NZ Super’s asset allocation chief on risk
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In the education environment it is often the case that time delays are viewed less seriously than obvious cost increases. It is of course possible to put a cost figure on a time delay simply by calculating the cost of staff working on the project for the extra time.
If the time delay was unacceptable you may also need to think about the cost of overtime or extra staff to get the project back on track. What will this project cost? EMV is a mathematical formula that can help make comparisons between a range of uncertain outcomes. Using the concept of EMV for comparative purposes, suppose someone were to offer you two envelopes. Which would you choose? In theory you should take envelope B as the EMV is higher. This goes back to the concept of utility we discussed earlier.
The concept of EMV becomes more useful when you consider the fact that you could spend some money to remove the risk.
This is about spending to save. This could cause a three-month delay whilst you recruit to the post and will incur recruitment costs and cost in terms of decreased productivity and delay to the project. In order to justify this you will have to cost the consequential impact of the risk. The concepts of EMV and actuarial cost really come into their own when you start to plan for the risks that fall into your green or acceptable category. A risk with this level of impact would have to be viewed individually and the necessary contingency would need to exist at the organisational, rather than project, level.
At the risk of stating the obvious, averages only work with a range of numbers. EMV is useful for looking at groups of similar risks. What this is really giving you is an opportunity to make savings against a realistic budget. In summary actuarial cost based on the EMV of groups of similar risks can give you a guide as to how much contingency a project requires. Not all of the risks will occur but the contingency should cover those that do.
Special arrangements will need to be made where a single risk could have a very high impact. Unless the probability of such a risk is very low it may undermine the business case for the project. This technique can also be useful in helping you plan your budget when you are bidding for a research or other contract. The contingency is there for specific risks and should only be released if a risk occurs. The project steering board or its equivalent should authorise the release of contingency funds. Having calculated the cost of both red and green risks the project budget can be seen to be made up of:.
Creative Commons attribution information Project budget.
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A project with all of these elements in the budget is funded to survive in the real world. If the project manager only gets A then the organisation is accepting the possibility that it will ultimately meet the full cost of all the unfactored risks. Factored risk exposure is the estimate based on average EMV.
1. Business Strategy and Risk Coverage
Unfactored risk exposure is the worst-case scenario if all the risks happen. Failure to include risk response costs and contingency for risk in the project budget is a failing at the most senior level. This spend always occurs but in immature organisations it is either invisible or appears as project overspend. It is usually the case that spending money up front to address the risks results in lower overall cost.
You can see from this that a lot of work has to go into setting a realistic budget. You may be able to give an indicative budget at an early stage when the business case for the project is being considered but there is much more work to be done as part of the project initiation before a detailed budget can be prepared.
There are a couple of other accounting terms worth looking at in considering how risk affects budgeting:. What do you do?
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Creative Commons attribution information Costing scenario. You may have made a massive mistake in getting to where you are but you need to decide how to move forward. Much the same goes for creating real world plans. In planning, perhaps more than in any other project activity, we tend to exhibit an optimism that verges on delusion. After all when was the last time you had a good surprise in a project?
Time and time again we see planned deadlines based on an absolute best-case scenario. A common scenario is that the absolute deadline is set before any scoping work is done. Very often you will be told there is a budget of X for you to deliver by Y then you are left to go away and work out how it can be done.
If you later deliver to more realistic estimates you will be seen as a failure. Proactive project managers create a robust and resilient plan by identifying and planning for risk. The role of the project manager is to deliver against the plan so it is essential that the baseline, against which you will be judged, is realistic. Again the concept of risk and opportunity management is an important one.
The answer is that you must build that delay into the plan. Our organisations are becoming more aware of risk but we are still poor at creating processes to deal with opportunity. Plans are of course based on estimates. We cover the topic of estimating in our project management guide but it is worth saying a little bit about it here just to draw out the relationship to risk.
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- NZ Super’s asset allocation chief on risk?
One way of looking at uncertain tasks is to use three-point estimates. For each uncertain task you estimate:. People using project management software often use this approach. The software can calculate the standard deviation of each of the estimates to show the relative uncertainty in the overall plan. This allows you to come up with statistical confidence limits e. If you ask a range of people how long various tasks will take they may all give different answers.
Another feature of many software tools is the ability to run Monte Carlo simulations. This uses three-point estimates for each of the tasks in a plan and assigns a random number of days to each task from within the given distribution. This is then repeated many times. Say a task has values of:. The numbers generated are random but based on the distribution of the actual estimates.
Running the model many times gives you an indication of how long the project may take in the real world. What is interesting about such simulations is that the answer equates to the most likely schedule ML for the overall project only about one time in Say we have tasks A, B and C that are all predecessors to task D. Creative Commons attribution information Three point estimates. The aim of this is not to encourage you to throw in the towel right now but simply to highlight the issue of overall uncertainty in the plan.
You also need to be aware that the critical path through your project may change depending in which, if any, of the identified risks occur. There are a number of fairly standard definitions of response types that can be summed up as follows:. Also known as risk removal and risk prevention. Altering the plan so that the circumstances which may give rise to the risk no longer exist.
Risk: You plan to build a new sports centre on a green field site but there is a risk that the council will refuse planning permission and delay the project. Response: You decide to build on brown field site on a former industrial estate. This incurs additional cost in terms of demolishing old buildings and removing hazardous waste. Risk: You are aware that colleges are the target of an organised gang stealing hardware. Response: Postpone the organisational restructure until the process review is complete and staffing requirements are known.
NB Apologies to those who know this scenario is unrealistic and the opposite always happens — we can but try…. Even from these very basic examples we can see that, in all cases, the risk response costs money.
At this point you may revisit your risk log to assess the status of a risk once the preventative or mitigating actions are complete. This is sometimes known as residual risk. You need to keep track of the identified risks, monitor the effectiveness of your risk responses and identify new or changed risks. This means having effective reporting mechanisms in place and ensuring that risk is covered in all key reports and reviews.
Most of the key issues are covered in the section on managing project phases in the project management guide.
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