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Project Risk Management

Risk management is an important process to the success of any organization's strategic project management. Organizations logically deal with the risks through the process attaching them to their events with the aim of obtaining persistent benefit within a particular activity and across the entire business portfolio events. The center of attention of good risk management process dwells in the detection and handling of each risk with the aim of adding maximum value to all the processes of the organization's projects. Risk management entails the understanding of the potential successes and failures of several factors which can affect a project. Good risk management improves the probability of success while cuts both the probability of failure and the uncertainty of realizing the project's objectives (Institute of Risk Management 2002, p. 2). The risk is viewed only in an event that events threaten the achievement of project objectives (Edwards & Bowen 2005, p. 181). In this research paper we study the case of GLE Customer Management System (CMS) project as reported by Smart Project Consulting 2002 to analyze its risks and prepare a Risk Register, and draft detailed contingency reserve for presentation to management.

Risk Register

Risk Description

Probability

Impact Amount

EMV

Contingency Plans

1) The risk of legal action against GLE

0.20

$30M being legal costs

$6M

Hire best lawyers for the company

2)The risk of losing $61 Million already paid

0.80

$61M difficult to recover

$49M

Sue the contractor for damages

3)The risk of high variance from budgeted costs

0.15

$96.9M excess over budget

$15M

Engage cost management plan

4)The risk of customer leaving due to ineffective systems

0.01

$100M lost business

$1M

Develop alternative strategies

5)The risk of poor management of entire GLE

0.02

$500M bad management acts

$10M

Train managers of good practices

6)The risk of poor decision by lazy board of directors

0.15

$50M due to bad board decisions

$7.5M

Train directors on executive decisions

7)The risk of reduced profits due to high project expenses

0.25

$90M out of unplanned costs

$23M

Invest in more sales to compensate costs

8)The risk of obtaining concluded inefficient system

0.35

$135M cost of project lost

$47M

Engage contractor on another project

9)The risk of losing track of projects because of poor records

0.20

$10M out of disorganization

$2M

Engage professional staff

10)The risk of bankruptcy due to unplanned expenses

0.01

$500M out of bad expenses

$5M

Create a reserve fund

11)The risk of project hardware/software not usable

0.01

$18M used in the project

$0.2M

Dispose the hardware/software

12)The risk of board dissolution by stakeholders

0.02

$10 cost of an AGM

$0.2M

Train stakeholders on good directors

13)The risk of high staff turnover

0.01

$10M cost of new recruitment

$0.1M

Motivate existing employees

14)The risk of appointing weak contractors for project

0.02

$10M cost of new bids

$0.2M

Check on previous performances

15)The risk of poor performance for entire industry

0.01

$5M reduced subscription

$0.1M

Utilize earlier retained earnings

Recommended Contingency Reserve in Monetary Terms

The contingency reserve is the resources put aside in our case money set apart for future risk situations. These risks are not known in certain whether they will occur and such a reserve would shield against unexpected project losses (Schwalbe 2009, p. 288). The contingency fund provision is viewed as a way of mitigating the risk whenever it occurs and save an organization or government the risk of losing huge amounts of investments in projects (International Monetary Fund 2003, p. 195). The organization with appropriate contingency reserve will always maintain amounts capable of covering the unexpected risks to enable organizational activities are not paralyzed by any expected risk.

The first contingency plan associated with the risk of legal actions against GLE is the hiring of expert lawyers. The EMV of the risk is $6 million and the estimated contingency reserve fund for hiring lawyers is $2 million. The EMV of the contingency reserve is $0.4 million. The second risk is that associated with losing an EMV of $49 million already paid for the project. The contingency plan is to sue the contractor for the damages to the same amount. The legal costs will be borne by the organization and as such requires an estimated contingency reserve of $39.2 million. The EMV of this contingency reserve is $31.36 million. The third contingency plan is that of engaging effective cost management plan to the risk associated with high variance of the actual project costs from planned. The cost management plan would cost the organization an estimated $5 million with this contingency's EMV of $0.05 million. The fourth contingency plan is associated with the risk of customers leaving the organization due to ineffective customer service management which could cause a loss of up to $1M. This plan involves the development of alternative processes of attracting and retaining customers as well as meeting their expectations which could cost an estimated $0.4 million. This contingency will have EMV.

