Managing Project Risk and Uncertainty

CHRIS CHAPMAN is a Professor of Management Science in the School of Management of the University of Southampton. He was the founding chair of the Association for Project Management Specific Interest Group on Project Risk Management. He is a past president of the Operational Research Society and the current chair of the Committee of Professors in Operational Research. He is an Honorary Fellow of the Institute of Actuaries.For more than 25 years his research interest has focused on risk and uncertainty management. Much of his research is consultancy based, giving him a broad spectrum of practical experience across a wide range of organizations, which he combines with a thorough conceptual understanding from which to write. He has authored and co-authored six books and more than 50 refereed papers. His books include Management for Engineers (Wiley 1987), Risk Analysis for Large Projects: Models, Methods and Cases (Wiley 1987) and Project Risk Management: Processes, Techniques and Insights (Wiley, 1997).STEPHEN WARD is a Senior Lecturer in the School of Management of the University of Southampton. He too combines his academic role with consultancy projects, and has published widely, including contributions to Management for Engineers (Wiley 1987) and joint authorship of Project Risk Management: Processes, Techniques and Insights (Wiley, 1997). He is the founding director of Southampton's MSc in Risk Management.

• Preface ixAcknowledgements xiii1 Introduction 1Managing Uncertainty, Risk, Threat and Opportunity 1The Scope for Uncertainty in Managerial Decision Processes 2Ten Tales About Uncertainty Management 5A General Process for Supporting Managerial Decision Making 10Constructively Simple Models 16Other Aspects of Constructive Simplicity 18Keep It Simple Systematically 262 Nicola’s tale: sizing inventories and other buffers 29Introduction 29A Stockholding Issue 30Focusing the Process 31Constructing a Model 32Refining the Analysis: Considering Safety Stock Policy 36Further Refinements: Influences on Holding Costs 39Interpreting the Results of Analysis Creatively 42Alternative Creative Interpretations 44Other Stock Control Contexts 46Other Buffer Contexts 47Conclusions 503 Martha’s tale: setting bids and other pricing decisions 55Introduction 55A Bidding Opportunity for Astro 56A Preliminary Proposal Document 58A Proposed Multiple-pass Process 63First-pass Uncertainty Management: Identifying Non-starters 64Second-pass Uncertainty Management: Identifying No-hopers 66Third-pass Initiation 72Third-pass Cost Uncertainty Analysis 73Third-pass Probability of Winning Analysis 88Third-pass Uncertainty Synthesis 94Third-pass Bid Setting Discussion 96Managing Requisite Change 97Some General Implications 109Other Bidding Contexts 111Conclusion 1134 Eddy’s tale: estimating measures of uncertain performance 117Introduction 117Some Basic Concepts 118Eddy Starts Work 126Eddy’s First-pass Minimalist Approach 128First-pass Interpretation and Anticipation of Further Passes 141Anticipation of Corporate Learning 144Scope for Automation 144Eliminating the Use of Probability Impact Matrices 146Managing and Shaping Expectations 148Robustness of the Minimalist Approach 150The User Perspective: Conditional Estimates and Cube Factors 154Conclusion 1585 Ian’s tale: aligning buyer and supplier motivation 163Introduction 163A Development Project 164A Consultant Is Hired 166A Framework for Project Risk Management 168A Critical Assessment of Current Common Practice 175Formulating An Incentive Contract 183The Way Forward 189Biars Contracts 191Conclusion 1956 Roger’s tale: assigning ownership of project uncertainty 199Introduction 199A Corporate Understanding of Uncertainty Ownership 200Roger’s Defining Moment 201A Simple Analysis of Anchor Risk 203Distributing the Ownership of Uncertainty 204Roger’s Simple Analysis of Distributed Uncertainty Ownership 212An Internal Trigger Contract to Manage Good Luck 217Designing An External Trigger Contract 226A Revised Corporate Understanding of Uncertainty Ownership 231Epilogue 236Conclusion 2377 Sarah’s tale: facilitating the precautionary principle 239Introduction 239The Rail Passenger Safety Trust 242A Conventional Analysis of Railway Buffer Events 243A Simple Scenario Analysis of Buffer Events 246Risk Efficiency for a Railway System 254Risk-reward Balance: How Safe Is Safe Enough? 257Ambiguities in ‘the Relevant Public’ 260Ambiguities in Equivalent Fatalities 262Regulation Via Mandatory Insurance 264Conclusion 2668 Norman’s tale: discounting future performance measures 275Introduction 275Norman’s Situation 279A First-pass Model and Parametric Analysis 280Probabilistic Analysis to Support the First Pass 288A Second-pass Probabilistic Analysis 289A Third-pass Probabilistic Analysis 291A Sudden Flash of Hindsight 294Is a Real Options Approach Really Useful? 297Conclusion 3029 Tess’s tale: making decision analysis practical 305Introduction 305A Machine Selection Problem 306A Basic Model and First-pass Analysis 307Exploring the Value of More Information 311Difficulties with the Model 314A Project Portfolio Perspective 316Abandoning a Common Set of Discrete Events with Certain Pay-offs 319An Explicit Threat and Opportunity Management Structure 324An Explicit Multiple-attribute Structure 327Explicit Analysis of Multiple-attribute Trade-offs 333Conclusion 33910 Sam’s tale: concepts and issues in portfolio management 345Introduction 345Sam’s Assignment 347A Basic Markowitz Mean–variance Model 348Extending the Basic Markowitz Model 355Sam’s Basic System 358Further Considerations with a Simplified Portfolio 373Robustness of Sam’s System 384Conclusion 38911 Conrad’s tale: formulating strategy 393Introduction 393Conrad’s Situation 394Planning Horizons 396Long-term Strategy Formulation 399Medium-term Strategy Formulation and Integration Upwards 424Short-term Strategy Formulation and Integration Upwards 434Integrating Social, Environmental, Ethical and Political Issues 440A Crisis 445Conclusion 44712 From concepts to culture 451Simple Efficiency 451Basic Concepts 453Key Modelling Concepts 454Key Process Concepts 456Uncertainty Management Systems 459Addressing Cultural Barriers to Uncertainty Management 460Culture Change Management 472Conclusion 473Bibliography 475Index 489