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White Paper

The Business
Case For Project
Risk Management
A briefing paper for IT and
Finance Directors who are
fighting a losing battle
against runaway project
expenditure

By Bryan Barrow PGDip MAPM MBCS CITP


The Business Case For Project Risk Management White Paper

© 2010 Bryan Barrow

All Rights Reserved. No part of this publication may be duplicated or


copied in any way without the express prior permission of the
publishers.

No responsibility for loss caused to any individual or organisation


acting or refraining from action as a result of the material in this
publication can be accepted by the publisher or author.

Tel: +44 ( 0 ) 7 050 192277


Email: info@bryanbarrow.com
Web: www.bryanbarrow.com

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The Business Case For Project Risk Management White Paper

The business case for


project risk
management
The benefits of project risk management go way beyond the minor
advantages of having a list of potential threats in a risk log. Risk
management can transform the fortunes of your projects and your company.
Project risk management can help you avoid delays, reduce cost overruns,
deliver benefits faster and at lower risk and take advantage of opportunities.

Good project risk management helps you to


deliver on time and on budget
• St. Pancras station. The transfer of Eurostar services from Waterloo to
St. Pancras stations was the culmination of the £6Bn project to introduce
the high speed Eurostar service, but the transfer itself took less than 24
hours. Engineers started to dismantle the fixtures and fittings within
minutes of the last train leaving Waterloo just after 6 p.m. on Tuesday
12 November 2007. By 11 a.m. the following morning Eurostar was
open for business as usual at St. Pancras station with the first train, the
11:01 service to Paris1. Eurostar reported a record rise in sales for the
first quarter of 2008, up 25% to £178.4M ($352.4M).

• Manila Embassy Relocation project. The Canadian Department for


Foreign Affairs (DFA) project to relocate one of their largest missions
for immigration was achieved on time and on budget. The original plan
was to complete the project by March 2005, but by combining the
Australian and Manila missions the DFA were able to fast-track the
project, bringing it forward by a whole year and reducing the cost by
almost 30%. The new Embassy opened as planned in November 2003.
The DFA cited the use of risk management as critical to the successful
relocation of the mission2.

1 http://news.bbc.co.uk/1/hi/in_pictures/7093730.stm

2 http://www.tbs-sct.gc.ca/rm-gr/arm-pgr/exfed3_e.asp

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The Business Case For Project Risk Management White Paper

Bad project risk management leads to failed


projects that can cripple your company for years
• Heathrow Terminal Five. The opening of this £4.3Bn terminal in
March 2008 saw an immediate meltdown of the baggage handling
system which took over a week to resolve. BA had to cancel more than
430 flights and clear a backlog of 28,000 items of luggage3. The effect
on passengers was catastrophic: passengers were delayed, missed
connecting flights, were forced to fly to their destination without their
luggage or were stranded in London because they could not get to their
destination. More than 400 extra staff were called in to deal with the
backlog. The fiasco cost BA around £50M and two top executives lost
their jobs.

• West Coast mainline upgrade. The planned upgrade to the West Cost
Main Line at Rugby led to almost a week of disruption and a record fine
of £14M for Network Rail4. The upgrade to a 40-mile section of track
overran by four days at the end of the Christmas holiday period, but rail
operating companies and passengers received just a few hours notice,
leaving operators unable to run trains and passengers either stranded or
having to use alternative means of transport. The delays put at risk the
planned upgrades for 2008, ahead of a timetable change due to take
effect in December 2008.

• Single Payments Scheme. This project to implement a system to


administer payments to UK farmers overran by £48M and was unable to
meet its target of processing 96% of cases by March 2006. As a result
payments to farmers were severely delayed, costing farmers between
£18M and £23M in interest payments and additional bank borrowing5.
The Chief Executive of the Agency lost his job as a result of the
debacle.

3 http://news.bbc.co.uk/1/hi/uk/7322453.stm

4 http://www.rail-reg.gov.uk/server/show/ConWebDoc.9082

5 http://www.nao.org.uk/pn/05-06/05061631.htm

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The Business Case For Project Risk Management White Paper

The key measure of good project risk


management: actual versus planned benefits
The majority of projects cost far more than planned and
deliver far less

According to research by the Standish Group about one fifth of projects are
cancelled before completion. Even those that are completed only do so at
great expense; they run over time and over budget - what the Standish
Group called “challenged” projects6. Often, descoping features is the price
paid for delivery. However, projects that profit in the short term pay the
price later. The Department for Food and Rural Affairs (DEFRA) were
fined £36M by the European Commission for "inadequate control
procedures or non-compliance with EU rules" on farm spending7.

