2.9 Risk-Diagnosing Methodology
2.9.1 Introduction
This chapter introduces risk-diagnosing methodology (RDM), which aims to identify and evaluate technological, organizational, and business risks in new product development. RDM was initiated, developed, and tested within a division of Philips Electronics, a multinational company in the audio, video, and lighting industry. Also Unilever, one of the world's leading companies in fast-moving consumer goods, decided to adopt and implement RDM on a worldwide basis. Since its initiation, RDM has been applied to new product development projects in areas as diverse as the development of automobile tires, ship propellers, printing equipment, landing gear systems, lighting and electronic systems, and fast-moving consumer goods in various industries in Germany, Italy, Belgium, the Netherlands, Brazil, China, and the United States. RDM proved very useful in diagnosing project risks, promoting creative solutions for diagnosed risks, and strengthening team ownership of the project as a whole (Halman and Keizer, 1994; Keizer, Halman, and Song, 2002).
2.9.2 Requirements for an Effective Risk Assessment
The true nature of project risk is determined not only by its likelihood and its effects, but also by a project team's ability to influence the risk factors (see e.g., Keil et al., 1998; Sitkin and Pablo, 1992; Smith, 1999). Thus a project activity should be labeled “risky” if the following criteria apply:
- The likelihood of a bad result is great.
- The ability to influence it within the time and resource limits of the project is small.
- Its potential consequences are severe.
To be effective, a risk assessment needs to help identify potential risks in the following domains:
- Technology: Product design and platform development, manufacturing technology, and intellectual property.
- Market: Consumer and trade acceptance, public acceptance, and the potential actions of competitors.
- Finance: Commercial viability.
- Operations: Internal organization, project team, co-development with external parties, and supply and distribution.
The most powerful contribution of risk assessment comes at the end of the feasibility phase of the innovation process, at the contract gate (see also Figure 2.9.1). At this stage, the transition to the actual product development and engineering of a particular product or product range takes place; uncertainty has to be managed, taking into account the potential risks relating to all the aspects of manufacturability, marketability, finance, human resources, and so on. In this phase of the project, management still has the ability to substantially influence the course of events and make a considerable impact on the eventual outcome (Cooper, 1993; Wheelwright and Clark, 1992). However, a periodical reassessment of potential risks in subsequent phases is still required.
Figure 2.9.1 A typical innovation funnel
In sum, it would appear that a comprehensive risk assessment approach would do the following:
- Evaluate each potential risk on its likelihood, its controllability, and its relative importance to project performance.
- Take a cross-functional perspective by identifying and evaluating technological, market, and financial as well as operational risks.
- Conduct the risk assessment at the end of the feasibility phase, and periodically reassess the project for unforeseen risks and deviations from the risk management plan.
- Identify and evaluate the product innovation risks individually, and generate, evaluate, and select alternative solutions in subgroups and plenary sessions.
2.9.3 The Risk-Diagnosing Methodology (RDM)
The purpose of RDM is to provide strategies that will improve the chance of a project's success by identifying and managing its potential risks. RDM is designed to be applied at the end of the feasibility phase, and should thus address such issues as consumer and trade acceptance, commercial viability, competitive reactions, external influential responses, human resource implications, and manufacturability. In this subsection, we will describe the successive steps (see also Figure 2.9.2) of RDM.
Figure 2.9.2 Outline of risk-diagnosing methodology (RDM)
Initial Briefing
The first step of RDM is meant to build a full understanding of the conditions to be met at the start of the RDM process and to make the necessary appointments. The initial briefing takes place between the risk facilitator and project manager. This initial briefing should cover both general and project-specific topics. Project-specific topics include its objectives and unique characteristics, its stakeholders, the nature of its current phase, and the commitments required from its participants. More general topics include how information about the project will be made available to the risk facilitator, how this information will be kept confidential, who will participate in the RDM process (e.g., stakeholder, a project manager, a project team, and experts), how participants will be informed of their involvement, when and where the RDM process will take place, and what may be expected from it. Special care must be taken to include in the team technological, business, and marketing expertise. The output of this initial briefing is twofold: agreements between the project manager and risk facilitator on actions to be taken, and invitations to a “kick-off” meeting for participants in the RDM process.
Kick-off Meeting
The objective of this meeting is to make sure that all participants know what to expect during the RDM process and are willing to cooperate. During the kick-off meeting, the following topics are addressed: objectives of and steps in the RDM process; the expected input, level of involvement, and amount of time from participants; the confidentiality of the interviews and other information provided by participants; and the expected output of the RDM process. After the kick-off meeting, agreements are made on the date, time, and location of the interviews and on the date, time, and location of a plenary risk management session.
