Interfacing Risk and Earned Value Management A Practical Synergy

[Music] hello my name is Frank Embry and it's my sincere pleasure to introduce this presentation by dr. David Hilson dr. Hilson is a highly regarded thought leader in project risk management an award-winning author and a widely sought-after presenter at conferences seminars and symposium he's often referred to as the risk doctor it's in this presentation that dr. Hilson will discuss with us interfacing earned value management with the risk management both are very important approaches regarding our decision-making in projects putting that together can enhance our abilities to make better decisions enjoy the presentation thank you Frank for that great introduction I'd like to talk to you about this subject but first we'll tell you something about me that most people don't know I'm known as the risk doctor because I'm a risk management specialist a risk enthusiastic I'm passionate about risk management but before I discovered risk management and I discovered a risk management in 1984 when I was quite young just a child of course before I even discovered a risk management and became an enthusiast for that I wasn't earned value specialist can you believe it I worked for an engineering company in the UK and I was one of the early advocates for employing an earned value management approach on our major projects and so I learned a lot about their own value even before I learned anything about risk at all so now for me to be able to speak about how to interface earned value management with risk management is a particular pleasure because it's taking one of my early passions and blending it with my current passion of course I would still say that risk management is the most important thing but then you'd expect the risk doctor to say that wouldn't you so my subject here is interfacing earned value and risk management and rather than focusing on an academic or theoretical approach which you might hear from other speakers I'd like to offer you a practical synergy giving you some real practical ideas that hope you can put into place to make your earned value system more effective and to use your earned value system to improve the way that you manage risk so what is it about these two things that might suggest to us that there's a synergy between them what do they have in common and what are they not having common before I answer that let me just make some assumptions as a presentation about interfacing the two techniques what I don't want to do in this presentation is to explain to you the basics of earned value management and the basics of risk management I'm kind of assuming that you'll have that basic knowledge of the key concepts and the terminology the purpose of both the techniques and the processes that might be involved what I want to do is to build on those two foundations to try and see what we could do by bringing these two things together so I also am assuming that you are open to new ideas that maybe you haven't thought of before because after all that's the whole purpose of learning isn't it so what these two techniques have in common let me suggest to you five things first of all they are both existing to help us make better decisions earn value analysis is not about understanding the earned value and neither is risk management they are both about helping us understand the performance of our project in the past and in the future about using past performance to improve future performance they are there to help us make better decisions on the way that we run our projects both of them are about looking backwards in order to look forwards and this illustration is of the Roman god Janus where we name our our month of January from he was the God of doorways and he would look one way and the other way he has two faces not to say that project managers should be two-faced but it is useful to look backwards in order to look forwards and secondly both earned value and risk management are entirely focused on objectives it's all about finding out the best possible way to make our projects succeed there are lots of things we could think about as project managers or project practitioners we must be focused on our objectives and both these techniques are all about getting to the end of the project successfully both earned value and risk management can be performed at a number of different we can do it at the task level we can do it at the sub project or the project level we can look at earned value or risk for a program or for a whole department or even for a whole organization so there are multiple levels which need to be integrated and aligned and lastly both earned value and risk our management techniques they are about taking action we do earn value analysis you know in order to do value management we do risk analysis in order to do risk management so the point is to do something differently as a result of the analysis or the information that we gain from looking at the earned value and the risk so there are at least these five ways in which the two techniques are common and so we might look for some kind of synergy between them because they have these commonalities what's the current status of risk management and earned value management there are good things and bad things for both of them they are well accepted and well defined and quite well used and supported by techniques by tools by training courses by academic courses and so on so we know the basics on the downside both earned value and risk management are kind of viewed as specialist subjects we have earned value experts we have risk experts and it's not something for everybody they're both existing in silos we have mainstream project management and there's kind of a team on the side who do earn value and there's another team over here who do risk management they're not integrated into the mainstream project activities and there's no systematic way of integrating earned value with the project activities or risk management with the project activities let alone with each other so there are some good things and there are some bad things but I still think it's worth