Managing Project Uncertainty
Managing Project Uncertainty
From Variation to Chaos
Uncertainty is an inevitable aspect of most projects, but even the most proficient managers have difficulty handling it. They use decision milestones to anticipate outcomes, risk management to prevent disasters and sequential iteration to make sure everyone is making the desired product, yet the project still ends up with an overrun schedule, overflowing budget and compromised specifications. Or it just dies. To find out why, we studied 16 projects in areas including personal-computer development, telecommunications, Internet startups, pharmaceutical development, iron-ore processing, airship development and building construction.
Interviews with team members and scrutiny of project documentation over five years showed managers consistently failing to recognize that there are different types of uncertainty, each of which requires a different management approach. The lack of awareness is understandable, given that the commonly accepted definition of a project (“a unique interrelated set of tasks with a beginning, an end and a welldefined outcome”) assumes that everyone can identify the tasks at the outset, provide contingency alternatives and keep to the same overall project vision throughout.
1 Those are fair assumptions for routine or well-understood projects, but not for novel or breakthrough initiatives, which require companies to rethink the traditional definition of a project — and the ways to manage it. (See “Beyond Risk Management.”) A more forward-thinking approach is uncertainty-based management, which derives planning, monitoring and management style from an uncertainty profile comprising four uncertainty types — variation, foreseen uncertainty, unforeseen uncertainty and chaos. From variation to chaos, managers move progressively from traditional approaches that are based on a fixed sequence of tasks to approaches that allow for the vision to change, even in the middle of the project.
What Uncertainty Looks Like
Some projects have few uncertainties — only the complexity of tasks and relationships is important — but most are characterized by several types of uncertainty. Accepted practice is to classify uncertain events by their source (technical issues, market, people, cost, schedule and quality) or by potential impact.2 Our categories, however, emphasize uncertainty as it relates to project-management techniques. (See “Characterizing Uncertainty in Projects.”) Although each uncertainty type is distinct, a single project typically encounters some combination of all four.
Take between 32 and 34 weeks, for example. At the start of projects characterized by variation, managers know the sequence and nature of activities and have clearly defined objectives. The project plan is detailed and stable, but schedules and budgets vary from their projected values. A shifting schedule causes the critical path (the train of activities that determines overall project duration) to move, forcing project managers to monitor variations across the board, not just critical activities. In a construction project, for example, myriad events (worker sickness, weather, delayed parts delivery, unanticipated difficulty of tasks) influence budget, schedule and specifications. Such influences are too small to plan for and monitor individually, but the project team could plan for and monitor the resulting variations in expense and time.
Variation Variation comes from many small influences and yields a range of values on a particular activity — activity X may
Foreseen Uncertainty Foreseen uncertainties are identifiable and understood influences that the team cannot be sure will occur. Unlike variation, which comes from combined small influences, foreseen uncertainty is distinct and may require full-blown risk
Beyond Risk Management
A project risk is an uncertain factor — positive or negative — that can significantly affect achievable performance.* Risk management is the practice of identifying, evaluating and controlling those factors to avoid or mitigate potential negative effects.† A power-plant contractor that executes projects in the Middle East might identify risks including natural events (a sand storm), technical events (a test failure), partner events (a supplier not delivering), financial events (a guarantee falling through) or political events (a local power broker’s resistance). Each identified risk would be assigned a probability, and then methods such as scenario evaluations, simulations or decision trees would be used to estimate potential impact and prioritize risks. Handling the risks could mean avoiding them, taking preventive action or simply accepting them as a nuisance.
For significant risks, the team might draw up contingency plans at the project’s start, then monitor events and implement the contingent response when necessary. Risk management is geared to identifying and controlling variation and foreseeable uncertainty. It acknowledges that unanticipated events may necessitate crisis management, but it also holds that “while crisis management may be necessary, few crises should come totally out of the blue.”‡ But what about breakthrough projects or projects undertaken in rapidly changing environments where unforeseen uncertainty or chaos may be unavoidable and important? To deal with such extreme uncertainty, managers need to go beyond traditional risk management, adopting roles and techniques oriented less toward planning and more toward flexibility and learning.
Management with several alternative plans. Pharmaceutical development typifies foreseen uncertainty. It is geared toward detecting and managing risks, primarily in the form of drug side effects. A developer of a new drug can anticipate possible side effects because they have appeared previously in related drugs. It then can outline contingency plans to change the prescribed dosage or restrict usage to certain indications or wellcontrolled circumstances. The side effect is the foreseen uncertainty. The contingency plan may never be used, but it is there if the side effect occurs.
Unforeseen Uncertainty As its name suggests, unforeseen uncertainty can’t be identified during project planning. There is no Plan B. The team either is unaware of the event’s possibility or considers it unlikely and doesn’t bother creating contingencies. “Unknown unknowns,” or “unk-unks,” as they are sometimes called, make people uncomfortable because existing decision tools do not address them. Unforeseen uncertainty is not always caused by spectacular out-of-the-blue events, however. It also can arise from the unanticipated interaction of many events, each of which might, in principle, be foreseeable. Unforeseen uncertainty occurs in any project that pushes a technology envelope or enters a new or partially known market. Pfizer’s blockbuster drug Viagra, for instance, began as a heart medication to improve blood flow by relaxing the arteries.
When clinical studies found that it also increased sexual performance, the company ended up developing that unexpected side effect into a blockbuster drug, implementing new clinical development and a new marketing approach midway through the original project. Chaos Whereas projects subject to unforeseen uncertainty start out with reasonably stable assumptions and goals, projects subject to chaos do not.
