Earning Value From Risk

Earning Value From Risk Ron Higuera March 1999 rph@cise.cmu.edu

Agenda Overview Earned Value Overview Risk Management Investment Strategy Summary 2

Presentation Objective Relate risk management and earned value concepts to a practical strategy of investment 3

Definitions Earned value is a management technique that relates resource planning to schedules and to technical performance requirements. Earned value management (EVM) uses earned value as the tool for integrating cost, schedule, and technical performance management, and risk management. Source: DSMC www.dsmc.dsm.mil/educdept/evmdept.htm 4

Performance Measurement Baseline to achieve a realistic, executable contract plan, called the Performance Measurement Baseline (PMB). Management Reserve Undistributed Budget Distributed Budget Contract Budget Base Performance Measurement Baseline 5

ESTABLISH THE BASELINE 1. DEFINE THE WORK $$ CONTRACT BUDGET BASE Mgmt Reserve 2. SCHEDULE THE WORK 3. ALLOCATE BUDGETS 100 40 60 15 25 30 30 Source: USAF www.acq.osd.mil/pm Performance Measurement Baseline TIME 6

Earned Value Terminology Data Element Term Acronym Scheduled Work Budgeted Cost for Work Scheduled BCWS Earned Value Budgeted Cost for Work Performed BCWP Actuals Actual Cost of Work Performed ACWP Authorized Work Budget At Completion BAC Forecasted Cost Estimate At Completion EAC Work Variance Schedule Variance SV Cost Variance Cost Variance CV Completion Variance Variance At Completion VAC Source: MCG www.acq.osd.mil/pm 7

WBS/Organization Integration SELECTED PSWBS ELEMENTS Product Development SOFTWARE INTEGRATION PROGRAM Master Planning SELECTED REPORTING ELEMENTS Ada Products Software Tools Standards CWBS EXTENSION Ada Study Ada Conversion Ada Approach FUNCTIONAL ORGANIZATION CPCI #1 MOS CPCI #2 MOLE CPCI #3 MAC VP/GM Marketing Engineering Operations Software Engineering Hardware Engineering Ada Applications Secure Systems LAN Applications Control Account Control Account Control Account Control Account Control Account Control Account BCWS BCWP ACWP BAC EAC Planning Packages Work Packages WBS DATA SUMMARIZATION OBS DATA SUMMARIZATION Source: MCG www.acq.osd.mil/pm 8

Control Account Elements Work Packages Detailed, short-span tasks, or material items, required to accomplish the CA objectives, typically in the near term Planning Packages Future work that has not been detail planned as work packages. They are always scheduled to occur in the future. Work Packages Planning Packages Task 1 Task 2 Task 3 Task 4 Task 5 Source: MCG www.acq.osd.mil/pm 9

Earned Value Data Elements 6000 Time Now 5000 4000 3000 2000 CBB MR BAC (PMB) 1000 BCWS ACWP BCWP 0 Jan Mar May Jul Sep Nov Jan Mar May Source: MCG www.acq.osd.mil/pm 10

Earned Value Data Elements 6000 Time Now 5000 4000 CBB 3000 MR BAC (PMB) 2000 BCWS ACWP 1000 BCWP Cost Variance Schedule Variance 0 Jan Mar May Jul Sep Nov Jan Mar May Schedule Slip Source: MCG www.acq.osd.mil/pm 11

Earned Value Data Elements 6000 5000 4000 Time Now CBB ETC EAC VAC 3000 MR BAC (PMB) 2000 1000 BCWS ACWP BCWP Projected Program Delay 0 Jan Mar May Jul Sep Nov Jan Mar May Schedule Slip Cost Variance Schedule Variance Source: MCG www.acq.osd.mil/pm 12

Data Analysis Relationships Term Percent Complete Cost Performance Index or Performance Factor To Complete Performance Index or Verification Factor Schedule Performance Index Estimate At Completion Estimate To Complete Symbol % Done CPI or PF TCPI or VF SPI EAC ETC Formula BCWP BAC BCWP ACWP BAC - BCWP EAC - ACWP BCWP BCWS ETC + ACWP BAC - BCWP CPI Source: MCG www.acq.osd.mil/pm Checklist Actions Ratio of work accomplished in terms of the total amount of work to do. Ratio of work accomplished against money spent (Efficiency Rating: Work Done for Resources Expended) Ratio of work remaining against money remaining (Efficiency which must be achieved to complete the remaining work with the expected remaining money) Ratio of work accomplished against what should have been done (Efficiency Rating: Work done as compared to what should have been done) Calculation of the estimate to complete plus the money spent Calculation of the budgeted work remaining against the performance factor 13

