Project Systemic Risk

ProjectLink has, over the past few years, performed a substantial amount of primary research on the matter of systemic risk in projects. The research involved real projects for which ProjectLink performed services such as Project Reviews and Quantitative Risk Assessments (QRA).

In projects, which are a type of system, systemic risks differ from “ordinary” risks because they cannot be addressed using conventional processes, such as identifying the individual risk, giving it a probability and impact score, determining a suitable risk response strategy, assigning an owner, monitoring the risk, and so forth. Instead, systemic risks are system-wide and, therefore, have the potential to overwhelm the entire system.

In considering probable project variance for schedule and time objectives, ProjectLink has found that, for a project for which systemic risks are not properly mitigated, the chance of time and cost overruns or even outright failure is often unacceptably high. To address the matter purposely, the observations lead to the formulation of several Systemic Risk Mitigation Areas (SRMA). Examples of such SRMA are project team history working together, the speed at which critical decisions are made, and the effectiveness of communication structures. These, and several more, are explored in the paper titled Managing Systemic Risk in Mining Capital Projects. Although the paper uses mining projects as case studies, in principle the key learnings are relevant to all types and sizes of projects. A few examples of lessons from the study that have universal application are as follows.

  1. All projects involve inputs, processes, and outputs; therefore, they are systems. Any system is subject to systemic risk, i.e. a type of risk that, if not identified and addressed pre-emptively, is likely to cause significant harm to the project.
  2. A project need not be earmarked for a QRA for it to benefit from systemic risk management, as it will also benefit qualitatively from doing so. For example, putting measures in place to effectively manage project communication will be beneficial to the project, regardless of whether the resulting successes can be measured in quantifiable terms.
  3. The causes of systemic risk are relatively easy to identify, as they are usually underpinned by good project management practice. For example, no-one who has ever worked with contracting in projects would need any convincing regarding the importance of proper contract clauses.
  4. Systemic risk mitigation takes a bit of effort but is relatively simple to implement; all it needs is some commitment.

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