Value is created by embracing risk effectively

The latest briefing from the real ‘Risk Doctor’, Dr David Hillson #75: RESOLVING COBB’S PARADOX? starts with the proposition: When Martin Cobb was CIO for the Secretariat of the Treasury Board of Canada in 1995, he asked a question which has become known as Cobb’s Paradox: “We know why projects fail; we know how to prevent their failure – so why do they still fail?” Speaking at a recent UK conference, the UK Government’s adviser on efficiency Sir Peter Gershon laid down a challenge to the project management profession: “Projects and programmes should be delivered within cost, on time, delivering the anticipated benefits.” Taking up the Gershon Challenge, the UK Association for Project Management (APM) has defined its 2020 Vision as “A world in which all projects succeed.” The briefing then goes on to highlight basic flaw in these ambitions – the uncertainty associated with various types of risk. (Download the briefing from: http://www.risk-doctor.com/briefings)

Whilst agreeing with the concepts in David’s briefing, I don’t feel he has gone far enough! Fundamentally, the only way to achieve the APM objective of a “world in which all projects succeed” is to stop doing projects! We either stop doing projects – no projects – no risks – no failures. Or approximate ‘no risk’ by creating massive time and cost contingencies and taking every other precaution to remove any vestige of uncertainty; the inevitable consequence being to make projects massively time consuming and unnecessarily expensive resulting in massive reductions in the value created by the few projects that can be afforded.

The genesis of Cobb’s Paradox was a workshop focused on avoidable failures caused by the repetition of known errors – essentially management incompetence! No one argues this type of failure should be tolerated although bad management practices mainly at the middle and senior management levels in organisations and poor governance oversight from the organisation’s mean this type of failing is still all too common. (for more on the causes of failure see: Project or Management Failures )

However, assuming good project management practice, good middle and senior management support and good governance oversight, in an organisation focused on maximising the creation of value some level of project failure should be expected, in fact some failure is desirable!

In a well-crafted portfolio with well managed projects, the amount of contingency included within each project should only be sufficient to off-set risks that can be reasonably expected to occur including variability in estimates and known-unknowns that will probably occur. This keeps the cost and duration of the individual projects as low as possible, but, using the Gartner definitions of ‘failure’ guarantees some projects will fail by finishing late or over budget.

Whilst managing unknown-unknowns and low probability risks should remain as part of the normal project risk management processes, contingent allowances for this type of risk should be excluded from the individual projects. Consequently, when this type of risk eventuates, the project will fail. However, the effect of the ‘law of averages’ means the amount of additional contingency needed at the portfolio level to protect the organisation from these ‘expected failures’ is much lower than the aggregate ‘padding’ that would be needed to be added to each individual project to achieve the same probability of success/failure. (For more on this see: Averaging the Power of Portfolios)

Even after all of this there is still a probability of overall failure. If there is a 95% certainty the portfolio will be successful (which is ridiculously high), there is still a 5% probability of failure. Maximum value is likely to be achieved around the 80% probability of success meaning an inevitable 20% probability of failure.

Furthermore, a focus on maximising value also means if you have better project managers or better processes you set tighter objectives to optimise the overall portfolio outcome by accepting the same sensible level of risk. Both sporting and management coaches understand the value of ‘stretch assignments’ – people don’t know how good they are until they are stretched! The only problem with failure in these circumstances is failing to learn and failing to use the learning to improve next time. (For more on this see: How to Suffer Successfully)

The management challenge is firstly to eliminate unnecessary failures by improving the overall management and governance of projects within an organisation. Then rather than setting a totally unachievable and unrealistic objective that is guaranteed to fail, accept that risk is real and use pragmatic risk management that maximises value. As David points out in his briefing: “Projects should exist in a risk-balanced portfolio. The concept of risk efficiency should be built into the way a portfolio of projects is built, with a balance between risk and reward. This will normally include some high-risk/high-reward projects, and it would not be surprising if some of these fail to deliver the expected value.”

Creating the maximum possible value is helped by skilled managers, effective processes and all of the other facets of ‘good project management’ but not if these capabilities are wasted in a forlorn attempt to ‘remove all risk’ and avoid all failure. The skill of managing projects within an organisation’s overall portfolio is accepting sensible risks in proportion to the expected gains and being careful not to ‘bet the farm’ on any one outcome. Then by actively managing the accepted risks the probability of success and value creation are both maximised.

So in summary, failure is not necessary bad, provided you are failing for the ‘right reason’ – and I would suggest getting the balance right is the real art of effective project risk management in portfolios!