Five phenomena impairing risk management from delivering value in major project environments

Five phenomena impairing risk management from delivering value in major project environments

Five phenomena impairing risk management from delivering value in major project environments
 Five phenomena impairing risk management from delivering value in major project environments 

 
A few weeks ago I published a thought piece demonstrating how conventional risk management techniques and methodologies appear to have failed in major project environments. This particular thought piece was the first of a series of submissions I am developing as part of my QUT research on the topic of “Establishing risk intelligence in major project environments” 
Since presenting my initial observations, I have received significant feedback from the global project community who share my interest in the topic (thank you). Of particular value was the numerous references provided as to existing or completed research supporting the topic. Although I have not yet had the time to research these areas of learning with any level of academic rigour, in the spirit of sharing early learnings; allow me to present five documented phenomena which have been observed by the academic community as currently impairing effective risk management within major project environments.

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1) The governance gap  

The importance of effective, executive decision making (good governance), when attempting to control material project risks is well documented. A quick title search on Google Scholar will uncover a broad range of submissions linking project failure to ineffective project governance. Many of these papers have been submitted by business schools, project society’s, advanced degree candidates and the auditors of major project environments.  In Australia alone, the Auditor Generals of the States of New South Wales, Western Australia and Victoria have all submitted public reports within the past 5 years identifying the lack of effective governance as being a primary cause of project overruns and blowouts in state funded infrastructure.

A common view provided by these papers is that no risk management methodology or system can succeed in an environment whereby senior executives are neither available nor accountable to make timely decisions regarding the manner in which risks are to be controlled. Therefore, in the project risk management universe; good governance appears to be the central solar system around which all other matter revolves.  
Yet despite this industry wide acknowledgement of the importance of securing effective governance structures and practices when attempting to control material project risks, few of the established project risk methodologies offer any form of emphasis or guidance on the matter. If establishing a sound governance framework is indeed so critical to both project control and risk management then where is the globally endorsed PMI, OGC or ISO project governance standard/guide?

It is thus implied if risk management is to add value to major project environments then establishing a robust decision making framework should be the foremost thought in all forms of risk training, planning, resourcing and mitigation. Until the globally accepted project risk management standards, guides and practitioners thereof start placing credible emphasis on closing the governance gap, conventional risk management approaches will potentially remain ineffective in major project environments.

 2) Wicked risks, complex uncertainties and the flaw of systematically linear risk management

As early as the mid 1920’s, the father of modern day economics John Maynard Keynes observed that systematically linear risk forecasting techniques have little effect in complex, evolving environments primarily due to the significant uncertainty that underpins such environments. Since this time, a plethora of academic research has been conducted and published validating Keynes’ observations that complex, evolving environments cannot be controlled through systematically linear means alone.  
Most noteworthy to the project risk universe was, Rittel & Webber’s 1973 paper which identified the existence of “wicked” risks in complex project environments. The two argued that every complex project is exposed to a range of uncertainties which are continually evolving due to dynamic inter-dependencies and external influences. Such evolving uncertainties create risks which are far too difficult to systematically identify, quantify and control. Such risks were defined as being wicked.

Supporters of Rittel & Webber advocate that because of the complexities involved, traditional brand name project risk approaches (e.g. ISO, PMBOK, PRINCE2) are potentially ineffective in complex project environments as they are systematic, linear and rational whereas complex project risks are in fact dynamic, deviant and irrational. Such misalignment simply cannot enable effective risk mitigation.  Furthermore, it is implied that the noticeable industry traction gained since 2009, in standardising global risk management through ISO 31 000, has potentially been damaging for enabling effective risk management in complex environments as it has promoted the flawed perception that by adopting such a systematically linear approach one can in fact control complex risks in uncertain environments. 