Risk Indicators (example) EVM provides several metrics that can flag potential problems (risks) either as trends or thresholds. CPI: Good = 1.0 SPI: Good = 1.0 1.06 1.04 1.02 1 0.98 0.96 CPI SPI 0.94 Jan Mar May 14

A Risk Management Process Correct deviations Control Identify Anticipate what can go wrong Track actions Track Communicate Plan Analyze Decide what is important Plan to take action 15

Identification Activities Overview Individual uncertainties PRINCIPLES 1. Non-judgmental 2. Individual voice 3. Multiple perspectives Identify capture statement of risk capture context of risk Statement of risk Context Group/team uncertainties Project data EV Data List of risks 16

Analysis Activities Overview Statement of risk Context PRINCIPLES 1. Most important 2. Vital few 3. Leverage relationships Analyze Statement of risk Context Impact Probability Timeframe Classification Rank List of risks evaluate classify prioritize Classification Class 1Class 2 Risk Risk Risk Risk Master list of risks Top N Risk Risk Class 3 Risk 17

Planning Activities Overview Statement of risk* Context Impact Probability Timeframe Classification Rank Master list of risks Top N Resources Classification Class 1Class 2 Risk Risk Risk Risk Risk Class 3 Risk Risk Project goals and constraints Plan assign responsibility determine approach define scope and actions PRINCIPLES 1. Action-oriented 2. Ownership 3. Accountability Statement of risk Context Impact Probability Timeframe Classification Rank Plan Approach Action plans 18

Tracking Activities Overview PRINCIPLES 1. Risk-driven Statement of risk Context Impact Probability Timeframe Classification Rank Plan Approach measures 2. Know your audience 3. Know what Resources success looks like Status reports risks mitigation plans Track Action plans Risk & mitigation plan measure acquire compile report Project data Statement of risk Context Impact Probability Timeframe Classification Rank Plan Approach Status 19

Control Activities Overview Status reports risks mitigation plans PRINCIPLES 1. Follow the plan 2. Conditions change Control Decisions replan close invoke contingency continue tracking Statement of risk Context Impact Probability Timeframe Classification Rank Plan Approach Status analyze decide execute Project data Statement of risk Context Impact Probability Timeframe Classification Rank Plan Approach Status Control Decision 20

Risk Management Framework Ex: Project Manager Top N risks Control - integrate across functions - reprioritize - authorize project resources decisions Transfer to staff, etc. Functional Area Managers (H/W, S/W, etc.) Top N risks Control - integrate - reprioritize - authorize functional area resources assign responsibility Team managers: e.g., Flight S/W, CM, Test Manager Analyze - review - prioritize assign nontop N Plan - approve plans EV Data 2 Individuals/ Team Members 1 EV Data risks - evaluate - classify Identify trends risk status - recommend actions - develop plans Track required indicators EV Data 3 21

Risk Indicators (example) EVM provides several metrics that can flag potential problems (risks) either as trends or thresholds. CPI: Good = 1.0 SPI: Good = 1.0 1.06 1.04 1.02 1 0.98 0.96 CPI SPI 0.94 Jan Mar May 22

Management Reserve Calculate total project management reserve required based on statistical modeling past experience 4000 3500 3000 2500 2000 1500 1000 500 Management Reserve BCWS Total Funds BAC Schedule Reserve 0 Jan Mar May Jul Sep Nov Jan Mar May 23

Management Reserve Investment Strategy 1200 1000 800 600 400 200 Estimate based on risk evaluation baseline Estimate based on straight-line 0 Jan Mar May Jul Sep Nov Jan Mar May 24

Project Plan 2A 4A 1A 3A 5A 6A 1B 2B 3B 5B 6B 4B 25

Risk Mitigation Strategy Tasks 2A 4A Project Plan 1A 3A 5A 6A 1B 2B 3B 5B 6B RISK MITIGATION 4B R1 R3 R5 R6 R2 R4 e.g., Requirements Management 26

Risk Mitigation Strategy 1.0 Reprioritize the baselined requirements and reorganize the builds to implement the high-priority requirements first. The likelihood of their changing will be factored into the prioritization process. 2.0 Estimate the impact to the schedule for builds and requirements based on the projected completion of the TBD requirements. Verify (as much as possible) that the new schedule accounts for the anticipated changes. 3.0 Complete the requirements document for TBD requirements 38-42 and submit a change request. 4.0 Complete the requirements document for TBD requirement 73 and submit a change request. 5.0 Complete the requirements document for TBD requirement 104 and submit a change request. 6.0 Complete the requirements document for TBD requirements 143-149 and submit a change request. RISK* 12 10 8 6 4 MITIGATION DOMAIN PROBLEM DOMAIN 2 WATCH DOMAIN Event #1 2 3 4 5 Feb 96 Mar 96 Apr 96 Time Accept 6 May 96 ID Task Name Duration 1 Reprioritze baseline requireme 10 days February March April May 2/4 2/11 2/18 2/25 3/3 3/10 3/17 3/24 3/31 4/7 4/14 4/21 4/28 5/5 5/12 5/19 2 Estimate Schedule 10 days 3 TBD Requirements 38-42 30 days 4 TBD Requirement 73 25 days 5 TBD Requirement 104 20 days 6 TBD Requirement 143-149 10 days 27

