Off the Bench: Implementing Reserves

When things go wrong, and they will, one of the best forms of defense is to have a reserve…

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Off the Bench: Implementing Reserves

I think we can all attest to having had the need, one time or another, to draw on our reserves – be they energy, cash, fuel, whatever the composition. Take a look at the recently concluded Rugby World Cup, where team after team pulled their fresh legs on to the field of play when the situation demanded it. No matter the context, sporting or otherwise, we can easily reach a common conclusion, and that is that in our increasingly uncertain business environment, reserves play a more vital role than ever before. And when it comes to projects, and the world of project management, it’s no different!

There was a time when the only reason to have a couple of players on the sideline was to mitigate the risk of one of the team getting injured (or not even showing up for the game after a big night on the town). Well, indeed that’s still valid and justifiable, but how times have changed. Selecting reserves and knowing when and how to utilize them is strategic in every sense of the word, and can make or break even the best laid plans…

I recently developed a reserve model for a leading global software development organization, with incredibly complex and risk rich operations, and it reminded me how sometimes the simplest things are the most effective and valuable. Implementing reserves really is just that – simple. Today, organizations are faced with a multitude of risks, both in their everyday business as usual, and in their relentless efforts to change their business. Risk Management as a discipline has grown exponentially, with Enterprise Risk Management becoming part and parcel of any corporate governance program worth its salt. Not to mention its growing prevalence in best practice frameworks like COBIT 5, the business framework for the governance and management of Enterprise IT, IT Governance, Risk and Compliance (GRC), and PMBOK, one of the world’s leading frameworks for project management.

When organizations undertake to deliver a portfolio of business change, the prevalent method of delivery is via projects (and programs), so it makes perfect sense that risk management is a key and critical component within project management. After all, although there will always be risks, unfortunately we won’t always know about all of them. Remember too that risks are uncertain events that could have a positive or negative effect on a project… so it’s not all about the bad news!

Most of us have heard the word ‘contingency’ being thrown about on projects. In reality, in my experience, what it tends to actually refer to is what would more accurately be described as a buffer of fat built into a project schedule – for  ‘just in case’. But that is not what reserves are all about. Reserves in the project management world are about helping projects to consistently deliver outcomes in ever changing environments, and come in two guises: 

Management Reserves

When a project starts, one usually doesn’t have the good fortune of having Nostradamus on the project team, and as a result there are always what are called Unknown risks. These are risks where you don’t know what you don’t know. However, based on indicative factors, like the complexity a brand new technology could bring, one is able to assert that the project carries a degree of risk, and that threats (from negative risks) or opportunities (from positive risks) will in all likelihood manifest; you just don’t know what the specific risks are or when they will be faced. But nobody wants to get hit by or miss the train either!

So in response to this aggregated level of Unknown risk, the project can adopt a management reserve, which is a reserve designed for Unknown risks. Management reserve is often called top-line or bottom-line reserve because it is typically an amount of time and money calculated on/off the overall schedule and budget of the project. These ‘funds’ are set aside at the start of the project, to be available in the event that Unknown risks come into play during project execution. At the discretion of management stakeholders, who control the management reserve (and not the Project Manager), it can be used to reduce the impact of issues or capitalize on opportunities, created by Unknown risks and keep the project on track.

- Contingency Reserves

On the other hand, a new project may have a number of specific known risks which have been identified. This is where contingency reserves step up to the plate. Let’s look at an integrated Contingency Reserve and Risk Management approach:

  • Identification of Risks
    • Risk identification sessions must be facilitated with all project stakeholders to identify as many real risks as possible (practical)
    • Failure to do appropriate and adequate Risk identification is the most common cause of missed Risks on projects (and subsequently unforeseen issues)
  • Qualitative and Quantitative Risk Analysis
    • Qualitative - all identified risks must be prioritized and ranked (eg. High – Medium – Low), and this is easily done using a Probability (chance of occurring) and Impact (effect on the project) matrix
    • Quantitative – all identified (or prioritized) risks must be quantified in terms of their potential impact, normally in terms of Cost or Time eg. Cost – R100 000; and/or Time – 35 days.
  • Planning Risk Responses and Estimating Contingency Reserves
    • For each risk, relevant risk responses must be determined. Four risk responses are available.
      • Risk Responses
        • Avoid – a risk could be completely avoided by , for example, removing a piece of scope to which the risk applies
        • Mitigate – actions to reduce the probability and/or impact of risks are set in motion
        • Transfer – the ownership and liability of the risk is passed on to a 3rd party, as is the case with insurance
        • Accept – a decision is made to continue with the project in the knowledge that the risk may occur, and this is where we find contingency reserve
          • Having a contingency reserve is common when choosing to accept a risk, and is considered an active risk response. A passive response would be to do nothing, and just accept the risk ‘as-is’ with its probability and impact.
          • As with management reserve, the contingency reserve is time and/or money, however in this case a specific contingency reserve is determined per relevant risk
          • Estimating Contingency Reserves
            • A contingency reserve should be commensurate with the quantified impact the risk could have on the project, and can either cover the entire impact or only part of it.
              • For example:
                • Accepted Risk A has a quantified impact of 60 hours and 5000 dollars
                • The contingency reserve could be the full 60 hours / 5000 dollars because the project wants to have no residual impact should the risk occur; or say 30 hours / 2500 dollars only, accepting that the project would be directly impacted should this not be sufficient
  • Implementing Risk Reponses: Utilizing Contingency Reserves
    • A Contingency Reserve is tied to a specific risk, where an Accept risk response has been chosen. It is not a bucket of time or money transferable between any risks and should only be used in the event that the associated risk has materialized into an issue or opportunity.
    • In contrast to management reserve, the project manager is in control of the contingency reserve and is able to approve its utilization, and in so doing keep the project on the ‘straight and narrow’ or as close to it as possible.

 When things go wrong, and they will, one of the best forms of defense is to have a reserve… and likewise when an opportunity presents itself, one of the best forms of attack is to have a reserve… Risk management needs to cater for threats and opportunities, or put another way, negative and positive risks respectively, and additionally for both Unknown and Known risks. Fortuitously project risk management provides for exactly that, with reserves for Unknown (Management Reserve) and Known (Contingency Reserve) risks. If it’s one thing I have learnt in my working life, it’s that I have always been open to ways and means of making (project) delivery more predictable, probable and consistent. Management and Contingency reserves can do just that. So while we can never quite be sure of the final score, we know we need a gameplan that is as flexible as it is robust, and that if we ever need to call on the bench, we’ve got the reserves we need to see to see it through. I know in this day and age I wouldn’t leave home with them.

Additional reading available at www.orbussoftware.com

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