Denise
Pappu, PMP
PMAN637 –
Spring 2012
University of Maryland University College
February 18,
2012
When companies select projects, the best course of action
is to prepare a risk analysis of the possible projects, so the team that
selects a project can determine which project will provide a balance of risk to
benefits. “The process for choosing
projects both creates project risk and relies on project risk analysis, so the
processes for project selection and project risk management are tightly
linked.” (Kendrick 2003, pg18) Companies want to be sure a project fits within
their current and future goals, their budget allowance, and one that will not
introduce any unnecessary risk to the company.
Companies should use a standard process for risk rating when selecting projects. Risks for any project are key items that
needs to be identified and rated using many elements to come to an overall
rating that can be used in the assessment of which project to select.
“Project risk also arises from the
type of projects selected. The mix of
projects by type – such as new research and development, next generation,
evolutionary, partner or joint venture, maintenance, support and infrastructure
– also needs to be kept in balance.”
(Kendrick 2003, pg19)
The
following three information technology projects will be used to illustrate how
risks can be rated to assist in selecting the best project to move forward
with. The three projects are:
·
Replacement
of Corporation Accounting System
·
Infrastructure
Enhancements
·
New
Customer Online Account Access System
The
following chart provides high level information about each project that will be
used throughout this discussion of the risk rating for project selection.
Project
|
Description
|
Cost
|
Time
|
Business Need
|
Replacement
of corporation accounting system
|
Purchase
of Commercial off the Shelf (COTS) application to replace internal
application
|
$1.25
million
|
2-3
years
|
Current
in-house system needs continuous updates to keep in line with current
accounting practices for reporting
|
Infrastructure
Enhancements
|
Replacement
of cabling at Headquarters and 2 divisional offices to provide video
capabilities, new servers with redundancy
|
$800k
|
12
months
|
Current
cabling does not allow video conferencing.
Servers are 5 years old and do not provide capabilities for future
growth
|
New
Customer Online Account Access System
|
Creation
of web site that customers can access their account status as well as place
orders
|
$950K
|
18
months
|
Reduce
customer phone, email and fax requests.
Provide 24 hours access for customers to access records and place orders.
|
Along with a description, estimated
cost and estimated time, a business need must be supplied. The business need information helps to rate
risks during the project selection. Once
a business unit defines and provides their business need, they need to provide
other information as specified by the project selection team to continue to
assist in rating the risk for the project.
Providing
how the project rates within the major project risks areas is very important. The major project risks can be identified by
asking the following questions (Gary & Larson 2008, pg. 40):
·
Is
the project a technical need?
·
Does
the project meet the current and/or future goals of the company?
·
Is
the project within the budget the company can live with?
The
major project risks need to have rating identification, so each project in the
selection can be rated according to risk impact. Creating a chart to outline the ratings is
helpful for this process. A scale on how
to rate each of the major projects risk should be established. For the examples provided, a scale of 1 to 3 will
be used to help quantify the possible risks. The scale will be 1 = Yes, 2 = Maybe, 3 =
No. The individual ratings for each
project then will be added together to provide a Major Project Risk Rating
number for each project. The result can
be used later for combining with other ratings to provide an overall risk
rating assessment for project selection.
Project
|
Is the project a Technical Need?
|
Does the project meet the current
and/or future goals?
|
Project within Budget?
|
Major Project Risk Rating
|
Replacement
of corporation accounting system
|
1
|
2
|
2
|
5
|
Infrastructure
Enhancements
|
1
|
1
|
1
|
3
|
New
Customer Online Account Access System
|
1
|
2
|
1
|
4
|
The results of the Major Project
Risk Rating will show that the lower the number the better the project is in meeting
the company’s major project goals. The
higher the number proves the project will present risk to the company’s major
project goals.
Another rating that helps to identify which project meets
the company’s goals would be to classify the project (Gray & Larson 2008,
pg. 36). Will the project satisfy a
compliance need, is it for an operational need, or is the project to help with
a strategic plan are some of the questions that must be answered. Projects that need to satisfy a compliance requirement
will have risks if the company decides not to do the project, so a rating to
complete this type of project would be high.
An operational project most likely is requested to assist the company in
gaining income or to resolve a problem that affects how the company conducts their
business, so rating this type of project will be subjective. Companies looking
to grow their business or even stay in business need to look at strategic
projects constantly, but how they rate projects would be subjective. Each of the projects classification’s, would
need to have a risk level since each type could present many risks to the
company during and sometimes after the projects’ life cycles.
