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Sep 25

What have we got to loose?

Let’s develop some consequences of the cone of uncertainty – in particular the high risk and uncertainty at the start of the project.

All is not lost down the cone of uncertainty. Although the inaccuracy is high at the start, the stakes aren’t high because you have no investment in the project.
We’re talking here in general terms about a typical project.
You could see scenarios where you have to have investment or commitment right up front; where, say, you are committed to a fixed price delivery or have to meet some absolute deadline like a regulatory change (although in

such cases you would have requirements specified so you would be some way down the curve already).
If we look at the spending through the project (Shown in the second chart of cumulative expenditure – with the steepness of the curve showing the “Rate of Spend” ):
  • Spending doesn’t really start in earnest until you get into the main development phase of the project – when construction starts or the programmers start to cut the code.
  • That’s the point too where most of the project capital expenditure gets made, such as purchases of hardware and licences for the production environment.

If we put together the risk and the cost we end up with the Value at risk – or to put it in plain English“What have we got to loose?”

This goes from the start of the project when the risks are highest but the investment is low. The value at risk then rises steeply as we progress; the spending rockets while the uncertainties and risks are still significant. As we reach the home straight the risk decreases. You will see that I haven’t taken it down to zero when the project is delivered. Most phased project payment schedules will have a “retention” at the end to cover those snags that come up after delivery.
(Try that the next time you call out a plumber to fix a leak – “I will pay you 90% now and the rest when it has stayed dry for a month”)
Let us not forget too, that for the user, delivery acceptance is only the start of the benefits that will come from the project, which will have risks too.
So what does this all mean for project risk management?
  • If the project is going to fail it is best to let it fail at the start – and your early risk assessments should consider this.
  • You need to have gateway reviews at the start – for assurance you have the governance in place.
  • You then need to have reviews at the start of any project phase where the value at risk is going to increase.
  • And you need to have project assurance all over the project through the main build/development phase when the value at risk peaks.

This, of course, assumes complete honesty and assurance that each phase is complete with the quality needed. So what if you start development -with its high spend rate – when in reality the requirements aren’t fully defined? Well the simple maths says that you should apply the higher rate of uncertainty during the requirements specification to the higher spend during development and the value at risk suddenly rockets!

We’ve seen how by taking a few generalisations about a project we can quickly infer a lot more about the risks of a project. Let’s go on to think about how we can bend some of these rules to our project advantage..

Permanent link to this article: http://transformingfinance.eu/what-have-we-got-to-loose/