Fig. 1: Comparison of project success


rates, 1994 and 2006.

The good news is that the proportion of


successful projects has doubled in
twelve years.

The bad news is that over the same


period the proportion of successful
projects is still less than half of all
projects surveyed . More than half of
projects are still cancelled before
completion or fail to deliver the
expected benefits.

Source: Standish Group

The key thing to measure is actual benefits, not actual costs


The actual cost of a project is only half of the story. And it’s the wrong
half. What you need to focus on are actual benefits. These will not occur
unless the project delivers. Even then, the benefits you go on to receive are

6 http://sdtimes.com/content/article.aspx?ArticleID=30247

7 http://news.bbc.co.uk/1/hi/uk_politics/6572687.stm

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The Business Case For Project Risk Management White Paper

dependent on two things:

• Whether features need to be de-scoped in order to deliver the project –


this may help the project to deliver on time but can often be at the
expense of the long-term costs and benefits, and;

• Whether the operational costs – the cost of live running, support, etc. -
are higher than forecast. These can often be affected by late project
delivery, by de-scoping of features and by the cancellation of projects.

Your goal should always be to monitor the actual costs and to keep an eye
on the likely benefits. Risk management is essential to delivering business
benefits.

Why you should be investing in project risk


management
You can save up to 50% of your project’s costs

Fail to manage your project’s risks and they’ll eventually become issues.
The greater the number of issues you have to deal with, the greater the
proportion of time that gets spent dealing with them. These costs begin to
mount up. The average overrun? 89%, or nearly double the original
project cost. Control your risks before they become issues and you stand to
save about half of your eventual project cost.

Fig. 2: Comparison of planned versus


actual project costs.

Most projects cost about twice as much


as originally estimated. They also take
twice as long too.

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The Business Case For Project Risk Management White Paper

Good risk management is now a key differentiator

If the potential costs to your company aren’t a big enough incentive, think
about the damage it will do to your company if your partners believe that
you cannot manage risk effectively.

A greater proportion of projects than ever before involve partnerships.


These can be with:

• Your clients;

• Their sub-contractors, or;

• Your sub-contractors (including consultants, sub-contractors and parts


of your business that have been outsourced).

If you’re managing a project involving these third parties, your failure to


manage to time and budget can cost them money too. If you get a

Fig. 3: The relationship between good


risk management and project delivery.

The Pareto principle applies here: 20% issues,


of your project’s risks will go on to problems,
cause 80% of your issues, problems, delays and
delays and fire-fighting.
fire-fighting
Unless you do something to prevent
them.
risks

reputation for poor delivery your partners will find ways to avoid doing
business with you if they can. Instead they will go elsewhere, leaving you
struggling to find partners willing to do business with you.

By developing your company’s risk management skills you can


differentiate yourself from your competitors. You can prevent partners
from loading up your project costs, you can attract the best partners and sub
-contractors who actively want to work in an environment where they can
plan their projects in the knowledge that they won’t be held up or delayed
and you can create long-term relationships with companies who can help
you fulfil your company’s goals.

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The Business Case For Project Risk Management White Paper

In a financial downturn good project risk management is


even more important

For the past decade we’ve benefited from a benign economic climate. This
has been a period of sustained economic growth, easy access to finance and
low inflation. Those days are over and you now need to be ready to do
business in a harsh economic environment.

In the days of solid economic growth and easy access to financing it would
not have been acceptable to operate loose financial controls, but let’s be
honest; it probably has happened. Not any more: you can no longer afford
to spend money you don’t have and if your projects are not delivering
you’ll be wasting money you can’t afford. Every one of your projects that
runs over time and budget represents money coming straight off your
company’s bottom line. If you’re not taking steps now to manage through
the economic downturn you can bet that your competitors will be. They
will come through this period leaner, fitter and better able to do business in
the future. Will you be able to compete with them? Will your company
even survive the economic downturn?

