© risk decisions, 2009 getting a return on investment from risk management val jonas ceo, risk...

© Risk Decisions, 2009

Getting a Return On Investment from

Risk Management

Val Jonas

CEO, Risk Decisions Group


Agenda

· Understanding uncertainty and risk

· Impact on ROI

· A recent example & conclusion


Part 1

Understanding uncertainty and risk


Uncertainty & Risk

• Risk analysis & Tornado results

{ • 3 point estimates (Max, Min, Most likely)

• Identified risks(probability & Impact)


Budget Uncertainty Analysis

Cost (£k)

Like

lihoo

d

0

20%

49%

60%

80%

100%

£4

5,0

00

£5

0,0

00

£5

5,0

00

£6

0,0

00

£6

5,0

00

£7

0,0

00

£7

5,0

00

£8

0,0

00

£8

5,0

00

£9

0,0

00

50% confidence

(Excluding Risk Events)


Cost (£k)

£45,0

00

£50,0

00

£55,0

00

£60,0

00

£65,0

00

£70,0

00

£75,0

00

£80,0

00

£85,0

00

£90,0

00

Baseline (incl. Estimating Error) Exposure

Budget Uncertainty Analysis

RiskAppetite

(Excluding Risk Events)

‘Long’ right hand tail may indicate risk events (which should be

managed in risk register)

Ta

rget

Max

imu

m

Aggressivetarget

Non-Aggressivetarget

Min

imu

m

Lik

ely


0

2,0

00

4,0

00

6,0

00

8,0

00

10,0

00

12,0

00

14,0

00

16,0

00

18,0

00

20,0

00

22,0

00

24,0

00

26,0

00

28,0

00

30,0

00

32,0

00

34,0

00

36,0

00

Provision for known risks

Provision for Known Risks

Exposure

Bu

dg

et

RiskAppetite

Max

imu

m

Min

imu

mPay attention to ‘Long’ right hand tail (must identify mitigation

actions)


Managing uncertainty and risk

¾ Manage cost and schedule over-runs• Estimating accuracy• Resource management• Project & change control

¾ Manage known threats• Proactive risk mitigation actions• Treat, transfer, tolerate, terminate• Budget and authority in place

¾ Exploit opportunities


Focus on ‘Left Shift’

Baseline

Targ

et

Reserve

Co

ntr

act

ed

Exposure


How to convince senior management?

¾ Limited ability to interpret risk analysis results¾ Confusion over meaning of Risk Appetite¾ Consider risk budget spent as ‘wasted’¾ Focussed on business objectives

(and the bottom line)

… We need to find new ways of getting information across to managers


Part 2

Impact on Return on Investment


Achieving return

· Contracting routes¾ Fixed price (vs. cost plus)¾ Fixed base + performance payments¾ Bonuses & penalties for on-time or late delivery¾ Pain / gain-share

· Business case¾ Need to understand sensitivity to uncertainty and risk


Modelling performance

Outcomes

Inputs


What-if scenarios on schedule

· Analyse the schedule

· Impacts of schedule uncertainty on:¾ 1a. Performance payments¾ 1b. Penalty and bonus payments¾ 1c. Costs of the ‘Marching Army’

· Contain the impact of schedule slippage


19 O

ct 2008

8 N

ov 2

008

28 N

ov 2

008

18 D

ec 2

008

7 J

an 2

009

27 J

an 2

009

16 F

eb 2

009

8 M

ar

2009

28 M

ar

2009

17 A

pr

2009

7 M

ay 2

009

27 M

ay 2

009

16 J

un 2

009

6 J

ul 2009

26 J

ul 2009

15 A

ug 2

009

4 S

ep 2

009

24 S

ep 2

009

Analysing the schedule

Baseline Schedule Reserve Exposure

Max

imu

m

Min

imu

m

Targ

et

RiskAppetite

Co

ntr

acte

dAggressive

targetNon-Aggressive

target


1a. Impact on performance payments

Expected Reduction of 15% ROI

Zeroperformancepaymentfor latemilestones


1b. Added impact of penalties/bonuses

NegativeexpectedROI(down 21%)

Dailypenalties/ bonusesfor late / earlydelivery


1c. Added impact of the ‘marching army’

No chanceof positiveROI(down 23%)

Assumes noopportunityfor savings iffinished early



Contain schedule slip


Managing the uncertainty

What-if’s based on containing the schedule slip:

(Do we really want this contract?)


What-if scenarios on risk

· 2a. The cost of risks materialising

· 2b. The post mitigation position

· 2b. Pain/Gain-share contracting


Back to base case model

Outcomes

Inputs


2a. Impact of risks materialising

Risks impact(down 12%)

Assumesno risk mitigation



Manage the risks


2b. Impact of risks (post mitigation)

Mitigatonsaves2% ROI


Risk sharing scenario15%

confidence65%

confidence


2c. Pain/Gainshare contracting

Back to15% ROI

Customershareof the risk payment


More what-ifs …


Part 3

Conclusion


but… …can we afford not to manage risk?

Not so much a question of… what is the value of risk management?


‘Getting a Return on Investment from Risk Management’

White paper:www.riskdecisions.com

Val Jonas, CEO Risk Decisions Group

http://www.riskdecisions.com/

© risk decisions, 2009 getting a return on investment from risk management val jonas ceo, risk...

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