thinking about synergies and ways that we could put them together because of those five main commonalities both earned value management and risk management have strengths and weaknesses thinking first about earn value it assumes that past performance predicts future performance but what happens when things change on the project when risks arise on the project when there is uncertainty around the project so that we're not sure how things will develop into the future what happens when we have management action that does things differently when we make decisions about the strategy of the project or about the scope of the project or about the approach of the project or the priorities all of these things change our forward plan so that it isn't necessarily based on our past performance so you might think of earned value management as a rearview mirror which is okay as long as the rearview mirror is pointing in the right direction and you use it properly what about risk management risk management is resolutely future focused all we think about is things in the future that haven't happened yet that if they did happen would affect our performance on the project which is a good thing but also a bad thing what about the past the past provides the context for the future what about learning from the past if we only look forwards and forget everything that was behind then we run the risk of missing some important drivers of future uncertainty risk management is rather like a forward-looking radar it scans the future looking ahead of us saying what's out there and coming in my direction that I need to take account of and position myself towards but it doesn't look behind I don't have a backward-looking radar that sees behind me and this gives us a clue as to the synergies that earned value and risk management might offer to each other of course there are real problems with using the rearview mirror if you use it for purposes that it wasn't intended for that can be quite dangerous and the same is true for and value management just like there are problems if you have a forward-looking radar but you don't respond to it in the right way and you don't actually focus on what it's telling you and you end up looking in the wrong direction altogether which are jokes so hopefully we won't be doing those things let me suggest you three ways in which we can bring synergy from these two techniques of earned value management and risk management two of them are ways in which risk management can help us in our management of earned value it can improve the earned value management approach and one of them is ways in which the earned value results can help us to shape our approach to managing risk so here they are the first is understanding what your baseline spend plan might be we call that in new language the planned value in old language it was called the budgeted cost of the work scheduled then I want to talk about how we actually calculate the the estimate at completion and finally I want to talk about how we can use the urn Valley results to help us evaluate how effective our risk management process is being so let's start with this idea of the planned value or the budgeted cost of work scheduled how do you create your baseline profile well the baseline profile plots the cost the spend on the project over a period of time starting from the planned project start down here at the bottom and going through to the planned project end and seeing how the cost builds up over that time incremental II and we have some kind of S curve that just quite neatly starts at the bottom and says there's more and more money is spent until we spent all of the time during all of the money and when we've come to the end of the project and spent all of the money then we've reached the end of the project the project has completed and we have an all goes to plan plan this is where everything is assuming is assuming that everything goes exactly as it is in the baseline but is that true does everything always go according to plan I don't think so it doesn't on many of my projects and it probably doesn't on yours it was class fits the famous polish general said no battle plan survives first contact with the enemy so we might have a plan to run our project to get from beginning to end but as soon as you start the project something changes productivity is different somebody goes off sick the customer tweaks the requirement a little bit some piece of equipment doesn't work when you expect it to stuff happens and we need to take account of change and risk and actually we should take account of those things as far as we can at the beginning of the project to have a proper planned value a project baseline which is robust enough to take account of expected ranges expected levels of change and risk on the project so how could we do that right at the beginning of the project how do we take account of future changes and risk in the project this is where risk management can help us because risk management is the forward-looking radar that says what's out there what might be coming my way that affect my project in fact it could affect the project baseline spend profile so how would you do that what we need to do is to understand that when you start a project everything's quite well defined when you get to the end of the project of course you know where you are it's in the middle where things get a little bit murky that's why we need and value management to see where we are and why we need risk management to perform the miracle to help us to get to the end of the project successfully and that's what we're going to be doing just now so let's go back to this process of including risk in the development of our planned value baseline the budgeted cost of the work that is scheduled so the first thing to do is to develop a work breakdown structure which is fully costed with no contingency and of course that can be a challenge in itself most people hide contingency in their project estimates we need to ask people to strip the contingency out first so that we can put it back in explicitly in the shape of risk and uncertainty so first of all we need