Does your company have unlimited resources such that it can pursue any project regardless of inherent risk? If so, this post isn’t for you.
However, if you work for an organization that must make go /no-go choices between projects, then you’ll want to read on to learn about two quick ways to assess project risk early in the Selecting and Initiating stage, before the company invests significant time and budget.
1. Perform a Project Appraisal
I found this great approach in Tom Kendrick’s 2009 book, Identifying & Managing Project Risk. From the title “Project Appraisal,” it may seem like a performance appraisal, but of course it’s too early in the process for that. No, this is akin to a home appraisal. The idea is to use comps – realtors use the term “comparables” – from similar projects, make adjustments for dissimilarities, and then evaluate the results for feasibility and against the company’s tolerance for risk. Kendrick uses effort-months as the basis for the comparison, although the analysis could also be used with budget.
In the table below, Project XYZ is compared to previous Projects A, B, and C. Small differences receive a 2% – 5% adjustment while large ones receive something in the 7% – 10% range. Prima facie, looks like the proposed project is executable and in alignment with historical performance. However, remember that Projects A, B, and C are all completed efforts. Their actual effort-month values reflect the realization of unknown unknowns, or problems the teams did not anticipate during planning. The estimation of effort for Project XYZ does not. The organization faced with the Project Appraisal below must decide if the potential unknown risk associated Project XYZ is acceptable. To get a read on this, the company could look at the impact of unknown risk on Projects A, B, and C and then apply the average effort impact as a positive, upward adjustment to the 120 total hours currently planned.
2. Analyze Scale
This also comes from Kendrick’s book and uses effort-months as the basis for the assessment. If after the above Project Appraisal analysis is complete, the proposed project is 20% larger than the average effort-months of previous work, then it represents a significant risk (p. 233). Here are the ranges Kendrick proposes:
Low risk: < 60% of the average
Normal risk: Between 60% and 120% of the average
High risk: > 120% of the average
However, organizations need not perform the above Project Appraisal first in order to get a sense for the proposed project’s risk. This analysis of scale can be done independently; all it requires is a simple average of the total effort-months of similar, completed projects. Then compare that number to the effort-months required for the proposed effort and use the ranges above to get a quick sense of inherent risk associated with the proposed project.
Neither of the two approaches above is quantitative, but they are extremely useful especially early in an organization’s strategic planning process when they’re selecting projects.
What about you? There are other approaches out there. How does your company get a quick read on project risk?