Risk Criteria Table Attribute: Probability Level Value Criteria 5 Near certainty Everything points to this becoming a problem, always has 4 Very likely High chance of this becoming a problem 3 Likely (50/50) There is an even chance this may turn into a problem 2 Unlikely Risk like this may turn into a problem once in awhile 1 Improbable Not much chance this will become problem Attribute: Impact Level Value Technical Criteria Cost Criteria Schedule Criteria 5 Catastrophic Can t control the vehicle OR Can t perform the mission 4 Critical Loss of mission, but asset recoverable in time 3 Moderate Mission degraded below nominal specified 2 Marginal Mission performance margins reduced Probability 5 4 3 2 1 2 2 1 1 1 1 3 3 2 2 1 2 > $10 Million Slip to level I milestones $ 10 M X < $ 5 Million Slip to level II milestones $ 5 M X < $ 1 Million Slip to level III milestones $ 1 M X < $ 100 K Loss of more than one month schedule margin 1 Negligible Minimum to no impact Minimum to no impact Minimum to no impact 6 5 4 3 2 3 Impact 9 8 7 5 3 4 12 11 10 8 5 5 28

Risk Metrics 12 10 PROBLEM DOMAIN RISK* 8 6 MITIGATION DOMAIN Pessimistic Expected Transition Thresholds 4 Optimistic 2 WATCH DOMAIN Event #1 2 3 4 5 6 Accept Note: *from risk table Feb 96 Mar 96 Apr 96 May 96 Time 29

Risk-Earned Value 6000 Risk Exposure $$$ 5000 4000 3000 2000 1000 REWS: Risk Exposure Work Scheduled 0 Feb Mar Apr May Jun 30

Risk Exposure Buy-Down 25000 Time Now 20000 15000 Actual to-date Risk Exposure Variance Schedule Risk Variance 10000 5000 Estimate To Completion Plan To Completion 0 Jan Mar May Jul Sep Nov Jan Mar May 31

Delivery Schedule Carnegie Mellon University $$$ 4500 4000 3500 3000 2500 2000 1500 1000 500 Management Reserve 0 Jan Mar May Jul Sep Nov Jan Mar May BCWS TIME Total Funds BAC Schedule Reserve negotiated 32

Delivery Schedule Carnegie Mellon University Now Total Funds negotiated $$$ 4500 4000 3500 3000 2500 2000 1500 1000 500 Management Reserve 0 Jan Mar May Jul Sep Nov Jan Mar May BCWS ACWP BCWP TIME Cost overrun BAC Schedule slip Schedule Reserve EAC 33

Management Reserve Ratio (MMR) MR = TFA - BAC MRR = TFA EAC = TFA BAC * CPI Ratio of total funds available against total estimated funds expended at completion 1.4 1.3 1.2 1.1 1 0.9 MRR CPI MRR: Management Reserve Ratio TFA: Total Funds Available 0.8 Jan Mar May 34

Risk Data Analysis Relationships Term Symbol Formula Checklist Actions Risk Exposure Performance Index REPI ARWP REWP Ratio of work accomplished against money spent (Efficiency Rating: Work Done for Resources Expended) Risk Schedule Performance Index RSPI REWS REWP Ratio of work accomplished against what should have been done (Efficiency Rating: Work done as compared to what should have been done) Management Reserve Ratio MRR = TFA EAC = TFA BAC * CPI Ratio of total funds available against total estimated funds expended at completion or total funds available against the budgeted cost at completion multiplied by the cost performance index 35

25000 20000 Risk Exposure Tracking Time Now 15000 10000 5000 Actual to-date Risk Exposure Variance Risk Schedule Variance Estimate To Completion Plan To Completion 0 Jan Mar May Jul Sep Nov Jan Mar May 1.4 1.3 1.2 1.1 1 0.9 0.8 MRR CPI Good Not so Good 36

Summary Earned Value methods used to indicate risks plan allocation of management reserve track risk exposure buydown track buydown investment Use for critical risks Account for actions that reduce risk Fixing risks is cheaper than fixing problems 37