a costed work breakdown structure which is just the amount of time and effort it takes and money to complete each of our planned tasks then what we need to do is to produce a fully costed and fully resourced project schedule we know what we're going to do when we're going to do it and how much it's going to cost us in time and resources the next thing we need to do is to assess the amount of estimating uncertainty within our estimates we think it'll be this much time and money it could be a bit more and a bit less so we develop a range estimate for each of our planned work breakdown structure elements and then we do our risk analysis we perform a risk identification we assess or analyze those risks and we develop responses to them and for each of those risks we then map those into our project timed and resourced schedule we quantify our cost and time assuming that the responses work and then we build a risk model which takes account of our baseline of the range of possible estimating uncertainty ranges for our planned activities and the explicit risks that we've identified in our risk analysis then we run the Monte Carlo simulation and we get a range of different outputs we got a best-case a worst case and we get an expected case one of those we need to choose to be our planned value baseline our budgeted cost for the work scheduled which takes a count of estimating uncertainty and explicit risks and so there's a range of different values you could use generally we use the expected value from the Monte Carlo simulation as our planned value but if you wanted to be particularly risk-averse or risk seeking then you could choose different range values that's that's a complication that's a an extra level of detail you might like to think about let me show you in a diagram how this works and here's the diagram of our increasing cost over the time as the project progresses and we have one result just that little red dot on the top right hand corner which shows you where we might end up in terms of how much time it might take to complete the project and how much it might cost us to do that work the reality is there's a whole range of different possible values for how long it might take and how much it might cost and the Monte Carlo simulation if we have an integrated cost and time risk model will tell you all the possible values of the duration and cost that could occur given the uncertainty in risks that we know about on this project and it might appear in the diagram something like this a whole range of little dots each dot represents and represents one combination of a possible project duration with a possible project cost and so there's a whole range of these things it generally falls into this kind of oval shape in the UK we call this an eyeball plot in America is called a football plot I can't think why because a football of course should be just round but for you guys in America I guess it is some kind of football I don't know you can draw a best-fit ellipse around these dots which is shown here and then what you can do and the Monte Carlo simulation will do this for you is say how do I get from this planned project start point where there's no time spent and there's no money spent to somewhere within that oval of possible end points and there are multiple ways of getting from the beginning to the end three of those ways are interesting one of them is the most efficient way which says what is the cheapest way spending the least money over the least period of time which arrives at the bottom of that ellipse so we arrive at the minimum time cost pair by going as fast as possible and spending as little money as possible and clearly that would be a best-case way of running the project there's also a worst-case way which ends up at the top end of that little ellipse which says it's going to take a very long time it's going to take a large amount of money and along the way everything is going to go wrong which of course it is a possibility we hope it doesn't happen but it could so we've got a best case and the worst case the minimum cost at the earliest endpoint and the maximum cost at the latest endpoint but what's actually likely to happen on your project it's not likely that everything will go really well and you'll have the best possible results and it's not likely that everything will go badly you know have the worst results what's likely is somewhere in between and a Monte Carlo simulation will tell you within those two boundaries what is most likely to happen what should we expect given the risks and the uncertainties that we know about and so it will plot for you a line somewhere between those two which shows you the expected the statistically expected value for the duration of the project and the cost of the project and how that would be achieved how you would get to that point and it's the very midpoint of the ellipse and it's the very midpoint between those two curves so this is our expected case you've got a worst case a best case and between it an expected case which has a 50% chance of being achieved that means it's just as likely to be worse or better and for most people this is what we will use as our planned value or the budgeted cost of the work schedule because it is the average outcome of our project given the threats and opportunities that we know about on average the project will follow the red line and end up at the red dot in the center of the ellipse so this is what we should budget for it takes account of the risks that we can foresee at the beginning of the project so that's quite simple isn't it we start with a baseline we add in our estimating uncertainty we add in the risks run a simulation and take the expected value as our project baseline spend and so here's my first recommendation which is to use the expected spend profile from an integrated cost and time quantitative risk analysis model as your planned value or your budgeted cost of work scheduled baseline simple you could do that right how about moving forward from somewhere in the project to the end of the project how do we calculate our estimate at completion here is a standard set of earn value