How to Predict the Future, AKA Estimating Risk
Fact: Every project holds risk. There is no such thing as a perfect project. If there was, your job wouldn’t exist! The risks for every project varies greatly in form and impact. In this post, we’ll outline the different types of risks that can apply for any type of project and a rule of thumb on how to estimate their impact as you begin to plan your project. But first, let’s define the term risk.
What is risk?
In project management, risk is any factor that holds the potential to delay or block successful completion of the project. For most projects, risks can fall into three categories.
1) Technical Risk
When creating project teams, team members’ abilities and knowledge may be overlooked or overestimated. Perhaps there aren’t other resources with the competency and the time to work on the project. Or this project requires new technology or techniques that aren’t routine for your team.
2) Monetary Risk
We are always working within a budget. Rarely are projects initiated with unlimited budget. It doesn’t matter how we arrive at the estimate, but once kickoff occurs, we should have an idea of how much the project will cost and project managers are expected to execute the project within the budget.
Post-kickoff, a large number of factors can contribute to monetary risk. Previously estimated out of pocket expenses may be higher. A specific task that the team is struggling with may take more hours to execute than anticipated, thus costing more. Last minute decisions such as an upgrade in materials or services may also up the total cost of the project.
3) Scheduling Risk
No one likes the words late or delay. OK, let me scratch that. Project stakeholders do not like the words late or delay. Sometimes, delays are unplanned. For example, the below zero temperatures in the Midwest this winter kept many people away from their work for days. Other times, delays may be in the best interest of everyone involved (for example, if you’re engineering a new bridge), but that doesn’t mean that completion of every task can be delayed. We’re always working to meet certain dates so that dependencies can follow as planned.
How to Predict the Future
It’s our job as project managers to minimize these risks as soon as possible. How can we best prepare ourselves before the start of a project? We have to taken an inventory of potential pain spots.
The only way to effectively take action on risk remediation is to foresee potential risks and develop alternative plans for as many of these scenarios as possible. As you are building your project plan, try and identify all risks you think are possible during the course of the project.
Assess all internal factors that can cause a budgetary change or scheduling delay. This should include assumption failures, funding availability and staffing changes. Think through the external factors as well. External factors include company or client approval processes, a change in company or client direction, technological changes, or a change in execution methodology or approach.
The easiest way to begin creating this list is to reflect on all declared project assumptions. Then, make a list of all factors that are considered new in this project. Anything new that has not been tried-and-true in a previous release or project should be considered. This should include new team members added to the project, new technology, new development methodology, or even a new project management methodology.
Don’t get too discouraged by all of the potential failures represented in this list. The most important takeaway at this stage is to recognize that these possibilities exist out there, no matter how bizarre or improbable.
Make Your Predictions More Accurate
OK, now is the time to freak out about all the possibilities. And by freak out, I mean evaluate the probability and estimate the impact these risks will have on your project.
Some items on your list would be truly bizarre, such as losing a subject matter expert abruptly. However, the impact on your project would be great because there wouldn’t be accurate knowledge transfer for his or her replacement. Or perhaps the project could be stalled because it would take a long time to even find a suitable replacement with similar knowledge. In this scenario, a project could be delayed for weeks or months.
Other predictions are bound to occur at some point. For example, the assumption that critical planning documentation would be approved within two rounds of review has a high probability of failure. Despite the high probability, the consequences can vary. The entire project can be delayed by days or by weeks - however long it takes for the documentation to be approved - but at least you know that the turnaround time and review of the revisions is equivalent to the delay.
Prioritize Your Risks
Take a look at your list and place them into one of the below categories:
Now create a linear list by listing the risks in this order:
- High probability - high impact
- High probability - low impact
- Low probability - high impact
- Low probability - low impact
This is the part that many project managers struggle with. We’re so used to approximating everything down to an exact number. Here, we have to use our intuition and reorder our list of risks based on probability.
There is a formula to help you calculate a number to help you prioritize your list. Multiply the probability of the risk occurring in a given week by the duration for which this risk could occur and multiply that product with the budgetary impact.
While this is useful if you composing a definitive list is important to you or if you have too many competing risks that appear to be equally probable. However, recognize that the first percentage is guesswork that relies on intuition, so whatever your list ends up being still contains a margin of error.
What is important about this list is that it gives you an orderly way of approaching risk mitigation planning. At this point, you should have some idea on how you would approach some of these risks. This list allows you better visualize the parts of the project that may be overlooked. You’ll know which risks can be controlled and you can begin mitigating these risks at kickoff. Or this list can help you identify parts of the project scope that need to be amended.
Whatever you end up doing, the important thing is that you predicted the future and proactively took action against the dangers. And for the risks where you can’t mitigate prior to execution, you’re now well prepared to take them on.