How you can calculate the benefits of project


risk management for your business
To work out the benefits of risk management to your company:

• Estimate the potential savings both during the complete life of the
project and to your operations and support costs;

• Estimate the increase in business benefits that come from delivering on


time, and;

• Estimate the costs that would be incurred through increased risk


management activities.

In producing the list of benefits I’ve drawn on my experience in working in


I.T. and application development projects. However all types of projects
can benefit from using risk management, as you’ll see.

Start with the benefits to project managers and their teams

1. More realistic project plans. Once you start actively managing risks
your plans become more realistic as they now better reflect the work
you really need to do in order to deliver successfully.

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The Business Case For Project Risk Management White Paper

2. More accurate project budgets. A direct result of more


comprehensive plans is that you have a better basis for costing and
budgeting.

3. Better contingency planning. By identifying the key threats to your


projects and programmes you can more easily identify what
contingencies you need to put in place.

Now add the benefits to project stakeholders and end users

4. Better communications and coordination. Poor stakeholder


involvement is one of the key causes of project failure. With risk
management you’ll be able to spot potential problems with stakeholder
involvement and resolve these problems more quickly.

5. Better resource utilisation. Stakeholder teams need to plan resources


just as much as project teams do. By improving overall planning and
scheduling stakeholders can provide better support to your project.

6. Greater stakeholder involvement. The earlier and better you are


able to describe the tangible risks to your project, the easier it is for
your stakeholders to understand the issues you need help with and the
easier it is for them to get involved.

7. Faster delivery of benefits. Avoiding late delivery means your


projects start repaying their investments earlier. Avoiding cost
overruns means that your profit margins are preserved

Fig. 4: How much would it be worth to


you if you delivered just one of your key
projects one time? Think of all that you
could do with the money you didn’t
waste.

Now add the benefits to IT and Finance directors

8. Lower costs. Avoiding cost overruns means lower overall project and
support costs.

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The Business Case For Project Risk Management White Paper

9. Better overall resource utilisation. Risk management doesn’t


eliminate hold-ups and delays. However it can help to identify how
best to use resources across key programmes so that you minimise
overall delays to your programmes.

10. Greater support for strategic objectives. A risk based approach


makes it much easier to see the threats to your corporate objectives.
This helps you to align your key projects to the fulfilment of your key
programmes.

11. Ability to reuse unspent contingency funds. Once your projects start
completing on time you can re-use any unspent contingency funds
elsewhere in your business. This may make the difference to the
survival of other projects, which in turn means additional positive cash
flow.

Now add the benefits to your clients, suppliers and sub-


contractors

12. Better client and supplier relationships. Once you involve your
clients and suppliers in your risk management planning, you’ll take
your relations to a whole new level. Together you will have a better
understanding of your respective issues, challenges and threats and
will plan ways around them together.

13. Better cross-project communications. More and more projects


involve a collaboration of suppliers, sub-contractors and partners.
Risk management helps to maintain good, open communications
channels—a key factor in project success.

Now add the benefits to your sales force or your account


managers

14. Better proposals, pitches and sales presentations. Proposals can


now be based on more accurate costings and realistic schedules. You
no longer have to bid low and hope that you can deliver. Instead, you
can price work knowing that you can stay within budget and achieve a
profitable return on your investment. Even better, your customers will
begin to award you work because you can deliver on time, even when
you are not the cheapest option.

15. Greater credibility with clients. If you’ve ever had to promise


something your company then couldn’t deliver, you’ll know how
much that hurts your credibility. Risk management doesn’t mean an
end to vapourware. It does mean you’ll put forward more realistic

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The Business Case For Project Risk Management White Paper

plans and proposals which better reflect the risk of delay. You’ll also
learn about problems that may affect your company’s ability to deliver
at an earlier stage so that you can keep your customers informed of
progress.

16. Better conversion rates. Once your clients see that your estimates
can be relied on and that you’re better at timely project delivery than
your competitors, they will start turning to you for new work.

Now add the benefits to your design and development


teams

17. Better designs. By anticipating design risks earlier you can create a
design for your product that works and that helps you to identify and
eliminate defects.

18. Better resource planning. Getting your design and development


teams involved at the right time is vital to achieving a smooth and
even resource profile, avoiding the last minute hiring of contractors or
the stalling of projects due to a lack of resource.