plots from partway through the project you'll see that time now has now moved along to about a third of the way the third of the way through the project the solid line is our planned profile the dotted line is the amount of money that we've actually spent the actual cost also known as the actual cost of work performed and then the Earned value line also known as the budgeted cost of work performed is the dashed line which is shown what we've actually achieved for spending the money and time that we spent and you'll see that sadly the dashed line is below the plan and the spend line is above the plan for some reason when we show these examples it's always that way around it's always that we've spent more money and we haven't achieved so much I guess it is possible that you might one day see a dashed line above the curve and a dotted line below but most of the time this is what everybody sees as the kind of sample and value outputs the question is where is it going to go from here and so most people would calculate the indicators that the standard earned value indicates us from these these results and then take the actual cost line and forecast it forward and we will predict forward extrapolate it forward assuming the same performance as the past and we'll say well if we're as bad in the future as we were in the past we're going to end up this amount late and this amount overspent and we end up with that curve a predicted estimate at completion which is the top right-hand point of the dotted line now that's fine if future performance is exactly the same as past performance but it might not be what about change what about risk what about decisions that we make that say hang on guys this isn't good enough we need to do something different if we go along this track we're going to end up late we're going to end up overspent we're not we're not going to do that so we need to make changes and then risks will occur good and bad so we can't just extrapolate from our current position and say well everything will remain the same it certainly shouldn't if these are your results so far we should be doing something different so we can take a risk-based approach to say well we're a third of the way through the project this is where we are now what might happen in the future given threats and opportunities that could affect us from now on so we do something very similar to that first exercise we start with where we are we record progress we record our actual cost and we calculate the earned value and then what we do is we make new estimates for the remaining activities we take account of estimating uncertainty in those activities then we do a new risk assessment we identify the risks from here to the end of the project we analyze them we quantify them and we plan responses then we build another Monte Carlo risk simulation model with the revised estimates for the remaining activities and a new set of risks and we run that model which gives us a range of possible outcomes and then we take the expected value as our estimate or completion just the same as we did at the beginning of the project but we're now doing it partway through the project and it looks like this here we are with just the actual cost line what we would have done is just predicted that forward to the end with a single new a new predictive performance but now we're going to say there's a range of possible things that could happen at the end each of these dots comes from the Monte Carlo simulation it comes from one cost time pair that's possible and of course there's a really good way to get from where we are now to the end which arrives at the bottom of the ellipse there's a really bad way to get from where we are now to the end which comes to the top of the ellipse and the Monte Carlo simulation will give you an expected way given the uncertainties and risks we know about to get from where we are to somewhere else and it ends up in the middle of the ellipse with an expected project duration and an expected project cost and the point it arrives at in the middle is our estimate at completion and in fact their plot to get there in between is the estimate to complete line so we can do exactly the same when we're partway through the project as we did at the beginning at the project of the project to set our continued for a prediction line based on what we know now not just predicting forward based on the CPI and SPI assuming that they'll remain the same for the duration of the project because they shouldn't if we're behind plan we should be doing something different and the risk based approach helps us to take that into account so my second recommendation is this use the expected cost time end point from an integrated cost time model as your estimate at complete and that is fairly simple you could do that what about the third suggestion of ways in which we can integrate earned value management and risk management at this time what I want to think about is how the Earned value results can help us improve our management of risk for these first two points we've been talking about how our view of risk can make our predictions in own value more realistic now we're going to turn the tables and see how earn value can help us make our risk process more effective if risk management is effective what would the results be just imagine yourself in a project where all the risks were understood and managed effectively what would it look like what would it feel like well you wouldn't have so many surprises oh no I wasn't expecting that Oh bother there's a good thing that I missed I wish I'd seen it your threats will be minimized your opportunities will be maximized you'll have a realistic plan which you can achieve and you'll be able to control change along the way so that you get to the end in the best possible way a successful project is one in which the risks are understood and managed proactively and your actual performance will closely match your risk based plan because you're managing the risks effectively as you go along now we all know it isn't really like that despite the very best efforts even really great people at risk management