Even the basic structure of the project plan is uncertain, as is the case when technology is in upheaval or when research, not development, is the main goal. Often the project ends up with final results that are completely different from the project’s original intent. For example, in 1991, Sun Microsystems conceived of Java as software to drive a controlling device for household appliances. It wasn’t until 1995 that Java became hugely successful as a programming language for Web pages. Ironically, a decade after Java’s conception, we are finally seeing consumer-appliance applications for it. of identifying conflicts, clarifying responsibilities and defining deliverables. Monitoring consists of comparing budget, schedule and deliverables against the project plan, coordinating stakeholders and suppliers and enforcing deliveries. The greater the uncertainty inherent in a project, however, the more the team may have to redefine the tasks — or even the structure of the project plan — in midcourse.
It is much easier to do that if everyone has begun the project with the same assumptions about how changes will be managed. The mechanism that ensures agreement is the uncertainty profile — a qualitative characterization of the degree to which each type of uncertainty may affect the project. For example, although the dominant uncertainty an Internet startup faces may be chaos (for example, the potential for fundamentally changed circumstances), it also may face variation (IT implementation taking longer than planned), foreseen uncertainty (market entry by a competitor) and unforeseen uncertainty (human-resource issues).
The uncertainty profile is the team’s subjective estimate and indicates which uncertainty types are potentially the most important. To help identify the dominant uncertainty types, teams may use hunches based on previous projects or may adopt more formal approaches, such as statistical analyses, technology and market forecasts, scenario planning or creativitymanagement techniques. Teams draw from many sources to create the profile. Its form is not as important as its purpose — to ensure that everyone understands the major uncertainty types faced and how each uncertainty type influences management style. Once a profile is created, it can be used to build a project infrastructure to execute a plan (in the case of variation or foreseeable uncertainty) or to learn from events and adjust (unforeseeable uncertainty or chaos).3 The project manager’s role and the planning and monitoring activities change as the uncertainty profile evolves. So flexibility — and the ability to communicate changes — is key.
Creating Uncertainty Profiles
In the rare projects that have little uncertainty, the project manager is primarily a coordinator and scheduler — planning tasks according to experience and using task-breakdown structures and critical-path methods. Relationship management consists Managing Variation In projects subject primarily to variation, the project manager is first and foremost a troubleshooter who can identify deviations and push through solutions to get the project back on track. Radical changes to the plan are not the concern as much as how to control slippage in the budget, schedule and deliverables.
If no one has planned for variation, the project manager must resort to firefighting to get the project back on track — a waste of resources and a drain on stakeholders. A better approach is to account for variation during project planning and build in buffers at strategic points in the project — for example, increased capacity or budget reserves.4 Top management must respect those buffers and avoid treating them as bargaining chips to be negotiated away.
Characterizing Uncertainty in Projects
Type of Uncertainty Variation
Flow Chart A linear flow of coordinated tasks (circles) represents the critical path toward project completion. Variation in task times will cause the path to shift unpredictably, but anticipating that and building in buffers (triangles) helps the team to complete project within a predictable range.
Project Manager’s Role
Troubleshooter and expeditor Managers must plan with buffers and use disciplined execution.
Planning •Identify and communicate expected performance criteria. Execution •Monitor performance against criteria. •Establish some flexibility with key stakeholders.
Planning •Simulate scenarios. •Insert buffers at strategic points in critical path. •Set control limits at which to take corrective action. Execution •Monitor deviation from intermediate targets.
Decision Tree Major project risks, or “chance nodes” (circles), can be identified, and contingent actions can be planned (squares), depending upon actual events and desired outcomes (Xs). Decision node Chance node Go X3 No-go X4 Outcome X1 X2
Consolidator of project achievements Managers must identify risks, prevent threats and develop contingency plans.
Planning •Anticipate alternative paths to project goal by using decision-tree techniques. •Use risk lists, contingency planning and decision analysis. Execution •Identify occurrences of foreseen risks and trigger contingencies.
Planning •Increase awareness for changes in environment relative to known criteria or dimensions. •Share risk lists with stakeholders. Execution •Inform and motivate stakeholders to cope with switches in project execution.
Evolving Decision Tree The project team can still formulate a decision tree that appropriately represents the major risks and contingent actions, but it
must recognize an unforeseen chance node when it occurs and develop new contingency plans midway through the project. X 1
X2 Go X3 X4 Unforeseen chance node X5 X6
Flexible orchestrator and networker as well as ambassador Managers must solve new problems and modify both targets and execution method.
Planning •Build in the ability to add a set of new tasks to the decision tree. •Plan iteratively. Execution •Scan the horizon for early signs of unanticipated influences.
Planning •Mobilize new partners in the network who can help solve new challenges. Execution •Maintain flexible relationships and strong communication channels with all stakeholders. •Develop mutually beneficial dependencies.
Iterative Decision Tree The project team must continually create new decision trees based on incremental learning. Medium- and long-term contingencies are not plannable. Entrepreneur and knowledge manager Managers must repeatedly and completely redefine the project. Planning •Iterate continually, and gradually select final approach. •Use parallel development. Execution •Repeatedly verify goals on the basis of learning; detail plan only to next verification. •Prototype rapidly. •Make go/no-go decisions ruthlessly. Planning •Build long-term relationships with aligned interests. •Replace codified contracts with partnerships. Execution •Link closely with users and leaders in the field. •Solicit direct and constant feedback from markets and technology providers.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 30 September 2016
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