Thus a negative phenomenon potentially exists where systematically linear risk approaches are adopted to control wicked risks in complex project environments. If risk management is to add value to major project environments, practitioners potentially need to move beyond merely adopting the standard brand name risk management approaches and design in dynamic, multi-dimensional and collaborative risk strategies, systems and behaviours. In brief, advanced risk environments require advanced risk solutions.

3) Hidden hands, optimism bias and the pitfalls of intentional under costing

A known phenomenon exists in major project environments whereby those tasked with costing a project will often plan for the most optimistic cost or schedule estimate in order to get an investment decision “across the line”. This phenomenon is often referred to as the hidden hand or optimism bias.  Albert Hirshman argued in 1967 that such optimism bias is a necessary evil because if investors knew the true cost of a project from the very beginning they would never invest in it, thus nothing would ever get built. 
 
Furthermore by not reporting all the bad news to the project owners, project managers can continue unimpeded thereby allowing for a greater capacity to correct the causes of the bad news. Although optimism bias may have some noble origins, Harvard’s Lovallo & Kahneman argue that project executives who present potential investors with an unrealistic investment scenario are either fraudulent or delusional.

Regardless of motive, such under costing has proven problematic for enabling effective risk management in major project environments as the advanced strategies and resources required to effectively mitigate complex risks, are often compromised from the very start due to the lack of an assigned budget. Advanced risk environments require advanced risk solutions, but such advanced risk solutions come at a premium and if this premium is not budgeted for then ineffectively simplistic solutions will almost certainly prevail.
Moreover, the ultimate merits of under costing are questionable as the end result is often predictably negative. Projects with ineffectively simplistic delivery frameworks will almost certainly over run the owner’s agreed budget, the owners in turn will almost certainly task the project executives to bring the costs under control, and when these executives inevitably fail; the owners will be forced to raise more capital as well as dismiss the failed executives. 

Case in point; of the 7 largest projects engaged in Australia within the past 5 years (>$200 billion), all 7 have significantly exceeded their original budget sanctioned by the owners; thereby creating severe cost pressures for their parent company. In almost all 7 cases the senior project leads and/or corporate heads have been replaced by the owners, in some cases multiple times over.

It would thus appear a correlation exists between under costing and executive longevity, and it is therefore implied that if risk management is to add value to major project environments; robust strategies, systems and resources will need to be cost in and planned for from the very beginning. Furthermore project owners should also potentially consider assigning specific budget classes for enabling robust risk controls in the same manner that corporate risk functions are budgeted for by the Shareholder’s Board.

4) Lord of the Flies  

In 1954 William Golding published his Nobel Prize winning tale Lord of the Flies, which describes how seemingly innocent children trapped on an island, ignore their own upper class value systems and resort to a system of tribal savagery and warfare in order to survive.  Golding’s story was inspired (in part) by a series of post-World War II social studies which observed that relatively honest, mild mannered people will often revert to extreme or uncharacteristic behaviours if they believe their self-preservation is at risk, particularly when operating in isolated or pressured environments.  
 
This observed social phenomenon is particularly relevant for major projects as they often operate in an isolated manner far removed from the direct line of sight of the corporate Board or supporting internal standards. Further more, such projects offer a highly pressured environment whereby staff are expected to deliver without question or be replaced, major project environments are thus potentially rife for professionals to engage in unprofessional behaviours.

It is not uncommon for project officers working in isolated or pressurised environments to ignore both their professional and personal beliefs as well as ignore proven better practices because they fear being replaced for not doing what their seniors instruct them to do. In the project risk management universe specifically, this phenomena of pressured isolation can result in project risk officer’s willingly managing risk systems they know to be ineffective or willingly submitting risk reports which they know to be misleadingly positive.
Thus if risk management is to add value to major project environments, project risk officers should potentially be empowered to operate uninfluenced from those executives whose remuneration is dependent on hiding the bad news. Project owners may even consider learning from such globally accepted corporate risk standards such as Sarbanes Oxley, COSO and Turnbull which advocate strongly for appointed risk officer’s to operate independently so as to eliminate those internal influences and pressures which might promote the very same uncharacteristic survival behaviours outlined in Lord of the Flies.

