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.
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
Stephen Ward is Professor of Management and Deputy Head in the School of Management, University of Southampton. For more than thirty years his teaching, research and consulting activities has focussed on risk and uncertainty management. He was founding Director of Southampton's MSc Programme in Risk Management. Stephen has served on the British Standards Institute Risk Management Committee, and is a Fellow of the UK Institute of Risk Management. Recent research funded by the UK Institution of Civil Engineers addressed operational risk in major infrastructure projects and businesses. Stephen has published widely, including authorship of Risk Management Organisation and Context (Witherby, 2005), and jointly with Chris, Managing Project Risk and Uncertainty: A Constructively Simple Approach to Decision Making (Wiley, 2002) and Project Risk Management: Processes, Techniques and Insights (Wiley, 1997 and 2003).
Chris Chapman is Emeritus Professor of Management Science in the School of Management, University of Southampton. He is a former Director of the School. 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 an Honorary Fellow of the Institute of Actuaries. For more than 35 years his research has focused on risk and uncertainty management. Like Stephen, his research is grounded on extensive experience. He has worked for a number of consulting firms as an international consultant for many different industries. Chris writes from a practical but conceptually rigorous perspective. He has published extensively, including joint authorship of Management for Engineers (Wiley, 1987), Risk Analysis for Large Projects: Models, Methods and Cases (Wiley, 1987), Managing Project Risk and Uncertainty: A Constructively Simple Approach to Decision Making (Wiley, 2002) and Project Risk Management: Processes, Techniques and Insights (Wiley, 1997 and 2003).
Preface and overview by the authors
Projects are about the planning and delivery of beneficial change. This beneficial change may involve the creation of a desired physical asset or some less tangible organizational change. In either case, the pursuit of opportunities is an inherent central concern. Throughout any project what can be achieved is subject to uncertainty and risk, both of which require careful management alongside an ongoing search for opportunities to improve performance. This book explains how and why uncertainty management should be employed in all projects to pursue all opportunities in the face of uncertainty and risk. This approach goes well beyond what can be achieved with most risk management practice.
The target readership for this book includes two groups of experienced professionals. One group is director level senior managers who would like to broaden the scope and effectiveness of their organization’s current ‘risk management’ process capability for projects, operations and corporate strategy contexts – what some refer to as enterprise risk management (ERM). The second group is those involved in implementing that capability in a projects context. Aspiring members of both these groups are also target readers. This is a very broad target audience, beyond the scope of all ‘project risk management’ books.
In part the wide target readership is driven by the wide scope of the ‘project’ concept which we believe needs to be addressed. In broad terms a corporate view of ‘projects’ includes projects of all types and sizes, from the small and simple to the large and complex, including programmes and portfolios of programmes, fully integrated with associated corporate operations and corporate strategy. This book uses ‘project’ in this broad sense, with a direct concern for the whole lifecycle of projects and the associated deliverable asset or organizational change, from conception to termination. In all cases links between projects, operations and corporate strategy are part of the corporate perspective, and enhancing corporate performance is the basic concern. This goes well beyond the scope of common project risk management practice – one component of ‘the bigger picture’ this book addresses.
In part the very wide target audience for this book is also driven by a belief that whether experienced or not, board members or aspiring project management team members, all managers need a clear understanding of what an effective and efficient uncertainty management process for clarifying opportunity and risk can achieve, and in broad terms how and where it can be used. This kind of ‘uncertainty management’ approach goes well beyond the scope of common practice ‘risk management’ in any context. All managers at all levels also need to understand why much common practice risk management is seriously limited in comparison, and why a change of approach is warranted.
In our view much common practice ‘risk management’ – often misleadingly treated as ‘best practice’ because it is common practice and seems compliant with guides and standards – is riddled with bad practice features, attempting inappropriate tasks using inadequate concepts and tools. Limitations include insufficient scope, inappropriate working assumptions, and limited objectives in terms of pursuing opportunities to improve performance. Typically project risk management is regarded as a process for ‘keeping things on track’ by identifying potentially adverse ‘risk events’ or threats to performance, and aspiring to neutralize them. Most current guides and standards acknowledge the potential for favourable events or opportunities, and addressing uncertainty is now firmly on the agenda of all the guides we are involved with. However, common practice project risk management does not provide a convincing basis for understanding all relevant aspects of uncertainty and exploring all feasible opportunities to enhance corporate performance. The underlying basis for this understanding goes well beyond project risk management and involves a number of ‘bigger picture’ concerns. Comprehensive treatment of uncertainty beyond the scope of guides and standards is essential to transform common practice.