19. Higher productivity. The key to high development team productivity


is minimising re-work and rectification of mistakes. By producing
better designs and eliminating defects earlier in the development
cycle, your developers can spend more of their time working on
productive activities and not on fire-fighting.

20. Better products! More time spent on developing your products


means more time for new feature development, instead of patching up
old products. This keeps you ahead of your competitors and helps you
keep your customers.

Now add the benefits to your test team

21. Better use of test team resources. When your projects run on
schedule, it becomes easier for testers to plan their time so that they
are available when you need them. This means no more hold-ups
waiting for resources to become available.

22. More time for testing. All too often, time for testing is cut to the
bone in order to reduce the impact of slippage from earlier on in the
project. With good risk management in place you can deliver
solutions into testing sooner so that they can be tested fully.

23. Earlier identification of defects. By testing earlier and more fully

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The Business Case For Project Risk Management White Paper

you’re able to eliminate defects from the final product and at an earlier
stage. This translates into better products. The cost of late defect
removal is staggering: a defect that slips through testing into the final
product costs up to 1,000 times more to fix than if it were resolved
before the product shipped. Each defect you find during testing leads
to lower costs.

Now add the benefits to your IT operations and support


teams

24. No more patching up old systems. If delays to projects are a


problem for project teams, they are a nightmare for IT operations and
support teams who often have to patch up old systems for months – if
not years - while waiting for the new ones to arrive. By delivering on
time you avoid these costs and allow for the timely disposal of old
systems. You’ll be able to terminate expensive support contracts and
licence fees for old hardware and software. Your existing resources

Fig. 5: When you proactively manage


your project’s risks you eliminate the
root causes of future project issues.
This means you deliver faster, at lower
risk and without the fire-fighting you
usually get with most projects.

can then focus on your company’s future and not on short term defect
fixing.

25. Better resource utilisation. More predictable deliveries means that


operations teams can plan their future resource needs, including
training people ready to support the new systems. This means no
more last minute requests for extra resource and no more wasting
money hiring in people to maintain old systems.

26. Fewer day-one disasters. When your projects start arriving on time

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The Business Case For Project Risk Management White Paper

you take the pressure off operations teams. With good risk
management in place you can plan upgrades in confidence, knowing
that the new systems will arrive on time.

How you can get more from your investment in


projects, starting today
Step 1: Calculate how much your company stands to lose through not
having risk management in place right now. You don’t have to take
forever to come up with a rough idea of the risks you’re currently running.
Ask yourself how much it could cost your company if any of the following
were to happen:

• If you have to cancel a project right now and write off the investment to
date;

• If you complete a project late and as a result you are unable to achieve
the expected benefits. This could be because of a failure to achieve
improvements in productivity, or the need to extend an expensive
maintenance contract, or the need to hire new people;

• If each one of your current projects came in just one week later than
planned, and as a result cost the equivalent of one week’s project spend;

• If you lost a key contract because of a late running project;

• If you were sued by a client, supplier or partner, or had to pay liquidated


damages to them, because you failed to meet the terms of a contract;

• If you failed to meet some legal or statutory obligation because one of


your projects failed to deliver on time.

Step 2: Decide which of your projects need to implement risk


management as a priority. Just going through the above review will help
you to see what your current exposure to loss is without getting into too
much detailed analysis. Find out which of your projects already has
effective risk management strategies in place which are working. Focus
your attention on the ones that don’t.

Step 3: Set tangible goals for your return on your risk management
investment. Once you have a better idea of your potential exposure and the
specific projects that are most at risk, you can start to build a business case
for your investment in risk management. My rough rule of thumb is this: if

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The Business Case For Project Risk Management White Paper

you spend the equivalent of one week’s project expenditure on risk


management and as a result the project comes in just one week earlier as a
result, then I believe your investment will have been worth it. In practice
you’ll find that you will save weeks, if not months. This means your
investment will repay itself several times over on just this one project.

Step 4: Secure your risk management training budget. Once you have a
clearer understanding of the potential loss, the particular projects that are
most at risk and a tangible goal for your investment you have all that you
need to make the case for your risk management training budget.

Step 5: Implement your training plan and monitor the improvements


in results. The benefits of using risk management don’t all appear at
once, but they do appear.

