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Engaging with risk and uncertainty

Better Practice results: Higher success rate on delivering projects within announced time, budget and scope due to risks and uncertainty being effectively addressed.

Risk

Many, if not all, entities have well-documented risk management frameworks based on sound risk management principles, and prepare risk plans as an integral element of project proposals.

Despite this attention to risk, there are still projects which are significantly late, over budget, or have shortfalls in planned outcomes due to reasonably foreseeable risks not being identified and addressed appropriately. Some of the causes of these shortfalls are best addressed at the entity level, by executives with corporate responsibilities.

Factors that may cause entities to not effectively address risk during project planning include:

• a lack of skill in reliably identifying and mitigating risks;
• insufficient support in entity operational arrangements for managing contingency funds and contingency time allowances;
• a lack of clarity on the level of risk the entity is prepared to accept (also known as the entity’s risk appetite);
• insufficient openness to the identification of risks; and
• high-risk objectives for projects, arising from legitimate expectations on the public sector for solutions to difficult problems.

Risk management issues following project planning, such as risk monitoring and effective response to adverse events, are discussed in Chapter 4.

The first two factors – skill and supportive operational arrangements – can generally be addressed through internal management improvement initiatives. For example: training programs in risk management; allocating time to monitoring actual risk events and using the findings to improve future risk identification and mitigation; developing an agency-specific list of risk categories (such as legislative, benefits realisation, implementation, public reputation); and developing protocols and organisational culture to have contingency allowances provided and to operate as intended.

The third factor – lack of clarity by the entity on an acceptable level of risk – leaves project risk to be addressed by approval committees on an ad hoc basis. This can increase the risk that there will be an unexpectedly high rate of project failure. Clarity on preferred risk levels can be improved by considering the categories of projects undertaken by the entity, and then nominating a preferred maximum residual risk for each category. This will provide a thoughtful, entity-wide approach to risk thresholds, which can be used as part of the screening of project proposals (as discussed on page 29). For example, an entity may decide that it will accept a high or medium level of risk for small pilot projects for innovative ideas, and will only accept a low level of risk for projects affecting service delivery to the broader public.

The fourth factor – insufficient openness to risk identification – can be more difficult to assess and address. Advice from a trusted independent adviser can be a useful first step – in assessing whether this is an issue, and if so, identifying any underlying causes and possible remedial actions. More generally, an important leadership responsibility for executives is to foster a culture of effective engagement with risk. The desired outcome is a balanced approach, where:

• executives take responsibility for either accepting risks or resourcing their mitigation, and executives acknowledge the benefits of being made aware of risks; and
• line staff make mature judgements on risks, deal with issues within their control or which are routine, and put forward risks for executive attention that are based on a realistic assessment and are accompanied by achievable mitigation measures.

The fifth factor – higher risk projects arising from high expectations – requires sensitive management. It is only natural that there are high expectations of publicly funded projects, and that there will be pressures from many sources to set ambitious goals. Accordingly, many risk management activities for this factor will be most usefully taken in advance, for example:

• Developing an effective relationship with the Minister’s office and central agencies, to provide a basis for discussions of potential project announcements and help reduce the risk of shortfalls in project delivery.
• Developing a pool of skilled staff that can develop project modules or phases that realistically balance technical feasibility with the need to provide a stream of benefits quickly.
• Assessing potential areas for ambitious projects and collecting information to aid in project planning and estimation in those areas – for example though consulting entities with relevant experience, tailoring of current work to explore areas of interest, or conducting pilot projects. This will assist informed decision-making before details of projects are made public.

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Uncertainty of estimates

The reliability of estimates of the cost and timeframe for a project is influenced by a number of factors. These include the reliability and level of detail of the description of the project’s scope and deliverables, the degree of innovation in the project, and the skills and experience of those making the estimate. The first two factors mean that estimates of project cost and timeframe at early stages of planning are likely to be inherently uncertain.

It is better practice for entities to acknowledge this uncertainty in project estimation and have a culture and planning processes that:

• make clear to decision-makers the inherent uncertainty of early estimates;
• help decision-makers express their preference as to how this inherent uncertainty is to be managed – for example by refining the project scope as needed to remain within a preferred timeframe, refining the budget for a preferred project scope, or some other combination of timeframe, budget and scope;
• assist decision-makers by expressing estimates as a likely range; and
• indicate the effort and activities to be undertaken to provide greater certainty of estimates as the project progresses.

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