How to Manage Project Opportunity and Risk

Why Uncertainty Management can be a Much Better Approach than Risk Management

Stephen Ward, Chris Chapman

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9780470686492
• eBook ISBN: 9781119966654
• Edition: 3
• Topic: Negocios y empresa
• Subtopic: Gestión

Since I wrote the Foreword for the second edition of this book, risk management processes have become much more widely used, but controversy about what should be done and how best to do it has grown. Managing risk is a risky business. Chapman and Ward provide an in-depth explanation of why it is important to understand and manage underlying uncertainty in all its forms, in order to realise opportunities more fully and enhance corporate performance. They show what best practice should look like. The implications go well beyond the conventional wisdom of project risk management, providing an enlightening new perspective.
— Professor Tony M. Ridley
Imperial College London, Past President, Institution of Civil Engineers

Chris Chapman and Stephen Ward continue to educate the profession with this masterful exposition of the differences between, and the potentials for combinations of, risk, uncertainty and opportunity. Particularly welcome is the way they integrate this trio into the project lifecycle – the bedrock of project management control and organization.
— Peter W.G. Morris
Head of School and Professor of Construction and Project Management University College London

Chris Chapman and Stephen Ward's books on Project Risk Management have been an essential part of my repertoire for twenty years, and they are top of my recommended reading for the courses I do on that subject. In this book they have enhanced their previous work to focus on uncertainty management and emphasise more strongly opportunities for improving project performance, rather then just identifying what can go wrong. A structured process is an essential part of managing project uncertainty, and their process is one of the most powerful. This book will be added to my repertoire.
— Rodney Turner
Professor of Project Management, SKEMA Business School Lille

A profoundly important book. With How to Manage Project Opportunity and Risk, Chris Chapman and Stephen Ward take a good thing and make it better. Members of the project management profession have been influenced for years by their insights into project risk management. With this latest instalment the authors demonstrate that risk and uncertainty needn't be dreaded; in fact, the reverse side of the 'risk coin' has always been opportunity. My sincere appreciation to Chapman and Ward for turning this particular coin over and showing readers, academic and practitioner alike, the opportunity embedded in managing projects.
— Jeffrey K. Pinto
Andrew Morrow and Elizabeth Lee Black Chair in Management of Technology Sam and Irene Black School of Business, Penn State Erie

Part I

Setting the scene

Part I sets the scene, introducing key concepts used throughout the rest of the book in Chapters 1–4.

Chapter 1 considers the nature of uncertainty in and around projects. It begins by considering the nature of projects, and the relationship between project management, strategic management and operations management. It then considers the implications of the project lifecycle, using a nominal 12-stage framework which can be adapted to any organization’s preferred structure. This helps to clarify the context in which project uncertainty management operates and a range of project management issues that uncertainty management needs to address. For example, the nature of the process used to manage project uncertainty should be driven by when in the lifecycle it is used. Within this project lifecycle structure, the seven Ws are considered: ‘who’ (parties involved), ‘why’ (motives), ‘what’ (design of the product of the project), ‘whichway’ (plans for relationships and contracts, business case purposes, operations and activities), ‘wherewithal’ (resources for operations and activities), ‘when’ (integration of all timing questions) and ‘where’ (the location of the project and wider context issues). The role of inherent variability, ambiguity and systemic relationships in addition to events is then explored briefly, followed by an introduction to the use of a ‘performance lens’ and a ‘knowledge lens’ to view uncertainty for different purposes, and a final linking conceptual framework to prepare for Chapter 2.

Chapter 2 uses all the basic definitions and linking conceptual frameworks from Chapter 1 to explore the nature of uncertainty in terms of its relationship with opportunity and risk. It first introduces a ‘minimum clarity’ approach to quantifying uncertainty. This practical tool is also an important conceptual framework. It is used to explain the distinction between targets, expected outcomes and commitments. The linked ‘opportunity/risk datum’ concept is then introduced and its subjective and ambiguous nature is explored. In this framework a ‘clarity efficiency’ concept is introduced, concerned with maximizing insight which can be communicated for any given level of analysis effort and cost, and choosing an appropriate level of clarity. This framework is then used to consider a generalization of Markowitz’s ‘risk efficiency’ concept, the conceptual basis of ‘risk’ used in this book. A linked ‘opportunity efficiency’ concept is also introduced, a key conceptual framework.

