The Likelihood of Achieving Expected Benefits
Blog Barista: Bob Marquis, CPA, PMP | July 1, 2020 | Project Management | Brew time: 5 min
Project managers typically concern themselves with risks that will cause project delays, budget overruns, resource constraints, etc. Usually, they don’t look at the risk to the value of the project itself, i.e. the risk that a project will not achieve its intended benefits.
Whether you, as a project manager, concern yourself with benefit risk depends on how your role is defined. If your responsibilities are limited to the execution of the project, then another stakeholder—such as the project sponsor—manages the risk that a project will not achieve its intended benefits. Even if you don’t have responsibility for benefit risk, it is helpful to know what your sponsor is concerned about. Either way, it is important that you understand this risk and how it should be addressed.
The primary business risk of any project is that the project will not deliver the expected benefits. A project can be very successfully executed—meeting budget, schedule, quality, and deliverables—yet, still end up being of no value to the business. This can happen if business strategy changes course, organizational priorities change, technological advances make the project outdated, or changes in the market alter the business case that justified the project in the first place.
If we dig a little deeper, one way to better understand benefit risk, and how to deal with it, is to compare it to risks encountered in a financial audit. The risk of a project not delivering its expected benefits is similar to the risk that an audit will not provide its expected benefit. Let me explain. An audit is conducted for the benefit of the stakeholders in a company. The benefit these stakeholders get from an audit is confidence that the financial statements are accurate and not falsified or misstated. Keep in mind though that an audit only guards against this; an audit isn’t a guarantee. An auditor does his best to determine if the financial statements are correct, but there is always a risk that he will miss something or be fooled. If this risk is significant, and there is no confidence in the auditor’s opinion, even a perfectly executed audit will be of no value. This is called audit risk and it is the benefit risk for an audit. It is similar to the benefit risk of any other project.
To address this audit risk, auditors take steps to reduce the risk to an acceptable level. They want very little chance that their opinion will be wrong. They want the audit to provide its intended benefit – confidence. Likewise, Project Managers responsible for benefit risk need to reduce the risk that their project will not deliver its intended benefits. CPA’s preparing to conduct an audit focus a lot of attention on minimizing audit risk. Many of the concepts related to minimizing audit risk can be applied to assessing and addressing project benefit risk. Let’s look at this.
Before beginning an audit, Auditors try to determine how likely it is that the financial statements are wrong. Is there a good chance that the statements are wrong, or is there little chance they are wrong? The higher the risk, the more tests and evidence the auditor needs to mitigate the risk.
Audit risk is actually composed of three risks:
1) Inherent Risk: This is the risk involved in the nature of the business. For instance, businesses that transact in a lot of cash are inherently more at risk to have unrecorded transactions and misstated financial statements.
2) Control Risk: If an entity has weak controls over their funds and their financial processes, there is a higher risk of misstatement.
3) Detection Risk: This is the likelihood that falsifications or misstatements won’t be detected. For instance, if not enough transactions are sampled, a misstatement may not be detected.
The greater each of these component risks, the greater the overall audit risk. Assessing each of these risks individually helps direct mitigation strategies.
These same concepts should be applied to assessing the benefit risk of a project. Projects are undertaken because there is a business reason to do them. The business case forecasts that the benefits will be greater than the projected costs. The risk is that the business case is wrong; that the project will not deliver its expected benefit or that the costs will exceed projections. Like an auditor, the project manager needs to determine if there is a good chance that the business case is not valid or if there is little chance.
The project manager can assess this risk by looking at the individual component risks:
1) Inherent Risk: Is the project benefit inherently risky? Has the organization undertaken projects like this before and achieved the expected results? Will the project cause significant change for people in the organization? Is the market stable or changing fast? Is the solution proven or untried? Are cost and benefit estimates easily quantified or vague?
2) Control Risk: How well will the project manager be able to control the project? Is he in charge or just supporting? Is the path to the end well-defined or uncertain? How many entities are involved in the project? Are stakeholders in agreement and supportive of the project manager’s authority?
3) Detection Risk: Will the organization know if benefits are being achieved? Are costs and benefits easily measurable? Are monitoring tools and resources sufficient? Can benefits be measured incrementally or only at the end?
If the risks above are high, significant attention is needed to ensure the project achieves its intended benefits. As with audit planning, time must be spent before the project even begins to develop strategies to mitigate the risks. Then, throughout the project, time and resources must be allocated to ensure that the project will in fact ultimately provide the benefits the organization expects.
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