Uncertainty About Objectives at Operational Levels

Careful attention to formal project risk management is usually motivated by the large scale use of new and untried technology while executing major projects, and other obvious sources of significant risk. A threat perspective encourages a focus on these initial motivating risks. However, key issues are often unrelated to the motivating risks and are usually related to sources of ambiguity introduced by the existence of multiple parties and the project management infrastructure. Such issues need to be addressed very early in the project and throughout the PLC, and should be informed by a broad appreciation of the underlying "root" uncertainties. A decade ago most project management professionals would have seen this in terms of a suitable high level activity structure summary and a related cost item structure. It is now clear that an activity structure is only one of six aspects, the "six Ws", which need consideration (Chapman and Ward 1997), the:

• Who (parties or players involved)

• Why (motives, aims, and objectives of the parties)

• What (design of the deliverable)

• Which way (activities to achieve the deliverable)

• Wherewithal (resource)

• When (time frame).

All six aspects are interconnected and need joint consideration in the pursuit of project performance (Chapman and Ward 1997). Much more critical than understanding the detailed activities proposed in a project is the need to appreciate the relationships between key parties to the project, their various objectives and motives, and the trade-offs parties are prepared to make between their objectives. The six Ws constitute a core framework for managing trade-offs between time, cost, and other performance criteria, different trade-offs for different project parties, and trade-offs that change over time.

A very common, specific context is projects that involve a buyer and supplier(s). In such contexts it is important to the buyer that the supplier be motivated to perform in the best interests of the buyer, via suitably formulated contractual arrangements. This means that the buyer must first resolve uncertainty about their own objectives and performance criteria for the product or service they seek. Specifically, the buyer needs to:

1. Identify pertinent performance criteria.

2. Develop a measure of the level of performance for each criterion.

3. Identify the most preferred (optimum) feasible combination of performance levels on each criterion.

4. Identify alternative combinations of performance levels on each criterion that would be acceptable instead of the optimum.

5. Identify the trade-offs between performance criteria implied by these preferences.

Adopting an iterative process and using a minimalist approach on the first pass may be the most effective way to complete these steps. The information gathered from these steps can then be used to formulate appropriate incentive contracts by selecting some or all of the performance criteria for inclusion in the contract, developing payment scales which reflect the acceptable trade-offs, and—with the supplier—negotiating acceptable "risk sharing" ratios for each contract performance criterion.

Clearly, steps 1—5 are not only applicable to buyers contemplating contractual arrangements with external suppliers. These steps should be undertaken by any project owner, particularly in the early conception and design stages of a project. Undertaking these steps should be part of the process of understanding the relationships between the six Ws of the project and managing uncertainty about project performance. The process of identifying and considering possible trade-offs between performance criteria is an opportunity to improve performance. It should enable a degree of optimization with respect to each performance measure, and it is an opportunity that needs to be seized. As a minimum, this process involves consideration of appropriate and effective trade-offs between cost, time, and quality—where "quality" involves performance measures other than capital cost and time, like operating cost (including maintenance and periodic refurbishment) and costs over the life cycle of the delivered product. Simultaneous improvement in all three areas of cost, time, and quality is rarely achievable, particularly in managing project risk, and it is important to be clear what appropriate degrees of freedom are available. In the face of a realized threat, any attempt to preserve performance in all three areas usually results in uncontrolled degradation of all three. In a deterministic context (no uncertainty), we can focus on what is most important. For project risk management purposes, it is vital to understand priorities, to know what is least important and what can be sacrificed.

This has important implications for performance measurement and the management of trade-offs within a single organization. For example, carrying on with the earlier example: how much is it worth to a project to be able to complete the design faster? If a trigger-based incentive contract with an internal design department is used, fewer hours may be required because the incentive structure will reduce multitasking. If multitasking is reduced, will the efficiency of the design department improve enough to eliminate the rumour of selling off the design function (outsourcing all design), which might be underpinning risks related to loss of staff and low morale? If these downside risks are eliminated, can the "upside risks" or opportunities associated with easy hiring and low turnover of good staff, high morale, and high efficiency be managed explicitly via a "virtuous circle?" Generalizing in other ways, would a flexible pipeline (laid by reel barge) be better than a rigid pipeline, and is a pipeline the best way to bring the oil to market?