A masterclass in risk
The February meeting of APMHK was held at the Royal Hong Kong Yacht Club on 19 February 2013. The event featured a presentation entitled A master class on risk or the challenges, cause, and cures for megaproject failure by Prof. Bent Flyvbjerg, BT Professor and Chair of Major Programme Management at Oxford University. Prof. Flyvbjerg shared with about 80 members and guests Nobel-prize winning theories in the field of project and programme management. Real-life cases were also used to illustrate how these new insights can improve the current project and programme management practices.
Megaprojects can be loosely defined as extremely large-scale investment projects costing more than US$1billion, with duration of typically more than five years, and affecting more than one million people through their impact on communities, environment and national budgets. The High-speed Rail in China (US$300billion), the F-35 Joint Strike Fighter (US$240billion) and the International Space Station (US$150billion) of the States are typical examples of megaprojects. The number of such projects is not only large today, but also the frequency of carrying out megaprojects is increasing worldwide.
According to Professor Flyvbjerg, cost overruns and time (schedule) overruns, over and over again are the huge challenges, followed by benefit/demand/revenue short and reputational damage. He applies the theories of scale and scalability, theories of success and failure, optimism bias and black swan blindness, among others, to do research on megaprojects. Prof. Flyvbjerg suggested that the overruns exist in the megaprojects were mainly due to technical, psychological and political-economic problems.
Professor Flyvbjerg focused on the human optimism bias and strategic misrepresentation, either from political or other pressures to show the huge impact on mega-project overruns.
A closer look at the planning fallacy reveals that people overestimate the probability of rare events, despite experience to the contrary. They tend to focus on the elements of the specific planned project, such as its critical path -seeing this action as unique- what Kahneman calls the inside view. To get a more accurate basis of estimation project leaders should use the outside view focusing on the outcomes of similar projects that have already been completed. This leads to the reference class forecasting (RCF) method for systematically taking the outside views and thereby compensating for the twin bias of both optimism and deliberate misrepresentation.
In closing, he disclosed that the RCF became mandatory in the UK for some large government projects, and that it was also being used in the Netherlands, Demark, Switzerland and South Africa. The members and guests attending asked many questions about the application of risk management and the evening concluded with a lively discussion.
Please note that any use of this material without the specific permission of Bent Flyvbjerg is prohibited.