5) Those who don’t learn from the mistakes of history are doomed to repeat them

One of the luxuries of delivering projects in the 21st century is that there are now a few hundred years of documented major project learnings to use as a reference for better practice. Yet despite this, project owners, executives and officers have been observed to regularly ignore such historical learnings and opt for strategies that are questionable in terms of accepted better practice, primarily due to their need to make politically acceptable budget, resource and schedule decisions.

Ed Merrow indicated in his 2012 book “Industrial Megaprojects” that throughout his career he had been regularly surprised at how the most well educated, experienced and honest of project officers could make the most poorly assessed of decisions despite all knowledge and evidence demonstrating the opposite. Also, Bent Flyvbjerg of Oxford Business School refers to the “iron law of megaprojects” (2011) whereby such projects are delivered “over budget, over time, over and over again”. It is implied that this law has come about (in part) because the adoption of best practice has become an outlier in executive decision making.
Thus an observed phenomenon exists in major project environments whereby project owners, executives and officers are known to ignore the proven teachings of history in pursuit of more politically acceptable means. This may help explain those major project environments which choose to ignore known better practices by;
  • placing limited emphasis on establishing a robust governance framework, despite the substantial case evidence demonstrating that poor governance is a leading cause of project failure     
  • adopting systematically linear risk management approaches to mitigate complex and wicked risk environments, despite almost 100 years of economic law advising otherwise     intentionally under costing projects just to get them across the line, despite substantial case evidence demonstrating the ultimate end for this approach is a failed budget with dismissed executives     
  • appointing risk officers to report to the very same project executives who are incentivised to hide risks, despite most corporate risk methodologies (SOX, COSO, ASX7, Turnbull) advocating that risk officers should operate independent of the executive
the inability to learn and/or apply better practices, is particularly problematic in the project risk universe as it implies a lack of progression in the manner which advanced risk solutions are brought to bear in advanced project environments. Thus if risk management is to add value to major project environments; project owners, executives and officers should head the learnings of known better practice as the cost of ignoring these learnings is potentially greater than the premium of implementing them.
 
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The Author: Warren Black
 
                                        Warren Black
About: 
I am an Engineer, Risk Professional and Complex Systems’ Thinker who has particular interest in understanding how the complexity sciences may offer a better means to controlling emergent risks within highly complex, operating environments.  I currently consult on how to improve organisational Governance, Risk & Assurance practices so that they may reflect not only the degree of investment at risk, but also the specific environmental complexities in play. I believe that over the past decade in particular, 
I have accrued deep expertise in my chosen subject matter as evidenced by the fact that I was the head of Program-wide Risk for BG QCLNG and have held Senior Project Risk & Business Advisory roles at both Deloitte and Marsh & McLennan Risk Advisory Practices. I am also arguably one of only a handful a Risk Professionals who has built a full end-to-end risk management & reporting framework for an organisation of over $25 billion (BG QCLNG). At its peak this was the 8th largest project in the world and is hence a significant indicator of my capability.  
 
As a practising complexity & risk specialist, I have worked within two of the world’s largest mining project hubs (BHPB and Rio Tinto), three of the Queensland mega LNG projects (GLNG, APLNG, QCLNG), Australia's largest construction company (Leighton’s/CIMIC), The State of NSW's largest Infrastructure PMO (I&P PMO), Victoria's Largest Rail PMO (VicTrack), Brisbane's largest city Rail Project (Cross River Rail) and the largest publicly funded civil & infrastructure PMO in Queensland (Brisbane City Infrastructure).  
 
Also, as a demonstration of my commitment to my art; I am currently engaged in a PHD by Research whereby I am "Investigating a Complex Systems Approach to Complex Project Risk Management". I believe that the complexity sciences provide a new generation lens upon which to help risk management transition into a future world of complex working relationships and perpetual disruption.
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