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Risk Management in Internet-Based
Software Projects
Risk Management in Internet-Based
Software Projects
Roy C. Schmidt,Bradley UniversityIntroduction 229
What Is Risk? 229
Risk as an Element of Decision Theory 229
Risk as Viewed by Practicing Managers 230
Information Technology (IT) Project Risk 230
Internet-Based Project Risks 230
How Internet-Based Projects Differ From
Other IT Projects 230Sources of Risk 231
Strategies for Risk Management 232
Recognizing Risks 232
Planning for Risk Countermeasures 233
Conclusion 235
Glossary 235
Cross References 235
References 235INTRODUCTION
Despite the success stories in the literature, it remains a
sad statistic that too many software development projects
end in failure. At least a quarter of all software projects
are cancelled outright, and it is likely that 75% of all large
systems projects are dysfunctional because the systems
produced do not meet specifications or are simply not
used. The average software project runs over its budget
by 50% (Gibbs, 1994; Lyytinen & Hirschheim, 1987; van
Genutchen, 1991; Walkerden & Jeffrey, 1997). It is com-
mon knowledge that software projects are risky, and thus
there has been an intense search for appropriate manage-
rial action to counteract software project risk.
One approach that has gained popularity in recent
years is the use of the Internet as a vehicle for communica-
tion among project team members (Benett, 1998; Collab-
orative Strategies, 2000). By improving communications
and facilitating work flow management, Internet-based
project management seeks to reduce some elements of
risk. A thriving industry of support and management of
Internet-based projects has grown up in just five years.
One such company is Reinvent Communications (for-
merly USWeb), which not only supports Internet collab-
oration but also uses its own tools to provide its support
(Bumbo & Coleman, 2000). At this point, it is too early to
tell if this new management approach has had any impact
on project success, but the new approach may be displac-
ing some risk factors with new ones, thus creating new
opportunities for failure (Ash, 1998).
A more traditional method for reducing failure in soft-
ware projects is the concept of software project risk man-
agement. Advocates of software project risk management
claim that by identifying and analyzing threats to success,
action can be taken to reduce the chance of failure. In this
chapter, the traditional risk management approach is ex-
tended to include the new Internet-based project manage-
ment environment.
Risk management is a two-stage process: assessing the
risk and taking action to control risk. The first stage, risk
assessment, consists of three steps: (a) identification of
risk factors, (b) estimation of the likelihood for each risk
factor to occur and potential damage from the risk, and(c) an evaluation of total risk exposure (Charette, 1989).
So the first step toward control of software project risk is
an understanding of the exact nature of risk factors.WHAT IS RISK?
The concept of risk is not clear to most practicing man-
agers. Much like the problems the average person has
understanding Bayesian statistics, the word “risk” usu-
ally conjures up an image of negative outcomes. A “risky”
project is seen as one that is likely to fail. A risk factor is
seen as an opportunity to fail. This view of risk overlooks
the true nature of the beast.Risk as an Element of Decision Theory
The following explanation is highly simplified but suffi-
cient for the purpose of this chapter. For a complete treat-
ment of decision theory and risk, see the collection of es-
says by Arrow (1965).
Decision theory describes the decision-making process
as a choice of actions leading to a specific outcome. A
small number of actions lead to outcomes that are favor-
able, a few to those that are unfavorable, but the vast ma-
jority lead to outcomes that are unclear. Assuming that the
clearly favorable outcomes are too small to be attractive,
the unclear alternatives present the decision maker with
risky opportunities.
For each of the risky alternatives, there is some proba-
bility of a favorable outcome. For example, a given alter-
native may have 15% chance of success (a favorable out-
come) and thus an 85% chance of failure. How would this
alternative compare with another that has 99% chance of
success? To make this evaluation, one also needs to know
the magnitude of the outcome.
Suppose that the first alternative, if successful, would
net $1 million in profit but a failure would mean the loss
of $50,000 invested in the alternative. The second alterna-
tive would net $500,000 profit, but failure would lead to a
loss of $3 million. Although the second alternative seems
unattractive because of the magnitude of the loss and the
smaller profit, it is actually the better choice. To compare
the alternatives, both the probability of the outcome and229