still find things go wrong when I was coming here yesterday I was traveling up from the Caribbean into Philadelphia I missed my connection I lost my bag I was late for a dinner appointment and I'm the risk doctor and all these things happen to me people think it's funny when something goes wrong for a risk person but you know even for the best best planned person things go things do go wrong so what can we do about it maybe the earned value management performance indicators can help us see where our risk process is going wrong if it is and particularly I want to focus on the cost performance index and the schedule performance index the CPI and the SPI I'm not going to tell you what they are you're supposed to know the basics right if you don't know you need to talk to somebody so how can these things help us understand how effective our risk processes they give us a kind of target if CPI and SPI are low below one this is a little reminder then that tells us that we're not doing well in our performance but performance is below plan if the indicators are below one if performance is below plan the risk process isn't working on the previous slide I said that if the risk process is working actual performance will closely match the plan so if performance doesn't match the plan the risk process clearly isn't working something is driving us off plan making us later and spending more money than we thought we would so clearly there are threats happening uncertainties with negative effects that are driving us away from plan in a negative way so if we get CPI and SPI below one we need to identify those threats and tackle them aggressively to get us back on plan the opposite is also true if CPI and SPI are above one then our performance is ahead of plan we're spending less money than we thought and we're doing it quicker than we thought that means the risk process is working really well and we can then afford to explore some of the opportunities that might be there in our project to save time and to save money and improve and consolidate on that good performance so a bar one is a good thing let's focus our risk process on the opportunities but actually this it's not quite as true as simple as say below one bad of what above one good what if it's a way way off what if performance is way below let's say a CPI of 0.1 or 0.05 what if it's two or five or ten what does that tell us is a CPI of naught point one really really really bad or does it say there's something wrong with our baseline plan we're comparing against something which was unrealistic in the first place and if we've got a CPI or an SPI of 10 or 20 does that mean we're really really brilliant or is there something wrong with the baseline plan actually we had a completely over optimistic baseline plan and now that's really easy to beat so if we get way off it might be that's telling us there's something wrong in the baseline and then we should go back to step 1 and make sure we have a risk-based baseline let's see if we can show this on a picture and here we've got in the horizontal we've got either cost performance index or schedule performance index so one in the middle means we're bang on plan less than one so that's to the left hand side of the figure means that we're below plan things are not going well and above one to the right hand side of the figure that means we're ahead of plan things are going well if the vertical access we've got how good is our risk management process in the middle it's kind of okay above the line it's doing well below the line it's not doing well so if we find that we've got CPI or SPI below one that suggested to us that the risk process is ineffective because we're off plan risk process should make performance match the plan if we're below plan with a low CPI or a low SPI and then clearly risk management isn't working if on the other hand we find that CPI or SPI are above plan above one ahead of plan that means that risk is doing quite well and our risk process is effective that's obvious but then we've got these issues of what if CPI or SPI is very low or very high I think that tells us that there's a bigger problem so if our CPI is let's say two or five or 10 or 20 then there's something real bad is happening the baseline plan is probably unrealistic and the risk process is bound to be ineffective similarly if our CPI or SPI is very low let's say it's point one or point O five then we know that there's something else wrong with our baseline plan or scope and that means that we need to do something to make our risk risk process more focused so what can we do what we need to do is to monitor as CPI and SPI and decide where we need to take action and what action we need to take so here I've got some plots of CPI and SPI over time they're varying from one we're showing that the cost Performance Index is doing on general quite well and we're ahead of time on cost ahead of plan on cost that means we're spending less than we expected but we're a little bit late SPI is below one it might be the other way round or they might both be above or below this is just an example we could actually set thresholds lookk using something like statistical performance management and we say well here are some thresholds let's say if the CPI SPI between let's say 1.25 and naught point nine that's kind of okay that's variation that you might expect things are usually a bit above and below as we go along through the project so we don't need to do anything particular if on the other hand we get outside of those boundaries let's say on the downside between 0.9 and let's say 0.75 the risk process is off there are risks happening which are driving us off track which we need to think about and we need to improve our management of risk if we're in the extremes let's say way above 0.125 or way below 0.75 we need to enhance the process more radically if we're really low in our performance we really need to focus on threats if we really high on our performance we need to focus on opportunities so showing this in this kind of bullseye diagram it might look like this in this bottom quadrant with CPI and SPI below one we need to focus