Chapter 3 describes the key motives for formal ‘performance uncertainty management processes’ (PUMPs). These include the benefits of documentation, the value of quantitative analysis which facilitates distinguishing between targets, expectations and commitments, the pursuit of risk efficient ways of carrying out a project, generalization of risk efficiency to ‘opportunity efficiency’, and related culture changes. Effective exploitation of opportunity efficiency implies proactive uncertainty management which takes an integrated and holistic approach to opportunity and threat management with respect to all seven Ws in all relevant stages of the project lifecycle for all projects in an organization’s portfolio of projects.

Chapter 4 outlines the basic PUMP – a seven-phase generic framework central to this book. This basic PUMP framework plus associated processes defining a ‘PUMP pack’ is compared with a number of other published frameworks, as a basis for understanding the transferable nature of the concepts developed in the rest of this book for users of alternative frameworks, and as a basis for understanding the choices available when developing uncertainty, opportunity and risk management frameworks for particular organizations.

Chapter 1

Uncertainty in and around projects

I keep six honest serving men, they taught me all I knew; their names are what and why and when and how and where and who.

—Rudyard Kipling

Uncertainty management as addressed in this book is concerned with clarifying all relevant aspects of opportunity, uncertainty and risk in all projects. In a plain English sense at a basic level:

‘uncertainty’ means ‘lack of certainty’,

‘risk’ means ‘possible unfavourable outcomes’,

‘opportunity’ means ‘possible favourable outcomes’.

These three definitions are both basic and general, in the sense that they are consistent with all definitions in widely used dictionaries (Oxford Concise, 1995, for example). They are nominal definitions in the sense that readers can use their own comparable plain English alternatives if they wish – we do not want to open a book with counterintuitive definitions that inhibit colloquial use of words. More specifically, we do not want to inhibit richer or more specific colloquial interpretations, such as ‘an opportunity is usefully seen as an occasion when it is relatively easy to achieve what you want’, and ‘risk is usually associated with problems and danger’. However, it is crucial to avoid the morass soon encountered if simple common practice technical definitions are used. The three definitions provided above are basic default definitions, in the sense that they will serve if the reader is unclear about an unrestrictive basic plain English interpretation.

These nominal/default definitions, or any comparable alternatives the reader may prefer, provide sufficient clarity for our purposes without the need for more restrictive formal definitions. This is because we will introduce explicit working assumptions as needed.

Managing opportunity is our top priority, and the identification and pursuit of opportunity are usually the starting points in terms of enhancing corporate performance. Risk may not be relevant provided it is understood and acceptable. However, uncertainty needs to be understood and managed to clarify both opportunity and risk, and that is why exploring the scope for uncertainty in and around projects is a useful place to start to understand how effective uncertainty management can enhance corporate performance.

An appreciation of the potential for uncertainty management in projects has to be informed by three somewhat different views of ‘projects’. One is projects as those concerned with ‘operations management’ see them. A second is projects as those concerned with ‘project management’ see them. A third is projects as those concerned with ‘corporate management’ see them. All three perspectives need a common framework and language for communication.

This three-part perspective requires a clear understanding of the scope of decision making involved in project management and the nature of linked concepts. One key concept is the project lifecycle which forms part of the lifecycle of the asset or change created by a project. This lifecycle is a natural framework for examining decisions and associated uncertainty. A structured view of this lifecycle is also important to provide a framework for looking ahead for sources of uncertainty that can be seeded by decisions in earlier stages of the lifecycle. Further, a structured view of this lifecycle is central to understanding how the ‘performance uncertainty management processes’ (PUMPs) of central interest in this book ought to change as the lifecycle of the project unfolds and the priorities of associated project management objectives change.

An appreciation of uncertainty also has to draw on Kipling’s ‘six honest serving men’ as identified in the opening quote for this chapter – plus a linked ‘resources’ concept – for convenience referred to as the seven Ws: ‘who’, ‘why’, ‘what’, ‘whichway’ (how), ‘wherewithal’ (using what resources), ‘when; and ‘where’. That is, to clarify in more detail where and how we need to look for uncertainty that needs managing, project uncertainty management has to be informed by seven basic questions associated with these seven Ws.

Exploring the lifecycle structure and the seven Ws is the central task of this chapter. However, our focus on performance uncertainty management needs to be linked to other aspects of uncertainty management, and it has to ensure that all aspects of uncertainty are addressed in a holistic manner. Such concerns are addressed in an introductory manner at the end of this chapter.

