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6.5 Risk Response
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PERT is similar to the critical path method (CPM) known from the scheduling theory. The methods were developed at nearly the same time. The difference is that CPM uses the most frequent duration and is used for standardized projects. In contrast to that, PERT is used for projects with high uncertainty and little experience. PERT is utilized to compute the probability of meeting different project durations.
PERT is useful as it provides the expected project completion time and the probability of the completion before a specified date. Furthermore, it helps in finding out the activities which may have slack time and those that can lend resources to critical activities. Disadvantages are that the estimates can be somewhat subjective and also depend upon the experience of the project members. Furthermore, the beta distribution might not always match the reality. It is said that PERT often underestimates the project completion time because other paths than assumed before can become critical paths if the related activities become late.
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With the risk transfer, the risk is just moved but not eliminated or dampened. One very common approach is outsourcing which is done far in excess in some industries. Then the contractor has to take the risk. Beside the fact that of course the risk transfer will cost money – as the contractor also has to include the risk possibility in his pricing – it could be challenging to ensure the subcontractor is able to deal with the risk.
Also, a well known approach to transferring risks is contracting insurance. This may work well for some specific cases but for project management in general it is not really the right approach. Contracting insurance for a project can be used for low-probability and high-impact events. As these are somehow often Acts of God they are more easily defined (e.g. an earthquake), but for day-to-day business risk insurances they are too expensive and the risks could not be described exactly enough.
Sharing risk, as the name says, means that different parties share the risks of the same project. One well known example is Airbus – from the aircraft industry. Airbus allocated risk to the R&D departments over different countries like France, Britain and Germany.
Another kind of sharing of risk is signing a BOOT contract. BOOT is an abbreviation for “Build-Own- Operate-Transfer”, meaning the project organisation is building the plant and after that the organisation is the owner until the operations are running smoothly and the whole check-up is done. Only if all these steps are successful is the ownership transferred to the client.
Sharing risks is also one possible way to save money. The approach is often used in the field of logistics.
With combining the ideas of the subcontractor with the project team parent’s organisation ideas a big improvement could be made, but to reach a level of teamwork where these procedures work, both sides should gain advantages from this relationship. This is also one reason why partnerships can emerge.
Then the relationship is good enough to work together closely. Both sides are taking the risk and the benefits coming from new ideas are most probably equal by that stage.
The last option, retaining a risk, seems a bit strange at first sight that, but there are cases where retaining and accepting the risk can be the easiest way to handle it. The possibility of such events occurring is often so low that the risk could be accepted. More often, the impact of the risk is very low and it is easier to buffer it with financial help and just keep on working.
With the help of buffers and reserves some risks could be taken as they appear. It could be easier to take the risk instead trying unsuccessfully to transfer or reduce the risk. In a few cases the occurrence of the event could be ignored totally.
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A contingency plan provides a plan which is fulfilled if one of the known risks becomes reality. With the help of that plan the action that is to be followed is already clear before the risk appears. That helps us to stay calm and get step by step to a solution which can be e.g. reducing or weakening the impact of the event. The contingency plan should then say what, when and where which actions are to be taken.
With the help of the contingency plan the manager who has to deal with the occurring problem does not have to invent a solution on the spot, which in any event would be a low quality solution, still taking time to find. It is much easier if one can look into the contingency plan where the steps are described after they have been well thought out during the project planning phase. The availability of a contingency plan can significantly increase the chances for project success.
At first sight it might seem easy: just plan the risks and it’s done but there are some conditions one has to consider. First of all, proper documentation of the steps is necessary. Within that documentation cost estimations and the probable source should be named. Furthermore, the involved teams should agree on the plan and the allocation of tasks should be clear. All these steps should be followed to ensure all team members know what to do and are committed to the work, especially in case of an emergency.
Having a contingency plan is absolutely necessary. Otherwise a risk might slow the managerial response and any decisions made under pressure will likely be poor and potentially dangerous and costly.
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One good way to follow all these instructions is to make a note of this information within a so-called risk response matrix. Still, there is a more extreme possibility left which one has to think of during risk contingency planning. There is the possible eventuality that the risk remains after a risk response as per the contingency plan.