Individual Interviewing of Participants
The objective of this step is to develop a comprehensive overview of all critical aspects in the innovation project. To enable participants to describe freely what they see as the riskiest aspects of the project, the risk facilitator interviews all participants individually. Each interview takes about 1.5 hours, during which the participant is led to think carefully on the project and its risks, and on his or her contribution specifically. Every participant is asked to study the project plan and the reference list of potential risk issues (see Appendix 2.9.A). In every new interview, the preceding interviews are taken into account (without mentioning the respondent's name) to test the completeness and correctness of the already gathered data. The protocol for the interviews is as follows:
- A short introduction of both participant and risk facilitator, and explanation by the risk facilitator of the objective of the interview.
- “Gaps” in the project: “What do you see as gaps in knowledge, skills, and experience for this project?” and “Can these gaps be bridged within the time and resource constraints of the project?”
- The reference list with potential risks: “What other gaps might be difficult to bridge?”
- Closing the interview: “Did we forget something?”
- Next steps: The risk facilitator briefly explains again what the interviewee can expect next, especially the risk questionnaire and the risk management session.
Processing the Interviews: Design of a Risk Questionnaire
After having interviewed all the participants, the risk facilitator analyzes the interview notes and clusters the critical issues according to the risk categories distinguished in Appendix 2.9.A (e.g., product technology risk, manufacturing technology risk, and project team risk). Then the risk facilitator designs a risk questionnaire, in which the critical issues from the interviews are translated into positive statements of “objectives to be realized” (see Figure 2.9.3). For example, if in one of the interviews a risk team member says, “We will be using a new ingredient in our product solution, and I have read in a journal that this material sometimes causes skin irritations,” the statement would be formulated thus: “The new product formulation will be safe to use also for people with sensitive skin.”
Figure 2.9.3 Example of a risk questionnaire
Answering the Risk Questionnaire
Respondents are asked individually to score the risk statements that they have developed on three five-point scales (see Figure 2.9.3):
- The level of certainty that the objective formulated in the risk statement will be realized.
- The ability of the team to reach an appropriate solution using the project's allotted time and resources.
- The relative importance of the objective to project performance.
Respondents are asked to answer the questionnaire as completely as possible, but not to respond to those issues about which they have no idea or opinion. The typical number of risk statements in these questionnaires is 50–60, and it takes 45–60 minutes to complete.
Constructing the Risk Profile
After the respondents have completed the risk questionnaire, the risk facilitator constructs a risk profile from their scores. Every risk statement is reported with its scoring for the three evaluation parameters (see Figure 2.9.4 for an example).
Figure 2.9.4 Example of a project risk profile
The risk profile presents both the degrees of risk perceived by the majority of the respondents and the distribution of their perceptions. Although the criterion can be chosen differently, we have chosen to mark with a dot the column in which a support of a minimum of 50% (the average of the scores) is reached. This will give an initial view of the thinking of the majority of the respondents. Next, the risk facilitator classifies the risk statements in two ways. First, every risk statement is classified along the three parameters into four groups by the following decision rules:
- (“∗”): At least 50% of the scores are 1 or 2 on the 5-point scale (1 being very risky), and there are no scores of 5 on the 5-point scale.
- (“0”): At least 50% of the scores are 4 or 5 on the 5-point scale, and there are no scores of 1 on the 5-point scale.
- (“m”): At least 50% of the scores are 3 on the 5-point scale, and there are no scores of 1 or 5 on the 5-point scale.
- (“?”): For all remaining cases. There exists a lack of consensus, visible in a wide distribution of opinions. After discussion with the interviewees, the “?” scores may be changed to one of the other three.
Next, the risk facilitator classifies each risk statement into a “risk class” by examining the questionnaire responses. RDM uses five risk classes: S = safe; L = low; M = medium; H = high; and F = fatal. For example, a combination of scores “∗,∗,∗” on a given risk statement would result in its classification as so risky that not lessening this risk would be fatal for the project (which would then be assigned a risk class of F), while the combination “0,0,0” would result in a classification as safe (risk class S). The total number of possible combinations of risk scores is 64 (see Keizer, Halman, and Song, 2002). If there is a distribution of opinions, the risk score can be represented by a range between the lowest and highest risk classes that can be reached if the respondents achieve consensus (e.g., L-M or H-F). For example, in Figure 2.9.4, the scores indicate a lack of consensus within the team for risk statement number 3. If, after discussion and clarification, the team as a whole is convinced that the statement “finding an appropriate solution for localized dye damage” is very uncertain and very important to project success, the risk range will change from “L-F” to “F.” It should be stressed that this lack of consensus in the risk profile is very valuable information and should not be “swept under the carpet.” It has happened more than once that a member of a team had a clearly divergent opinion that appeared, after discussion and clarification, to be right!