Begin by considering a standard definition of a ‘project’ and the ‘asset/change’ concepts that underlie it.

Projects and the associated ‘asset/change’ concepts

Turner (1992) provides a useful illustrative definition of a project:

an endeavour in which human, material and financial resources are organized in a novel way, to undertake a unique scope of work of given specification, within constraints of cost and time, so as to achieve unitary, beneficial change, through the delivery of quantified and qualitative objectives.

Turner’s definition covers a very wide variety of projects where the ‘beneficial change’ to be delivered is a tangible asset of some kind that will subsequently be made use of in an operating mode – such as a building, aeroplane or computer system. It also includes the creation of less tangible assets – such as incremental improvements in operating systems, new ways of working, new knowledge acquisition or a new image creation – that have value beyond the delivery of tangible changes. Further, the acquisition of both tangible and intangible assets may be usefully viewed as changes for some purposes. The term ‘asset/change’ is sometimes a useful reminder that:

• projects may involve the creation of a physical asset, but it may be useful to view them in terms of the change to the organization or system in which the asset operates; projects may involve changing organizational processes, but it may be useful to view these changes in asset creation terms;
• most projects benefit from both perspectives – simple traditional asset creation terms are convenient sometimes, but management of change terms can be more relevant at other times.

A flexible approach to all terminology can be useful, adapting to the context. For example, a culture change project may be approached in change management terms for most purposes, but the initial concept evaluation of that project needs to value the culture change as an asset to justify the effort and expenditure involved. A new electricity generation power station project may be approached in asset creation terms for most purposes, but the initial concept evaluation of the project needs to value the power station in terms of all related changes to the electric utility’s portfolio of assets, cost of capital, operating costs, reliability, plus other changes in terms of all relevant objectives, such as a green (environmentally friendly) image. Table 1.1 lists a sample of example projects in conjunction with the asset/change delivered to illustrate the variety of organizational changes and assets that may be associated with projects.

Table 1.1 Examples of projects and associated asset/change

Project examples	Examples of the asset/change created
The design and construction of new built environment facilities	New office buildings, housing, hospitals, schools, prisons
The design and construction of new production facilities	New power plants, factories, processing plants, production lines, storage facilities, computer facilities
The design and construction of new infrastructure assets	New roads, railways, airports, pipelines, power transmission networks, tunnels, bridges, operational infrastructure, communication networks, leisure facilities
The formulation and implementation of organizational process change	New processes for future working or more efficient and effective arrangements for carrying out operations including new procedures
The acquisition of specified data and its analysis	Additional knowledge/information to inform future decision making and actions
The design and creation of new tools, techniques or decision support systems	New software for data processing, data retrieval or data analysis
The modification of existing assets to improve their utilization and operating performance	Refurbished, upgraded or augmented plant or service facilities
The completion of maintenance work while minimising disruption to operations	Serviced or repaired assets with future operating performance assured or enhanced and extended service life.
The organization of a conference or away day for a management team	Enhanced knowledge for participants, development of relationships with work colleagues, suppliers, contractors, customers via networking and discussions
The change of an organizational culture or organizational reputation	Enhanced effectiveness or enhanced perceived effectiveness or both

Turner’s definition highlights the change-inducing nature of projects requiring formal management, the need to organize a variety of resources under significant constraints, and the central role of the objectives to be achieved. It also suggests inherent uncertainty related to a novel organization and a unique scope of work. In our plain English terms this uncertainty may imply risk, but it may not. In our terms this uncertainty always implies potential opportunity – projects without possible ‘beneficial change’ should be rejected, if ‘beneficial change’ is sensibly defined. As a central part of effective project management, all relevant uncertainty requires attention to clarify opportunity and risk, and enhance performance.

Much good basic project management practice might be thought of as uncertainty resolution by clarifying what can be done, deciding what has to be done, and ensuring that it gets done. For example, good practice in planning, coordination, setting milestones, and change control procedures seeks to progressively resolve and reduce uncertainty as a project progresses. However, uncertainty management is not just about un...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Foreword to this edition by Mike Nichols
• Foreword to the second edition with an update by Tony Ridley
• Foreword to the first edition by Peter Wakeling
• Preface and overview by the authors
• Acknowledgements
• Part I: Setting the scene
• Part II: The generic process in one key lifecycle stage
• Part III: The generic process in all lifecycle stages
• Part IV: Key corporate implications
• References
• Glossary
• Index