The

Business Value of Risk Management

Risk Management is Not Op)onal
John Sponholtz

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Overview

Introduc)on
Deni)ons
Value
Business Value
Project Value
Project Risk
Project Value of Risk Management
Business Value of Risk Management

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 Value

Value is something that is so important that the person is willing to pay for it.

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Business Value

Value is something that is so important that

the person is willing to pay for it.
Business value is the agreed-upon price
between the buyer and the seller.

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Project Value

Value is something that is so important that

the person is willing to pay for it.
Business value is the agreed-upon price
between the buyer and the seller.
Project value is the budget.

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Risk Deni)on

An uncertain event or condiHons that, if it

occurs, will have a posiHve or negaHve impact
on one or more project objecHves.
Project Management Ins)tute

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Example Project

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Project Value of Risk Management

TradiHonal Plan
Cost = $616,400
Dura)on = 340 days

Tradi)onal Plan

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Project Value of Risk Management

TradiHonal Plan TradiHonal Result

Cost = $616,400 Cost = $1,078,800
Dura)on = 340 days Dura)on = 493 days

Tradi)onal Plan Tradi)onal Consequence

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Project Value of Risk Management

TradiHonal Plan TradiHonal Result

Cost = $616,400 Cost = $1,078,800
Dura)on = 340 days Dura)on = 493 days

Tradi)onal Plan Tradi)onal Consequence

Risk-based Plan

Risk-based Plan
Cost = $794,307
Dura)on = 424 days

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Project Value of Risk Management

TradiHonal Plan TradiHonal Result

Cost = $616,400 Cost = $1,078,800
Dura)on = 340 days Dura)on = 493 days

Tradi)onal Plan Tradi)onal Consequence

Risk-based Plan

Risk-based Plan Risk-based Result

Cost = $794,307 Cost = $791,107
Dura)on = 424 days Dura)on = 419 days

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Project Value of Risk Management

TradiHonal Plan TradiHonal Result

Cost = $616,400 Cost = $1,078,800
Dura)on = 340 days Dura)on = 493 days

Tradi)onal Plan Tradi)onal Consequence

Value ProposiHon
Cost Savings = $287,693
Risk-based Plan Dura)on Savings = 74 Days

RealisHc Plan RealisHc Result

Cost = $794,307 Cost = $791,107
Dura)on = 424 days Dura)on = 419 days

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 Business Value of Risk Management

Year 1 & 2 3 4 5 6 7 8 8 10 11
Investment Cost -$797,945
Revenue $750,000 $787,500 $826,875 $868,219 $911,630 $957,211 $1,005,072 $1,055,325 $1,108,092
Fixed Cost $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000
Variable Cost $375,000 $393,750 $413,438 $434,109 $455,815 $478,606 $502,536 $527,663 $554,046
Cash Flow -$797,945 $225,000 $243,750 $263,438 $284,109 $305,815 $328,606 $352,536 $377,663 $404,046
IRR (ROI) -0.72 -0.29 -0.04 0.1 0.18 0.24 0.27 0.3 0.31

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Conclusion

The combinaHon of project risk and

business risk changes the way we manage
both risks. Changes include:
Addi)onal risk
Risk rela)onships
Risk interpreta)on
The deniHon of value changes when
project value is a part of business value.

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Lessons

Risk management is not op)onal.

Risk management reduces uncertainty
and increases our ability to predict
realis)c outcomes.

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Summary

Value is the monetary measure of a thing

of importance.
Proper risk management greatly
enhances the value of the project.
Project risk is a part of business value.
Proper risk management enhances
business value.

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 Visit: IIL.com Questions: Learning@iil.com

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