NATURAL SPI. Optimizing Risk Management. NDIA 9 TH Annual Systems Engineering Conference October 23-26, 2006 San Diego, CA. Rick Bollinger, PMP
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1 Optimizing Risk Management NDIA 9 TH Annual Systems Engineering Conference October 23-26, 2006 San Diego, CA Rick Bollinger, PMP NATURAL SPI Natural SPI
2 Life at Level 3 Avoiding a Statistical Trap Improving Risk Management Risk Management System Use in Higher Levels Going Forward Natural SPI
3 Life at Level 3 Prepare for Risk Management RSKM SG1 Level 3 Risk Practices Identify and Analyze Risks RSKM SG2 Identify Project Risks PP SP2.2 PMC SP13 RSKM GP3.2 Collect Improvement Information Establish Budget and Schedule Monitor Project Risks PP SP2.1 Mitigate Risks RSKM SG Natural SPI
4 Life at Level 3 Establish the Budget & Schedule For each risk, multiply its impact times its probability, to get it s exposure Add them all together to estimate a buffer or reserve Do this for effort Do this for duration Do this for costs You could be falling into a trap! Natural SPI
5 Avoiding a Statistical Trap Natural SPI
6 Avoiding the Trap Common Risk Planning Buffer Calculation B = SUM( r i * p i ) Where: r i = impact of risk(i), i = 1 to n p i = probability of risk(i), between 0 and 1.0 B = total risk buffer estimated for any dimension of impact: cost duration effort, etc Natural SPI
7 Avoiding the Trap The Problem Based on B = SUM( r i * p i ) HALF of your projects will be late! Natural SPI
8 Avoiding the Trap Big Questions Would you start a project knowing there was a 50 percent chance it will be late based on risks alone? Would your customers accept having 50% of their projects being late? Natural SPI
9 Avoiding the Trap Why the Problem? The random variable to reflect the risk outcomes has a distribution that looks like this: R bar R B The buffer to protect the project from these risks, B, is commonly set to the expected value for the sum of manifested risks, R bar. But, 50% of the outcomes will be greater than B Natural SPI
10 Avoiding the Trap On the Average You Will Break Even R bar R B Assuming that the value of dollars or days to the left of B is the same of the units to the right Natural SPI
11 Avoiding the Trap But, the Assumption Does Not Always Hold R bar R B Dollars/days/units of estimate to the RIGHT of B can be much more expensive than units to the LEFT Natural SPI
12 Avoiding the Trap Central Limit Theorem to the Rescue The Central Limit Theorem of statistics says that the sums of random variables tend to become approximately normal, i.e. they follow a Gaussian Curve Natural SPI
13 Avoiding the Trap How big should buffers be? Applying this distribution to real projects with duration D means that half the projects will experience outcomes from manifested risks that will use up the buffer and put them over the common estimate, E. E = D+R bar 1σ 2σ 3σ D+R Start D We can estimate the standard deviation from the binomial nature of our risks: σ = SQRT(SUM( r i * p i )/n) Natural SPI
14 Avoiding the Trap Choosing the Buffer And use our estimate to calculate a new buffer, B, and new Estimate, E = D + B = D + R bar + (z * σ) z is chosen to decide what percentage of projects should be expected, based only on risk, to go over their estimates. D+R bar z = 1 E 2 3 Start D z * σ Natural SPI
15 Avoiding the Trap Choose your z Select a standard value for z to use to calculate risk buffers. z = 0 will give you the protection you have now. z = 2.0 will give you risk buffers to protect 97.72% of projects (or phases of projects). Only 2.28% would be expected to exceed their buffer. z % expected to be over 50.00% 30.85% 15.87% 6.68% 2.28% 0.62% 0.13% 0.02% Natural SPI
16 Avoiding the Trap Using the New Buffer The duration of projects will not increase. The costs of projects will not increase. Customers will not pay more or wait longer for projects. Because Not all of risk buffers will be consumed! Some will. But, many won t. Customers will actually find that you are early and under-budget (or late and over-budget) according to the z factor that you chose Natural SPI
17 Avoiding the Trap Benefits You will not over-promise. You will not under-deliver. You won t have to charge more. You will just have to apologize less Natural SPI
18 Improving Risk Management Natural SPI
19 Improving Risk Management How Do We Improve Risk Management? Learn more about risks: estimate better plan better Increase what we remember about problems and risks Leverage lessons learned Do all this systematically Natural SPI
20 Improving Risk Management Prepare for Risk Management RSKM SG1 Level 3 Risk Practices Identify and Analyze Risks RSKM SG2 Identify Project Risks PP SP2.2 Risk Magic! PMC SP13 RSKM GP3.2 Collect Improvement Information Establish Budget and Schedule Monitor Project Risks PP SP2.1 Mitigate Risks RSKM SG Natural SPI
21 A Risk Management System RMS Natural SPI