aggressively on threats in this top right-hand quarter where both are above one we're doing really well we can focus the risk process on opportunities what about the other two quarters where one of our indicators is good and the other is bad that's quite useful too in terms of focusing the risk process around what types of risk we need to look for so let's imagine in the top left hand corner scheduled performance is good so we're ahead of time and cost performance is bad so we're spending too much money what we can do is look at the cost risk drivers why are we spending too much money but we're ahead of time so we can use that time to address cost risk to do some kind of cost-benefit analysis or some options analysis to find lower cost and higher value options so because we're good on time and bad on cost we can spend the time to recover the cost and we can tell that from the court the quadrant that we're in we can focus the risk process on cost risk because the CPI is low and we've got time to do that because the SPI is high I hope that makes sense and of course the converse is true in the bottom right hand corner what that tells us is that schedule performance is bad we're late but cost performance is good we're under spending so we can spend our money in a way that helps us to save time and focus the risk process on looking at schedule risk drivers so not only do these CPI and SPI indicators tell us if the risk process in general is doing well or badly they also help us to focus the process on either time risk or cost risk as appropriate and then we've got these outside places where CPI and SPI really high or really low and then we know we need to look at the baseline plan because it's probably not set in the right place because the indicators are so wildly away from the center so this kind of bullseye plot can help us to make more sense of the types of risk that we are exposed to based on our analysis of performance to date using the Earned value indicators of cost performance index and schedule performance index so that gives us another recommendation we can determine these appropriate thresholds for when we need to take aggressive action you could develop your own based on the way that your own projects perform or you could use the ones that I've suggested here then you calculate the CPI and SPI and see where they're going then you decide whether you need to modify the RISC process if your thresholds are being consistently breached and we can focus our risk process based on which of these indicators are above or below the threshold if they're both low we focus on threats if they're both high we focus on opportunities if one is high or the other is low then we focus on either time or cost risk and if they're both persistently way off then we review the baseline plan so here is my third recommendation the final recommendation on this interfacing presentation use the CPI and the SPI the Earned value indicators of cost performance index and schedule performance index to tell you if your risk process is being effective and if not it will tell you where to focus your action to make it more effective and you could do that if you're calculating CPI and SPI so let me offer you a conclusion these things are both powerful techniques powerful in management supporting management decision-making but they're complementary they work together they are not competing you don't have to do either earn value or risk management they're not focused in completely different areas one looks back to see where we've come and how we got here that's earned value management the rear view mirror one looks forward to see where we're going and possible influences on our future progress that's the forward-looking radar of risk management what we need to do is to use them both to make better decisions and to take corrective actions on our products to make sure we stay on track there is a powerful synergy possible based on a realistic assessment of what's happened in the past through earned value and a realistic view of the future based on risk management which means we should expect some synergy synergy is where you put two things that are different together to create a whole there are lots of things which are quite different that when you put them together they make something else which is quite special in England we would talk about fish and chips obviously or beef and two veg or draw berries and cream sometimes the synergy is planned and it looks good and then it just doesn't always last so we do have to have you know corrective action to maintain synergy otherwise it might not always be there and so when we're talking about known value and risk we have the same opportunity earned value offers us a view of the past so we can predict the future risk management helps us to understand the future uncertainties both bad and good and position ourselves in advance to deal with them a pro and what we can do is take both of those into account to help us build benefit and deliver more successful projects I hope you'll try some of these techniques they're based on the foundations of basic earned value management and basic risk management putting the two together in synergy means that one plus one equals more than two I hope you'll give it a try here are some recommended reading the APM the UK Association for project management produced a guide line called interfacing risk with earned value management I was one of the editors of this you can buy it online for Amazon for about 10 good British pounds or about I guess now 13 US dollars or something similar if you happen to be a member of the Association for project management you can download a PDF for free and the leak link is here this embodies a lot more of the details of what I've talked about today and will give you some more practical guidelines as well I hope you found that useful I hope you can put these things into practice and I hope that by interfacing these two powerful techniques of earned value management and risk management your projects will be more successful thank you you

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Published: Fri Sep 29 2017