Chapter 24: Project Risk Management - The Required Transformations to Become Project Uncertainty Management

Chris Chapman, Ph.D.University of Southampton
Stephen Ward, Ph.D.University of Southampton

Introduction

Project risk management is an essential part of project management, aimed at improving project performance via systematic identification, appraisal, and management of project-related risk. This aim, improving performance, implies a wide perspective that seeks to manage both threats, which if they occur have a negative effect on project performance, and opportunities, which if they occur have a positive effect on project performance (Project Management Institute 2000, 127; Simon, Hillson, and Newland 1997). In practice, the emphasis is often on managing threats or "down-side" risk. This emphasis might reflect a difficulty in throwing off the commonly understood meaning of "risk" or an underlying view that it is more important to manage threats than opportunities. A focus on threat management is reasonable, and very useful in the face of a general tendency to set challenging objectives. If a "tight" budget for a project is set, then by definition this implies a preponderance of threats to keeping to budget rather than opportunities for coming in below budget. Nevertheless, if the potential for opportunities is never explored, opportunities will not be discovered and exploited.

The importance of project opportunity management in project risk management has been understood for some time, and interest in project opportunity management has been growing steadily. For example, the approach to project risk management adopted worldwide by British Petroleum (BP) International in the mid-1970s (Chapman 1979) was built around the concept of risk efficiency (a minimum level of risk for a given level of expected profit or cost). This is a very basic objective for both opportunity and threat management. BP's approach also reflected a linked key objective for opportunity management: an aggressive approach to expected profit, so long as the risk/expected cost trade-off did not expose the organization to potentially catastrophic losses at a higher level of risk than other aspects of its operations. In addition, BP's approach recognized the importance of managing good luck as well as bad luck, and the need for corporate culture changes that would empower more explicit opportunity management. The IBM United Kingdom (UK) Forum 2 program in the late 1980s was built on these ideas to engineer a culture change involving less bureaucracy, faster responses, and more aggressive risk taking. The NatWest Bank internal project risk management process of the early 1990s transformed itself into a program benefit management process by the mid-1990s, which linked all project risk management to achieving the benefits of the program (portfolio of projects) as a whole; as defined in terms of the business case used to approve the program. These developments are all reflected in Project Risk Management: Processes, Techniques and Insights (Chapman and Ward 1997). And the opportunity management emphasis of that book has generated further interest in project opportunity management.

To emphasize the need for an even-handed approach to opportunities and threats, Ingemund Jordanger (1998) of Statoil recently adopted the term "project uncertainty management", instead of project risk management. This was a bold and seminal step. However, if the term project uncertainty management is to achieve the full potential that this term facilitates, it has to embrace more than a change in emphasis with respect to opportunities and threats as events that may or may not occur. What is needed is attention to uncertainty in terms of variability and ambiguity arising from a lack of knowledge, not readily attributable to a particular set of events or conditions, and therefore not readily treated as risk in the project risk management process. This chapter briefly explores four specific areas of ambiguity that need to be addressed and incorporated in an uncertainty management paradigm.