The fifth and sixth risks are associated with the management and board of directors' efficiency in making decisions and managing the organization. The combined contingency plan is to train both parties at a combined estimated cost of $4 million with EMV of $0.08 million. The seventh contingency involves an investment in other strategies such as marketing to increase the sales revenue to meet the risk of unexpected costs. These strategies would cost an estimated $5 million. In addition, the eighth contingency involves the process of engaging the contactor in doing another project for similar EMV of the risk without pay and end up recovering the total amount that could have been lost and with an ineffective system.

The ninth contingency is to engage professional staff to maintain proper records at estimated $0.5 million with an EMV of $0.01 million. Moreover, the tenth contingency would need an estimated reserve of $5 million to cover against the risk of bankruptcy with an EMV of $0.05 million. The eleventh contingency plan costs estimated $0.05 million to dispose of unused hardware and software. Also, the last four contingencies would require an estimated contingency reserve of $0.25 million covering the contingencies of training stakeholders on appointing good directors, motivating current employees, conducting prior research on the effectiveness of the contractor before engagement and providing for payment of subscriptions to the industry. Therefore on summing up all the above-estimated contingency costs, we arrive at a contingency reserve requirement of$27.2 million dollars that would be used to mitigate the risks associated with the GLE project.

Derivation of Contingency Reserve

The process of deriving a contingency reserve begins with a specific identification of a particular risk which is to be managed by a contingency plan. With the probability and the estimated loss expected for each risk, an EMV of the risk is obtained. This is the probability multiplied by the estimated loss expected from a particular risk. The expected loss is called impact and thus EMV is the probability multiplied by impact (Brandon 2006, p. 167). Once we achieve the expected monetary value of a risk, we proceed to develop its contingency plan to counter the risk if it happens. The contingency plan requires money to be executed and we refer the same as a contingency reserve.

The contingency plan begins with the estimation of costs expected to be incurred if the risk associated occurs in 100 percent. In addition to the estimated costs, the additional costs of executing the contingency plan are included. However, the occurrence of a particular risk depends on its probability and in most cases, they are not 100 percent. Therefore we use the probability to calculate the EMV of the contingency plan. This implies that the expected value of each contingency is arrived at by multiplying its particular probability by the total estimated contingency plan cost (Verzuh 2008, p. 116).

Thereafter sum the expected values of all contingencies to arrive at a particular number where the executive management will base their decision concerning the final contingency reserve amount. It is very important that they consider all factors in their negotiations. This will avoid putting excess funds to contingency reserve and denying the resources to develop other projects. On the other hand, there should be sufficient reserves to ensure that the risks happening are well covered thus indicating good preparedness and response to risks (Verzuh 2008, p. 116).

The process of arriving at a conclusive contingency reserve amount will further involve the management engaging in making provisions based on the current performance as well as past occurrences. Since the arrival at a contingency amount will involve a lot of estimations, it is of importance that the management creates accountability for risk analysis as well as its management (Dunbar 1971, p. 36).

Conclusion

The risk management process in projects is very important because it enables an organization to gain a better control of a project in terms of planning, costs, quality as well as its importance to the entire organization. The process has promoted the continuous flow of activities in a project without failure due to interruptions. Moreover, it adds confidence to the project as seen by third parties when a full risk management is in place. Therefore the process of risk management is crucial to the success and control of costs in any organization (Well-Stam, Lindenaar & Kinderen 2004, p. 3). Just like our case study of GLE, failure to carry out proper risk management of its project caused its costs to escalate and its termination later.

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