In addition to planning and implementation processes, governance processes also should be informed by the understanding an uncertainty management approach can bring. Such governance goes well beyond simply looking for an approach that is compliant with guides or standards. Setting aside uncertainty management issues which really matter as ‘too difficult’, because they are not readily addressed by existing risk management processes, is unprofessional and unacceptable in our view. This is especially so in a governance context. Effective governance of investment decisions and projects is a very important further ‘bigger picture’ concern.
Risk needs to be seen in terms of downside implications of any sources of uncertainty when commitments are made. Shaping plans to achieve a minimum level of risk for any given level of expected performance for all relevant objectives at any given stage of the project lifecycle should be a core concern. Opportunity needs a broad interpretation that embraces all ways to improve performance, including creative and lateral thinking in formulating plans, exploitation of favourable circumstances, and seeking better tradeoffs between all objectives. This includes objectives which are not measurable. It also includes process considerations. In particular, it includes exploiting improvements in practice that make decisions easier to make and easier to defend whatever the eventual outcome.
Effective management of corporate performance in any context requires an appreciation of the sources of uncertainty that can have a significant effect on future performance at a level of decomposition which reflects their importance and corporate capability to do something about them. ‘Risk events’ in projects, that may or may not occur, need to be seen as just part of a broad view of uncertainty that also includes sources of ambiguity, inherent variability and systemic uncertainty. Recognised lack of certainty has to include ‘the unknowable’, but sometimes uncertainty is usefully viewed as ‘incomplete knowledge’ which can be reduced at a cost or by the unfolding of the project lifecycle. Determining how the lifecycle should unfold has to consider these relationships from a different angle. All sources of uncertainty require attention, at an appropriate level of decomposition for the lifecycle position and process objectives. ‘Risk events’ are often the least important uncertainties.
In this book, ‘best practice’ is given a systematic basis using three component ‘efficiency’ concepts: risk efficiency, clarity efficiency, and opportunity efficiency.
‘Risk efficiency’ is the lowest level of risk for any given level of expected performance. Risk efficiency can be demonstrated graphically for all measurable performance criteria. It should be sought for all non-measurable criteria that matter as well as for all measurable criteria that matter. Risk efficiency matters because less risk for more expected reward is an opportunity that matters.
‘Clarity efficiency’ is the lowest level of effort for any given level of insight about upside and downside aspects of uncertainty which can be communicated to relevant parties. Clarity efficiency matters because less effort for more reward matters. Clarity efficiency is a function of the concepts and processes used to shape plans and decisions.
‘Opportunity efficiency’ requires risk efficiency and clarity efficiency, plus appropriate tradeoffs between risk and expected outcomes for all objectives, plus appropriate tradeoffs between all objectives. Opportunity efficiency matters because better tradeoffs between risk and expected outcomes and better tradeoffs between all objectives matters.
A key feature of this book is using plain English and common colloquial interpretations of key words like ‘risk’, ‘opportunity’ and ‘uncertainty’. We shape perceptions about how these words are used by a limited number of explicit working assumptions, like our definitions of risk efficiency, clarity efficiency and opportunity efficiency. We explicitly go beyond the long legacy of conflicting and limiting technical definitions of terms like ‘risk’ which cripple current common practice.
An opportunity can still be seen in a colloquial sense as a situation where doing something desirable is easier than usual, and colloquial interpretations of other terms are still part of the language available. However, these three efficiency concepts collectively clarify why ‘best’ practice is very different from what many argue is ‘good’ practice, and why best practice involves a revolution relative to common practice.
All the central concepts and tools in this book have been used in successful practice since the 1970s, but they are more clearly explained in this book than in earlier publications by the authors, using simpler language and particularly simple but very effective recent applications, including a successful 2007 re-estimation exercise of a £20 billion portfolio of major road projects undertaken with the UK Highways Agency.
The way we choose to look at things matters. The concepts and words used to analyse situations and communicate our insights matter. They are part of the scope for opportunities that...