22 Risk Management System Elements of a System People: trained and assigned with responsibilities to operate and maintain the system Technology: tools make it easier to operate the system. If people find activities too difficult they will not be done well Do this, do that.stop. Do this, Do do this, that. do Do that.stop. this, do Do that. this, Do do this, that. do Do that. this, Do do this, that. do that. Do this, Do this, do that. do Do that. this, Do do this, that. do Do that. this, Do do this, that. do that. Do this, And do then that. do Do this, this, and do then that. do And that. then do this, and then do that. Do this, do that. Do this, do that. Do this, Do do this, that. do that. Do this, Do do this, that. do that.and Do this, do then that. do this. Do this, Stop. do Do that.and this, dothen do this. Stop. Do this, do Processes: defined and available to guide activities and contribute to greater effectiveness, efficiency, and quality Natural SPI
23 Risk Management System RMS Components People, training, support, responsibilities, stakeholders, monitoring and supervision of risk management Database of problems and risks with historical occurrences and supporting information Mechanism to collect data on problems, risks, and lessons learned on the success and costs of mitigations and contingency plans Processes, policies and plans defined to guide and give consistency to risk management activities Natural SPI
24 Risk Management System Projects Have Problems Risks Projects Lessons Learned Updated Impacts, Probabilities, Mitigations, Contingencies Problems New Problems Natural SPI
25 Risk Management System Learning About Risks Risk parameters and attributes Actual risk impacts Actual risk historical probabilities Mitigation plan successes Contingency plan successes Natural SPI
26 Risk Management System Risk Management System Risks Updated Risks Potential Risks Risk Database Project Planning Identified Risks Analysis Risk Occurrences, and Impacts Project Execution & Monitoring New Risks Lessons Learned Problems & Successes Natural SPI
27 Risk Management System Risk Management System Goals Improve accuracy of risk parameters and contingency buffers Improve identification of risks Improve mitigation of risks and effectiveness of contingency plans Reduce the impact of risks on project objectives Natural SPI
28 Risk Management System Goal Confirming Questions How stable are risk parameters? How accurate are risk estimates of probability and impact? How often are projects surprised by new risks and problems? How effective are mitigation and contingency plans? Natural SPI
29 Risk Management System Goal Revealing Measures Risk impact estimates vs. actuals Risk probability estimates vs. actuals Frequency of new issues and problems Mitigation plan estimates vs. actuals Contingency plan estimates vs. actuals Natural SPI
30 Risk Management System Prepare for Risk Management RSKM SG1 Using the System at Level 3 Identify and Analyze Risks RSKM SG2 Identify Project Risks PP SP2.2 Establish Budget and Schedule PP SP2.1 RMS RSKM GP3.2 PMC SP13 Monitor Project Risks Mitigate Risks RSKM SG3 Collect Improvement Information Natural SPI
31 Using the System in Higher Maturity Levels Natural SPI
32 Use in Higher Levels Prepare for Risk Management RSKM SG1 Level 4 & 5 Risk Practices Identify and Analyze Risks RSKM SG2 Identify Project Risks PP SP2.2 Institutionalize an Optimized Process RSKM GG5 Establish Budget and Schedule PP SP2.1 Institutionalize a Quantitatively Managed Process RSKM GG4 RMS RSKM GP3.2 PMC SP13 Monitor Project Risks Mitigate Risks RSKM SG3 Collect Improvement Information Natural SPI
33 Use in Higher Levels Correct Root Causes of Problems Pareto Chart Sources of New Risks Count of QA Compliance Questions % 80% 60% 40% 20% Cumulative Percentage 0 MGMT. DEV. CM VER. VAL. QMS Process Area 0% Natural SPI
34 Use in Higher Levels Stabilize Subprocess Performance Natural SPI
35 Use in Higher Levels Quantitatively Managed Process Uspec = 19 Lspec = Natural SPI
36 Use in Higher Levels Ensure Continual Process Improvement Natural SPI
37 Going Forward Natural SPI
38 Going Forward Summary Risk estimating can be improved by avoiding a common statistical trap Risk Management can be improved even at Level 3 It takes a system to optimize Risk Management Natural SPI
39 Going Forward Conclusion It takes a system to optimize anything A system where that optimization is its AIM Where can we apply such a system? Project estimating Requirements Management Natural SPI
40 Going Forward Adding to your System? OSSP Process System RMS Natural SPI
41 Thank You! Questions Natural SPI
42 Thank You! References/Reading Grant, E. L., and R. S. Leavenworth: Statistical Quality Control, McGraw-Hill Book Company, New York, DeMarco, T., and T. Lister: Waltzing with Bears, Dorset House Publishing, New York, Galorath, D., and M. Evans: Software Sizing, Estimation, and Risk Management, Auerbach Publications, Boca Raton, Natural SPI
43 Thank You! Contact information Rick Bollinger Natural SPI, Inc NATURAL SPI Natural SPI
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