At first you’ll notice many more items being escalated for action. This isn’t
because things are getting worse, it’s just that for the first time people are
openly discussing and trying to resolve problems that in the past would
have gone unnoticed until they became serious issues. Next you’ll see your
people are tackling problems earlier and resolving them more quickly and if
you’re a project manager, they start taking responsibility for resolving
problems and will come to you only when they can’t fix the problems
themselves.

If you’re a finance or I.T. Director, you’ll start seeing better, more


comprehensive risk reviews, clearer plans and detailed and realistic
contingency budgets. Oh, you’ll soon see a string of successful projects
too.

What to look for in a risk management consultancy

Real world experience. Our background is in project management, not


Fig. 6: Risk management tips, articles training. We’ve managed projects and had our share of successes and
and guides help to reinforce skills
failures. So we know what your people go through and can give them
learned on our courses
practical advice.

A focus on improving attendees’ motivation to act, rather than on the


tools and techniques. There are dozens of books on risk management, but
real change comes from getting people to use the techniques and that means
working with them so that they are personally motivated to change.

A focus on delivering tangible results. We want to be judged on the


success we bring to your project success rates.

Tailored training programmes. We can work these around specific

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The Business Case For Project Risk Management White Paper

projects so that your project team leaves the course with the risk
management plans they need to drive your project.

The use of real life case studies. Our consultants have years of experience
and use their knowledge to explain how our techniques work in practice.

Accountability. Since we only train people in the use of our methods, we


have a vested interest in making sure that they work.

How we can help


Our core services:
• Risk management audits. If you have projects in progress right now,
what do you know about their current key risks? Often the answer is:
“Not a lot”. By auditing your key projects you can identify potential
threats to your business programmes. Audits are fast and very cost
effective – the typical audit reveals problems that could cost your
company a fortune. Audits don’t stop your people from working. In
fact our audits often help your people to focus on real value added
activities, rather than waste time fire-fighting.

• Risk planning workshop facilitation. If you’re starting a new project


it’s vital that you identify and prioritise potential risks at an early stage.
Sometimes it’s better to use a third party facilitator who can help you to
do this. If you don’t have someone with the facilitation skills you may
not have time to wait while you train someone. Even if you do have a
trained facilitator they may struggle if they are seen as being on one side
or another.

Other services:
• Risk Management training. for those who are not directly involved in
managing risks but who need to understand the risk management
process.

• Risk management coaching. The biggest drawback of training is that


your people can stop using their new skills once they get back into the
workplace. The aim of coaching is to reinforce the learning so that it
becomes a permanent improvement, instead of a temporary change.

• Risk management seminars for clients and stakeholders. These are a


powerful way of demonstrating how your company differentiates itself
from others and is often the first step to training your partners to
improve their risk management skills, reducing the risks they represent
to your programmes.

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The Business Case For Project Risk Management White Paper

“The Business Case For Risk Management”


By Bryan Barrow

Risk Management Consultant and professional speaker

www.bryanbarrow.com
Is your company spending more than it can afford to on projects? Does every project proposal that crosses
your desk fill you with hope that you ’ ll get good value for money, or fill you with fear that this will be yet
another drain on your company ’ s scarce resources in the weeks and months to come?

If you ’ ve ever needed to reduce your project costs, increase your return on investment and put your
company ahead of the competition, then this White Paper will help you.

About the author


Bryan specialises in helping IT Directors who are frustrated because they can't get their

projects delivered on time and on budget. With Bryan's help they are able to complete

projects faster and at a lower cost, so they go on to profit from delivering on time. Bryan

works as a professional speaker and consultant. He runs risk management seminars and

workshops and provides executive coaching.

Other white papers in this series:

Effective Risk Management In The Real World


This talk was first delivered to the Bristol Chapter of the British Computer Society in
February 2008. It explains why risk management matters, examines key mistakes
that most projects make in managing risks and goes on to offer real world solutions.
Read Effective Risk Management In The Real World

Are You Making These Risk Management Mistakes?


This talk was delivered at the Association for Project Management’s KnowledgeShare
event in May 2010. It identifies the top people, process and communication risks that
can cripple your projects and outlines a fast and effective formula that you can use to
deal with them.
Read Are You Making These Risk Management Mistakes?

Copyright © 2010 Bryan Barrow - 16 - www.bryanbarrow.com

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