Against the Gods”, against all odds
Project management is all about managing uncertainties...
Dramatic and deviant as it may sound, my title of this article attempts to capture the essence of risk management in our (bold, brave) decision making processes. Through the ages, man has ascribed all uncertain events, unknown phenomena and unsolved mysteries, to the omnipotent and omnipresent entity called god, so much so that the most famous book on risk management is titled “Against the Gods”. Or, consider that the new book on Bitcoins is named “god is a gamer”! Even an atheist like Einstein famously said, “coincidence is god’s way of remaining anonymous”, wherein, I would replace coincidence with uncertainty, and nothing will change.
Management is mostly about decision-making, and making decisions is such a challenging thing to do, because of uncertainties. Therefore, I have many times told my friends, risk management is not a chapter in business management but that business management is synonymous with risk management and vice-versa. Think about it, if the future outcomes of the decisions that you are taking today, are definitively known to all and sundry, then you, a very important and knowledgeable manager, would not be required to take that decision, even a baby could do it. Fortunately or unfortunately, this is not so, and a large number of variables make decision making into a complex affair. However, thankfully we do not have to depend on gods for dealing with these odds; we can follow a scientific approach of risk management which can be largely quantitative, with at best a garnishing of intuition/instinct.
Managing a project has its own share of uncertainties, which in turn give rise to risks. For example, both project cost estimates and project time schedules have to be dependent on some uncertain variables like, say, inflation, foreign exchange rate variation, prices of steel and cement, unforeseen or accidental damages to equipment, unrest of construction workforce, failure of contractors, encountering unexpected strata while excavating, fire or flooding at site, attrition of key personnel, excessive rains, unprecedented heat waves, political interference, delay in right of way or land acquisition, financial constraints, etc. Assumptions have to made on these counts in order to arrive at an agreed cost and time parameter, and the risks that arise are managed through a combination of risk avoidance, risk reduction, risk acceptance and risk transfer.
Some of the tools that are used in this process are risk modelling spreadsheets, sensitivity analysis, fall-back plans (often called Plan B) insurance products, forward covers, incentive mechanisms for contractors and/or employees, penalties or liquidated damage or similar contractual features, pressure testing (computing “what if” scenarios considering a combination of downside risks materialising together), type of contract itself (for example, a turnkey contracts shifts some of the risks to the contractor at a commensurate cost) and many more such options available to a trained project manager. But, I would say that nothing can substitute the basic risk management technique of making dispassionate, pragmatic and realistic choices while considering key assumptions. A sure shot recipe of disaster in the making, is unbridled optimism. One of the commonly used, and “easy to apply” tools is the famous probability vs impact matrix, which helps us to empirically analyse and classify the uncertainties based on combination of likelihood of something happening and its material effect on cost or time.
Two dissimilar points need to be made in this context. The first one, is that it is a very good strategy to focus on aligning the motivations of various involved parties, so that they are incentivised to pull the project in one direction with speed, and there are no counter currents of other disparate or opposing motives. A project manager has several tools in his repertoire, in order to implement this strategy, but these have to be well thought through and coordinated in advance.
The other important point to note is the role of higher management or board of the company to ensure adequate review of the risks, and periodic oversight of the project, with particular emphasis on discovery of issues arising from negative outcomes of uncertain variables, can never be over-estimated. Many more projects have gone under due to failure of board oversight, than those which have failed due to incompetent project managers. An organisation with robust corporate governance processes is less likely to have inadequate risk management and consequently, will be that much less likely to produce failed projects.
- SUMIT BANERJEE