Risk Management Basics – Technology Development Has Risk
A Program Manager is responsible to meet all contractual obligations on a project. The customer expects that all performance specifications will be met and that all deliveries as stated in the contract will be met on time. The company’s management expects that this will be accomplished within the agreed to cost quoted to the customer. It is reasonable to expect that there are going to be some risks associated with the development of technology. Consequently, it is important for engineers to learn high tech risk management basics.
Plan For Risk & Plan to Mitigate Risk
It is important for engineers to learn high tech risk management basics primarily because risks translate to the possibility that some of the specifications may not be met. The areas of technical concern need to be revealed and plans for reducing these risks must be thought out – by engineers. In addition, some of the delivery milestones may not be met unless some actions are taken to identify and mitigates these risks and/or to have contingency plans if some of the risks materialize. Therefore, during the cost estimating phase of the project, before a quote is submitted, the risks to the project have to be identified and quantified so that a reasonable contingency fund is included in the estimate. This ‘reserve set-aside’ covers the mitigation activities and also covers the cost associated with a reasonable amount of risks that will materialize including their contingency plans so that overall contractual commitments are still met.
Opportunities Can Offset Risk
There may be opportunities as well that if realized will help offset the risks and these also require identification and quantification even though typically the risks tend to out weigh the opportunities. The reason we do not estimate conservatively to cover all conceivable risks and have many opportunities on a project is usually due to competition, customer budget constraints, and the fact that new technical development is inherently risky. Nonetheless, opportunity management and opportunity realization is a key part of high tech risk management basics.
Risk vs. Opportunity – Depends What was Assumed in the Baseline
It is interesting to understand that sometimes the same item can be either a risk or an opportunity. It depends on what was assumed in the baseline. If a $100,000 package of money that is in the middle of a highly trafficked highway is part of the estimate to complete the project then getting the money is a risk. If the cost to complete the project did not depend on this money then it represents an opportunity albeit the opportunity is risky and the realization cost may not be worth the effort. Understanding the importance of the baseline assumptions is crucial to learning high tech risk management basics.
Risk Identification, Quantification, & a Financial Reserve ‘Set-Aside’
The process to identify and quantify risks encompasses an assessment of the likelihood of occurrence of each risk identified, and an assessment of the associated impact to the program for each risk should it occur. A matrix is established that categorizes each as one of the following:
- It’s going to happen and is impactful so put the full value (100%) of the impact into the baseline as a reserve including the cost of any contingency plan
- It is highly likely although not a certainty that it will happen and is impactful so put a factored amount (75%) into the baseline as a reserve and budget the cost to mitigate the risk / realize the opportunity
- It may happen and is somewhat impactful so put a reduced factored amount (50%) of the impact into the baseline as a reserve and budget the cost to mitigate the risk / realize the opportunity
- It probably won’t happen and is not very impactful but just in case put some minimal factored amount (25%) of the impact into the baseline as a reserve and keep an eye on it
Typically the reserve included in the baseline estimate is the sum of the factored risks minus the sum of the factored opportunities. The baseline also includes all mitigation and realization costs.
This thinking is fundamental to the process of high tech risk management basics. There is a structured methodology to conduct the likelihood of occurrence and impact analyses for each Risk & Opportunity and is included and discussed more thoroughly on this site in the high tech management guide.
Risk Mitigation / Risk Burn-Down & Opportunity Realization
Enacting a plan to Mitigate, or ‘Burn-down’, the major risks on a program is essential to reducing the likelihood and impact of their occurrences and it is important to enact a realization plan as well to make opportunities happen. Both activities form an integral part of the overall program plan to offset and reduce risk and thereby meet contractual and budget commitments. Risk mitigation is fundamental to high tech risk management basics.
7 Example / Generic Mitigation Plans
The following seven example activities are listed as an aid to stimulate thought in developing mitigation and realization plans. Typically if implemented they generally reduce risk and/or lead to opportunities when engaged in applying high tech risk management basics:
1. Perform Analyses
2. Conduct Requirements Review with Customers
3. Multiple Sourcing Vendors
4. Early Testing
5. Selective Prototyping
6. Modeling / Simulation
7. Formulating a ‘Tiger Team’ to focus on key areas of concern.
Assessing Risk Burn-Down Progress
Ultimately, the goal of high tech risk management basics is to make what were identified as risks no longer risky. As such, each Mitigation / Realization (M/R) task in a M/R plan is intended to improve upon the situation. The expected improvement in risk or opportunity factor (an improvement of 5%, 19% etc.) is a judgment without the need for formal likelihood vs. impact quantification. By definition, if the interim event is successful it is assumed that the actual improvement has been achieved. For example, if an analysis is performed relative to a performance risk with favorable results the improvement may be judged to be a few percent reduction in the risk factor; if modeling or simulation is then performed on the risk area and the outcome is judged to be successful the risk is reduced further by a percentage deemed appropriate based on experience; and if selective prototyping is then performed on the risk area and its outcome is successful the risk is burned-down even further possibly mitigating it completely.
A similar argument can be made for assessing the success when enacting opportunity realization plans.
Risk Handling Approaches
Note: Mitigation is not the only way to handle risks. High tech risk management basics include other options. Transferring the risk is an option. For example, if meeting a requirement via a hardware design is risky, performing the task in software may not be risky. Moreover, if the cost benefit trade-off to mitigate a risk is not sound, i.e. spending $50,000 to mitigate a $60,000 risk would not be sound, then Absorbing the risk may be the best strategy.