Managing Uncertainty and Risk on the Project

Revision as of 02:20, 22 September 2015

Abstract

One of the most challenging aspects in projects is to manage the risk and the uncertainty. Yet with the knowledge we possesses, it is a topic, which for many is difficult to handle. Many stakeholders are involved in the projects and therefore might have different opinions of what is the best solution approach is. The majority of people tends to think in deterministic terms of an optimal solution instead of probabilistic terms of a robust solution. This article will highlight the main differences of the risks and the uncertainties in a portfolio management. The risk management processes will be clarified in its four stages, where the identification of the problem, assessment of the risks, how to respond to the risks and lastly how to control the risks. To assess the risks, a risk-management process tool will be utilized and further explained.

Definition

Risk and uncertainty has many different definitions and can be hard to settle down to only one way to define it. Risk management had their origins in the insurance industry in USA in the 1940s. Project Portfolio management refer not only to a single project or a single program, but all projects and programs of it. When talking about risk, people often link it together with uncertainty, while others refer to it as opportunity. Risk can also be defined as a combination of the probability of an event and its consequences. There is a relationship between risk, uncertainty and opportunities. This is illustrated in figure xxx Risk has many kinds of statements and can be classified into three different classes. The first class is the with the negative aspects. The second class is related to the uncertain, which is the unknown and unexpected issues. The third is correlative to possibility and result. In table xxx, it can be seen who as classified what into the three categories.

Table

The authors states project failure is highly connected with uncertain event (uncertainty). Uncertainty includes three different consequences, and the first is good for the project / portfolio, the second has no effect on the result for the project, and the last is harmful for a project success and objective. The first consequence of uncertainty seen as an opportunity for the project / portfolio. The second can be explained by something uncertain occurring throughout the life cycle of the project but the result of the uncertain event is either good or harmful for the project’s objective and success. And based on that we can say that uncertainty has no effect on the project. According to this section, the following definition of uncertainty is: “An unexpected event, if it occurs, may have either no effect or a good or bad effect on at least one of the project’s objectives and success.“ And risk is defined as: “An uncertain event or situation, if it occurs, may have threat(s) or bad effect(s) to at least one of the project’s objectives and success”

Risks and uncertainties has a big role in projects. The uncertainty is by definition the lack of the information that is available to take a decision at a given time. In figure XXX it is illustrated the difference between the information required and the actual information available. Uncertainty have two sources and the first source is the complexity, which is where the information is available, but is too costly to collect and analyse. Second is the predictability, which is where you are able to predict uncertainties, based on previous experiences.

In the beginning of the a project the uncertainty is very high and depending on the size of the project and to decrease the mission uncertainty it can some extend be used e.g. standardised components and solutions etc. As a project moves forward more information will become available and therefore the dynamic uncertainty will be decreased since some parts of the project will be finished and therefore has less impact on the actual uncertainties. To understand the relation between risk and uncertainty, figure XXX illustrates the risk sources which indicate the underlying condition that can generate a possible risk event. The management team can respond to the risk source and can plan to respond when or if the risk event occurs. The model explains in short terms how you can prepare the risk sources and events.

The relationship between risk source is thus the dimensions of the risk source, the impact of the risk and the to which extent the management team can respond to the risk source and events. The understanding of risk in relation the probability is divided up into four terms: • The objectivist believes that a sample of previous observations can be used for predicting the future risk sources. The predictions rely therefore on statistics inferred from experience. • The logical could be an engineer who is solving problems with an engineered system. Engineers’ understanding of the design and the scientific properties they might be able to identify risk sources and therefore possible risk events. It rely closely up against the basis of FMEA. • The subjectivist rely mostly on subjective decisions. That means that despite from the information available, the observer might consider other factors than just historical facts. Therefore might there not be a clear result from two different subjectivists in the same situation unless it is an obvious decision. • The behavioural has focus on the actual behaviour with the decision-making under uncertainty. Therefore it is relied on how decisions are made in practise. When managing risks and uncertainties, the four different terms is important when looking at decision-making. There is a difference between the definition of uncertainty and risk where there is probability of a risk event could occur. The reason is the subjective term where the decision-maker has an impact on the outcome where the decision is not relied on historical event and statistics. The underlying definition of risk and uncertainty can be divided into four different stages of standpoints, which is defined as the cognitive standpoint. They are stated as follows: • Known knowns is the condition of the risk where the risk source has been identified and a probability can be assigned to certain risk event. This is the standpoints which has most concentration because many advocates the use of subjective probabilities. • Known unknowns is where the uncertainty plays its role where a risk source has been identified but cannot be assigned to the risk event. • Unknown knowns is a condition where the uncertainty appears because somebody knows about the risk source and its chances to appear. Therefore, the information is kept private instead of sharing the information. • Unknown unknowns is the uncertainty where the risk source has not been identified and therefore the risk event cannot because of that be known. That phenomenon has been called the ‘black’ swan. The four different standpoints is illustrated in figure XXX