Evolving Strategy: Risk Management and the Shaping of Large Engineering Projects
Author(s)Miller, Roger; Lessard, Donald
Large engineering projects (LEPs) are high-stakes games characterized by substantial irreversible commitments, skewed reward structures when they are successful, and high probabilities of failure. Their dynamics also change over time. The journey from initial conception to ramp-up and revenue generation takes 10 years on average. While the “front end” of a project – project definition, concept selection, and planning – typically involves less than one third of the total elapsed time and expense, it has a disproportionate impact on outcomes, as most shaping actions occur during this phase. During the rampup period, the reality of market estimates and the true worth of the project are revealed. Sponsors may find that actual conditions are very different from expectations, but only a few adaptations are possible. Once built, most projects have little flexibility in use beyond the original intended purpose. Managing risks is thus a real issue. The purpose of this chapter is to sketch out the various components of risk and outline ranges of strategies for coping with risks and turbulence based on an assessment of 60 projects as part of the IMEC study. Further more, we propose the elements of a governance system to master their evolutionary dynamics. The main finding is that successful projects are not selected but shaped. Rather than choosing a specific project concept from a number of alternatives at the outset based on projections of the full sets of benefits, costs and risks over the project’s lifetime, successful sponsors start with project ideas that have the potential to become viable. These sponsors then embark on shaping efforts to influence risk drivers ranging from project-related issues to broader governance. The seeds of success or failure of individual projects are thus planted early and nurtured over the course of the shaping period as choices are made. Successful sponsors, however, do not escalate commitments, and they abandon quickly when they recognize that projects have little possibility of becoming viable.
MIT Sloan School of Management Working Paper4639-07
Risk Management, Strategy, Engineering