7
15-S
ep-0
7
1-O
ct-07
15-O
ct-07
1-N
ov-0
7
15-N
ov
-07
01-D
ec-07
15-D
ec-07
01-J
an
-08
AFE Approval
+6
Engineering to 60%
+1
3
Preliminary Vendor Data
+7
Module Steel Fabrication
0
Module Pipe
Fabrication Duration
0
Rack/ Process
Module Assembly
-3
Last Process Area Module
On-site to Construction
Complete
0
Evaporator Units
0Vapour Compressors 0
Site Prep Duration
+1
Piling
-8
Commissioning Duration
+1
4
Start-up Duration
-3
Construction Duration
+3
1
Materials Delivery
+5
Weather Delay
+5
Labour Issues
+1
2
Long Leads
Complete to MC
+1
4
Design definition Changes
+5
Labour Productivity
+1
0
Reworks
+3
Sta
rt Date
Base=
03-S
ep-0
7
EV
= 2
0-D
ec-07
Th
e Step
Dia
gra
m d
emon
strates w
here th
e gro
wth
from
the
base estim
ate to
the E
xpected
Valu
e occu
rs, an
d id
entifies k
ey
facto
rs impactin
g th
e cost.
Imm
edia
te Risk
Con
trol M
easu
res
May 2005CSC
Excellence In Risk Management
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07
Unconstrained
Fix Filing Date (-120 days)
Early Application (-40 days)
No JV Delays (-60 days)
No Staffing Delays (-30 days)
The analysis can be used to evaluate impacts of schedule
risks, and test mitigation steps to show the potential for
schedule advancement. Incremental mitigation can be
applied to reach an acceptable target date.
Base
EV = 1-Nov-04
Mitigated
EV = 21-Feb-04
Contingency Plans
May 2005CSC
Excellence In Risk Management
Pro
ba
bil
ity
Project NPV ($MM)
10%
30%
50%
70%
90%
2000-800 -400 0 400 800 1200 1600
Definition
EV = 528 $MM Project AFE
EV = 697 $MM
Mid-ConstructionEV = 669 $MM
Start Up
EV = 695 $MM
PlanningEV = 460 $MM
Use of risk analysis throughout the project life helps the
project team to focus on the most important risks for each
stage of development, resulting in a better defined project
(i.e. less risk).
Risk Monitoring System
May 2005CSC
Excellence In Risk Management
CSC utilizes a proven risk analysis process that captures the total
risk environment, quantifies the project impacts and provides the
project team with effective risk management tools.
1Frame
TheProblem
2Develop
AnalysisBasis
3Evaluate
TheRisks
4Interpret
TheResults
Risk
Management
Recycle to Focus on
Most Important Risks
DevelopAlternativeStrategies.
Identify allImportant Sources ofUncertainty.
Model how underlyinguncertaintiesinteract to influence outcomeson the Project.
Identify the Experts in eachof the uncertainvariables.
Assess the impact and theprobability ofoccurrence foreach uncertainvariable.
Calculate the uncertainty inthe key resultmeasures.
Quantify therisk & return for each scenario.
Analyze anddocument theresults.
Identifypreemptiveactions.
Develop & Testcontingencyplans.
Recommendedactions.
5
May 2005CSC
Excellence In Risk Management
CSC Specifics:
• Supports Owner Organizations in major project development.
• Group formed in 1982, over 250 project assignments in 7 countries.
• Extensive and varied background in Project Planning and Management.
CSC Specialties:
• Risk & Decision Analysis for a wide range of Business Application.
• Strategic & Mitigation Planning for projects using risk models.
• Facilitation of Project Management & Reviews, Business Planning,
Value Engineering, Opportunity Analysis and Team Building.
• Project Management and Risk Management Education Workshops.
• Development of Contract Claims and disputes and litigation support.
May 2005CSC
Excellence In Risk Management
• Risk Management is fundamental for accountability on corporate governance and on maximizing shareholder value. It begins with strategic definition and continues in a consistent manner throughout the investment life cycle. The earlier risk management starts, the earlier you can
avoid or mitigate risks and capture opportunities.
• Risk Management ensures that there are no surprises.Documentation of assumptions and all risks. Communication of risk analysis results and the plan for managing those risks (avoid, accept, manage). The focus of efforts is on the underlying project risks.
• Range Estimating is not Risk Analysis.Risk analysis must consider the specific uncertainties of a project, and incorporate these underlying risks into the project value. Processes that provide single-point outcomes or risk distributions based on the probability of fixed outcomes (decision trees, KT, range estimating) do not meet the definition of risk analysis.
• “Ignoring risks to a project is not an option; important decisions will be made anyway, should they not be made with the best information available?”(Project Manager Today, October 2000)
Modern Day Applications of Risk Analysis