Jun 30

Risks out of control

In any project some of the projects costs and benefits are out of your control. Not through any fault of the project. It’s just the way it is.
In any business case there will be a number of macroeconomic and other external factors in play, and with the market discontinuity in the last year these have seen unprecedented turbulence:

  • Cost of funds -used for your IRR or NPV of cost and benefits, and possibly any project financing.
  • Exchange rates, particularly for multinational projects : although for offshore work, the vendor bears this risk, any adverse movement in x-rates can impact the vendors appetite for continuing work, and so still pose a risk to the project.
  • Raw materials costs, for the business or the project. Will high fuel prices blow your travel budget?
  • End product prices and sales volumes. You will have heeded my warning not to justify projects on increasing sales without demonstrable justification but still a 50% drop in sales is going to impact the businesses willingness to invest in projects.
  • And throw in a few non ecomomic factors. What would happen if 30% of you project team were suffering from swine flu in the month of go live?

How should a project cope with this turbulence?

  • Firstly you should identify the risk. Any assumption made in planning should be documented and the risks from changes to the assumptions identified.
  • Stress testing and scenario planning. Once you have established the assumptions see the impact on changing them: Double them and halve them. Double some and halve others. What does this do to your business case?

On the outcome of your scenarios then you can use the standard risk countermeasures:

  • Prevention. If the risk has too big an impact then terminate the risk – even to the extent of stopping the investment.
  • Reduction. If the project travel budget can’t absorb a future increase in airfares then reduce travel plans now, and buy a good conference phone.
  • Transference. Speak to your CFO or treasury department. Will they accept the risk for you? If you have FX exposure does the business have some opposite exposures? Offshore profits to be repatriated? Can the business hedge the risk?
  • Acceptance. Just get over it. If your scenario planning shows the impact is small then the project board can decide to live with the risk and bear the costs when the happen.
  • Contingency. Plan and budget for the impact, if the risk materialises. If airfares increase then stop travel or have a contingency budget only to be used if air fares increase. To be fair to your project sponsor you should also reduce the budget if air fares go down!

Management of risk should be a core discipline of your project management.

Permanent link to this article: http://transformingfinance.eu/risks-out-of-control/