Proactive Risk Management

Controlling Uncertainty in Product Development

Preston G. Smith, Guy M. Merritt

• Publisher: Productivity Press
• Year: 2020
• ISBN:
  9781000285659
• Edition: 1
• Topic: Business
• Subtopic: Gestione di rischi finanziari
• Index: Business

Listed as one of the 30 Best Business Books of 2002 by Executive Book Summaries. Proactive Risk Management's unique approach provides a model of risk that is scalable to any size project or program and easily deployable into any product development or project management life cycle. It offers methods for identifying drivers (causes) of risks so you can manage root causes rather than the symptoms of risks. Providing you with an appropriate quantification of the key factors of a risk allows you to prioritize those risks without introducing errors that render the numbers meaningless. This book stands apart from much of the literature on project risk management in its practical, easy-to-use, fact-based approach to managing all of the risks associated with a project. The depth of actual how-to information and techniques provided here is not available anywhere else.

1
WHAT IS RISK AND HOW IS IT MANAGED?

To open with a clean slate, we considered writing this book about “ksir”^* rather than risk. Risk is a tainted term. Each of us has prior, often subconscious and unhelpful, associations with risk. Perhaps it recalls the life insurance salesperson who called during dinner last evening, or the high blood pressure reading the doctor took last year. Maybe it stems from a downturn in the economy and its implications for your job. If you are an engineer, risk may recall for you a design professor showing a film of the Tacoma Narrows Bridge collapse.

* Risk spelled backward

Narrowing our focus to risk management does not help much. An Internet search on “risk management” (in quotation marks) yields over a million hits, very few of which have any connection with this book’s contents.

Consequently, let us substitute “surprises” for risks for a moment. This book is about managing surprises in a project environment. Rather than just letting surprises affect you, we will show you how to identify them beforehand, assess their consequences early on, and plan ways to render them harmless to the objectives of your project. Although we focus on projects to develop new products, the techniques apply equally well to other types of projects that you may encounter in industry.

If you are an engineer, you may think of a surprise in terms of a design of yours that fails in a field trial. If you are a marketer, the surprise may relate to that start-up competitor you assured your boss last month would be no problem. If you are an accountant, you probably envision surprises as being preceded by dollar, euro, or yen signs. You are all correct. To further clarify, we provide an example to illustrate the scope of project “surprise” management.

Example of Project Risks

To ensure that we have a common understanding of the types of project concerns that could be subject to risk management, we here provide an example to focus our attention on the scope of potential problems that risk management could address in a product development project. The product here is a household version of the postage meter found in offices. This machine would be a small appliance that could be charged with postal value through an encrypted telephone connection to a postage supplier under contract to the post office, and you would make payment to this supplier using your credit card. It would print the necessary postage either directly on an envelope or on special labels that could be attached to larger packages.

Below are some of the potential problems that could result in risks for such a project. It is not important that you comprehend the detail of each of these risks, but please observe the broad variety of uncertainties that could plague this relatively simple project. This list, as long as it is, is only a sampling. When we have shown the list to others, they can usually readily add even more risks. Nevertheless, this list suggests the scope of project risks that we address:

• Marketing
  • – Will an Internet technology, such as Stamps.com™ (a supplier of U.S. postage over the Internet, which can be printed as stamps on your home computer), take over this market before we can exploit it?
  • – Will market research show that the need for international and package rates is sufficient to add this complexity, or will domestic letter rates be adequate?
  • – Would we miss a sizeable senior citizen market if we do not magnify the control panel and buttons and make the display print larger?
• Sourcing
  • – Can the print head supplier meet our standards for indicating an out-of-ink condition?
  • – Will we be able to get ample quantities of certain components that are on allocation?
• Regulatory
  • – Will stricter governmental standards for auditing such devices, which are now under consideration, go into effect before we can launch our product?
  • – Will we find a cost-effective means of repairing these units without compromising the postal value that was in them when they failed?
• Technical
  • – Although we do not now know all of the failure modes, can we design it to protect its postal value regardless of failure mode?
  • – Can we meet corporate drop-test requirements with the relatively fragile display technology required to meet our cost targets?
  • – Can we attain legible, indelible print quality on any type of envelope paper?
• Management
  • – Will we obtain the sales force support needed to complete the specified field test?
  • – Will the software specialists be available when needed to code the value transmission?

