Published here January 2004. 

PART III | Reason 4 | What is Risk? | Project Risk Management
The Need for Project Selection Risk Management | Hurdle Rates
Characterizing Risks with Probabilities | Characterizing Project Risks
Organizational Risk Tolerance | PART V

This is the fourth part of a six-part paper explaining the reasons organizations tend to make poor project choices. Part 1 described the common errors and biases in human judgment that distort decision-making. Part 2 described the error of failing to see the forest for the trees and provided recommendations for establishing a project portfolio management function. Part 3 described the need for metrics for evaluating and selecting projects. This part describes Reason 4 why organizations choose the wrong projects and stresses the importance of addressing project risk.

Reason 4: Inattention to Risk

Risk management is receiving greater attention since September 11 and the stock market losses that occurred shortly thereafter. Yet, while nearly all organizations are focusing more on security, assurance, and liquidity, when it comes to selecting projects many still don't adequately address risk. Inattention to risk is the fourth reason organizations choose the wrong projects.

There are important reasons why more attention to project risk is needed. The increasingly competitive economic environment is putting tremendous pressure on managers to produce results quickly. Meanwhile, projects are becoming more complex due, for example, to new technologies, more regulatory requirements, increased product liability, and the greater interdependency organizations have with multiple business partners.

Organizations are being held to higher standards by shareholders, customers, regulators, and the public. Executives are much less tolerant of budget overruns and inferior project outcomes. A serious project mishap can seriously damage the reputation and profitability of the organization. Coming in on time, on budget, and to project specifications is no longer good enough.


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