Preparing a Risk Management Session
In this RDM step, the project manager reaches agreement with the risk facilitator on the agenda for the risk management session. Certain risks will be better tackled in a plenary session, and others in subgroups. The choice will depend on the number and difficulty of risks requiring a solution. Experience suggests that a risk management session will require a one-day meeting where the team can work in plenary as well as syndicate (subgroup) meetings.
Risk Management Session
The objective of the risk management session is to achieve consensus on action plans for dealing with the high risks and on procedures for dealing with the medium and lower risks. In addition to the project manager and the risk facilitator, all persons who participated in the RDM process are invited to this session, which the project manager usually leads. A typical session includes an introduction to the objectives of the meeting, the program, and some “rules of conduct.”
Our experience has shown that observing these rules of conduct (see Figure 2.9.5) helps participants to increase the effectiveness of the process and foster breakthroughs in problem solving. Not only do these rules enforce the requirements generally agreed on for brainstorming (Ivancevich and Matteson, 1996) but also they limit as far as possible the potential negative effects of group dynamics discussed in this section. After the introduction and an agreement to follow the rules of conduct, the risk facilitator presents the risk profile: What are the high risks everyone agrees on? What are the risks about which opinions differ but that could potentially turn out to be high? The risk facilitator also shows how certain issues are related to each other.
Figure 2.9.5 Rules of engagement for a risk management session
The first part of the risk management session is designed to create a common understanding of the risks and to generate ideas for managing them. In the second part of the risk management session, the group is split up into subgroups, which are asked to work further on the suggested ideas and to formulate action plans specifying what needs to be done, by whom, and when. Appendix C presents some trigger questions that might help the subgroups design these plans. In the third part of the session, the subgroups present the outcomes of their respective discussions. After further clarification and discussion, the project team decides on which follow-up actions should be taken to manage the diagnosed risks, and on how to present the results to senior management.
Drawing Up and Executing a Risk Management Plan
The risks and corresponding action plans are brought together in a risk management plan. In addition to documenting the risk assessment results and the outcome of the risk management session, the risk management plan states who is responsible for each of the diagnosed risks, how much time and resources are needed to deal with these risks, and how progress will be monitored and reported. This plan enables management to decide upon the feasibility of the project and make a “go” or “no go” decision. The action plans drawn up by the subgroups are documented in risk-tracking forms (see Figure 2.9.6). These provide a framework for recording information about the status and progress of each diagnosed risk. To guarantee follow-up, besides regular monitoring and control of the project risks in project team meetings, senior management should also require formal approval of the risk management plan and verify the progress of the risk actions plans in all subsequent gate reviews.
Figure 2.9.6 Example of a risk-tracking form
It may be necessary to repeat the RDM for some product innovation projects. In particular, in cases where the project newness and complexity are great, modifications and unforeseen issues are almost certain to arise; this might demand reassessment of the overall risks at later stages of the project. Senior management in consultation with the project team therefore should reconsider at each stage whether to repeat the RDM process or simply to have the project team update the existing risk management plan.
2.9.4 Added Value of RDM
Evaluation studies show that professionals in the field of new product development are very satisfied with the way RDM allows them to identify, confront, and manage risks in their projects (Vuuren, 2001). Factors causing this satisfaction are, for example, that RDM helps to pull out the key risk issues and actions and to clear misunderstandings and varying interpretations about the existing project risks. Similarly the limited time that is needed to conduct the whole process, the application of the rules of engagement, and the appeal to think cross-functionally contribute a lot to this satisfaction. Also the use of the risk reference list is evaluated positively: It stimulates the team to think more in detail about the project and to identify risks the team hadn't thought of before. RDM provides the project team with the following:
- A list of classified risks identified while there is still time.
- A risk evaluation on scenarios that can be followed.
- A plan on how the major risks will be tackled.
- A solid basis for communicating the risks, project planning, and required resources with senior management and other stakeholders.