To
rate the classification of a project risks, using a checklist of questions for
the risk ratings will help to ensure each project is rated with the same
criteria. Using a checklist that asks
about potential risks (Heldman 2009, pg240), helps to quantify the risk and
provide data to those evaluating the projects.
The next table provides a sampling of questions that could
help rate and identify potential risks that may occur on projects, so an
overall risk of the classification can be calculated.
Risk Questions
|
Replacement
of corporation accounting system
|
Infrastructure
Enhancements
|
New
Customer Online Account Access System
|
Classification of Project:
1-Strategic, 2-Operational, 3-Compliance
|
2
|
2
|
1
|
Internal or Vendor Resources: 1-Experienced Internal, 2-Internal,
3-Vendor
|
3
|
1
|
2
|
Is it possible the project will go
over budget? 1-Unlikely,
2-Possible, 3-Likely
|
3
|
2
|
2
|
What is the possibility the project
will go over scheduled time? 1-Unlikely, 2-Possible,
3-Likely
|
3
|
1
|
2
|
Is there prior experience with this
type of project? 1-Yes
Internal, 2- External, 3-No
|
2
|
1
|
3
|
Total
|
13
|
7
|
10
|
Most risks are not known during the
selection process or even during the planning phase of a project. Using expert opinion is needed to ensure the
ratings are logical and reasonable, during selection of a project. “Experts generally are those having
experience with similar projects that occurred in the not-to-distant past….The
experts’ bias should be taken into account…”
(Project Management Institute 2008, section 11.3.2.6). The experts that help with the selection
process most likely are the ones that would be involved in the project if it is
selected. These experts can be business,
technical and managerial as well as external resources.
Selection of projects involves looking at resources that are
needed as well as ensuring not to over commitment those resources. Identifying, early on, whether the project
will use internal or external resources is important so risk can be determined. Ensuring that the internal resources can
handle the work load assigned is important for a successful project. If the internal resources are currently over
scheduled before starting the project than that would be a risk and it needs to
be determined whether to take on that risk or acquire additional/other
resources. Resources will always be a
risk to any project but how that risk is rated can depend on many factors that
the company needs to review and provide a risk rating for. The risk ratings will determine the tolerance
the company is willing to live with for the life of the project.
An overall Project Risk Rating is needed once all the data
is collected. Companies would need to
determine how they will perform their final calculation. For this discussion, a calculation was done
by adding the Major Project Risk Rating with the rating from the Risk Questions
for the sample projects. The results
would be used for project selection. The
results are:
Project
|
Major
Project Risk Rating
|
Risk
Questions
|
Overall
Project Risk Rating
|
Replacement of corporation accounting
system
|
5
|
13
|
18
|
Infrastructure Enhancements
|
3
|
7
|
10
|
New Customer Online Account Access System
|
4
|
10
|
14
|
It could be assumed that the project with the lowest rating
is the best choice but there are other factors that need to be included. Along with the risk rating, other ways
projects are rated for selection is based on cost, benefit analysis, and return
on investment. When these are rated they
need to include what risk they can present to the company. (Rife & Dabbah
2012, pg4) Companies generally have set
tolerances as to how much they are willing to spend and how long the project
timeline can be. Cost overruns and time
delays can be an issue for companies so when selecting projects they want to
try and minimize those potential risks. Companies want to be confident the
project will be completed within the identified budget and schedule.
Project selection is important to
the overall health of any company.
Making good choices helps to ensure projects provide benefit not
liability to a company. Risk rating
projects will assist with the selection process so companies have a way to
evaluate and make good choices in which projects to do. Evaluating risks during project selection
does not guarantee that the project selected will succeed. Some projects will fail no matter what. Evaluating risks during project selection
will at least help companies to avoid projects that are doomed to fail. There
is risk in all projects but the key is to identify, monitor and control the
risks during the life of the project. Identifying risks during project
selection is a great way to start the process and aim towards a successful
project.
References:
Gray, C. F., & Larson, E., W., (2008). Project Management, A Managerial Process (4th
ed.). NY, New York: The McGraw-Hill Companies, Inc.
Heldman, K., (2009). Project
Management Professional Exam Study Guide (5th ed.).
Indianapolis, IN: Wiley Publishing, Inc.
Kendrick, T., (2003).
Identifying and Managing Project Risk: Essential Tools for Project Risk.
New York, NY: American Management Association.
Project Management Institute (2008). A Guide to the Project Management Body of Knowledge (4th
ed.). Newton Square, Pennsylvania:
Project Management Institute, Inc.
Rife, P. & Dabbah, R., (2011). Conference 2: Planning for Risk Management. Graduate School of
Management & Technology: UMUC.