Observe two things about this list. First, it is specific to this project and market at this point in time. Second, it goes far beyond engineering items.

Risk Management and Product Development

Risk management is a fundamental component of project management. The Project Management Institute (PMP) lists the management of risk in their Project Management Body of Knowledge (PMBOK®) as one of nine knowledge areas, along with the management of project scope, cost, and schedule. Project managers are thus trained to manage risk as an integral, ongoing part of a project, not just as an afterthought or when risks begin to disrupt progress.

Link this with the fact that we carry out product development as projects. Generally, each new product has a project associated with it. In some companies, the connection between projects and product development is implied, but in others, the leaders of projects are actually called project managers. Companies recruit individuals with project management skills and also train their own people in these skills so that development projects run more smoothly. It would be difficult to imagine a product development effort that did not have the project management tools of a schedule, a statement of scope, and a budget associated with it.

Given that risk management is an integral part of project management and that product development inevitably requires project management, it would seem that managing risk would occur as naturally as managing the schedule during a product development effort. This may be the case in a few years, but today genuine risk management often gets lost in the crunch to get the new product out the door.

The prime purpose of this book is to enable product development teams to greatly enhance their management of project risks—across the board. Some individuals are instinctively good at managing project risks, but others deny risk or are unaware of it until it happens. Our goal is to build project risk management methodology into the organization so that it does not depend on being an innate gift but is a way of life in the organization.

Risk is an essential characteristic of product innovation. Every decision regarding a project—whether made explicitly or implicitly—has risk associated with it. Going into a project, we know that we will have less than a complete understanding of the project’s components, so we will have to take some risks and make decisions regarding these risks. That is, we are practicing risk management whether we prefer to or not.

Today’s increased focus on time to market makes it a business imperative that a business assumes certain risks. At the same time, the importance of time to market intensifies the consequences of risks as schedule slippage becomes increasingly intolerable. In the past, it may have been acceptable to manage risk implicitly, but managing schedule risk explicitly is one area today that separates leading companies from ordinary ones.

Relative to other kinds of projects, product development carries additional elements of risk. Product development involves innovation, and an essential characteristic of innovation is that, regardless of where we start with it, there are always pieces of information that we need now that will not be known until we are further downstream. This leads to iteration or looping, and it means that we have to make some assumptions now based on incomplete information and then revisit our assumptions on “Design Structure Matrix.”) Projects with considerable innovation have more of this guessing and looping than less innovative projects.

Consequently, no other type of project is in greater need of risk management than product development. At the same time, our experience tells us that few product development projects today receive adequate risk management. This is why—considering both the great need and the current weakness—this book centers on product development projects. The proven, cost-effective techniques provided here are your keys to enhanced product development risk management.

What Is a Risk?

In teaching this material, we have discovered that much of the confusion about managing risk stems from differing interpretations of many of the terms involved. This is understandable, because risk is a popular word in our daily vocabularies. However, this popularity can work against us in managing risk, where we have to be more precise in our thinking about it.

As applied to a project, a risk is the possibility that an undesired outcome—or the absence of a desired outcome—disrupts your project. Risk management, then, is the activity of identifying and controlling undesired project outcomes proactively.

For reference, as you work with these and other terms, we provide a glossary at the end of the book. However, we go to greater depth here to describe three essential facets of a risk: uncertainty, loss, and its time component.

UNCERTAINTY

As illustrated by our postage meter example, when you manage risk, you are always dealing with uncertainties. A risk may or may not happen, and you will not know for sure until the risk occurs, that is—until after it ceases to be a risk. This inherent uncertainty cannot be eliminated. However, you can often narrow the uncertainty by:

• clarifying the probability of occurrence of the risk,
• understanding the consequences or alternatives if the risk event happens, and
• deter...