Unknown knowns

In Risk Management, there are three major categories of risk:

  • Known knowns: these are risks that can be identified at the outset of a project and the outcome of which can be more or less reliably predicted. Rising labor and material costs are typical example of such risks.
  • Known unknowns: the risks that can be identified, but the outcome of which may not be initially clear. For example, dealing with vendors is such a risk for vendors do not always deliver on what they promise.
  • Unknown unknowns: risks that can’t be foreseen. Major accidents, natural and man-made cataclysms fall into this category. Remember Donald Rumsfeld’s famous: “Stuff happens?”

The scandalous cost overrun plaguing the organization of the 2014 Sochi Winter Olympic Games seems to warrant introducing yet another risk category: unknown knows, the risks that can’t be precisely identified due to their multiplicity, but whose gross negative impact on the project appears quite certain.

Let me elaborate.

When managing a project, project managers have to balance a number of competing project constraints, of which the most important are time (schedule), cost (budget) and scope/quality, a concept widely knows as the Triple Constraint Model. Should one of these factors change, at least one another will be affected too. For example, if the availability of funds becomes problematic, achieving planned deadlines would no more be possible. In addition, product quality may suffer. Conversely, slipping deadlines could be somewhat recovered by adding more resources, if the funds are available.

These simple relations don’t seem to work in Russia. Take, for example, one of the country’s recent megaprojects, the annual meeting of Asia-Pacific Economic Cooperation (APEC) countries held in Vladivostok, last September. The total price tag for the APEC summit was $20 billion, more than twice than had been originally budgeted. Yet, by the beginning of the summit, only a third of planned construction projects had been finished. Moreover, the quality of construction was extremely poor: a section of a $1 billion road collapsed three months in advance of the summit, and the summit’s hallmark, the $1 billion bridge to the Russian Island (a.k.a “bridge to nowhere”), is already showing construction deficiencies. The widespread corruption of local officials–a risk factor known to everyone in Russia, yet never officially recognized (an unknown known, so to speak)–resulted in the situation when even the inflated budget had failed to ensure elementary quality of the product and its timely delivery.

The lesson of the APEC summit might be very relevant in case of the Sochi Games. The estimated price tag for the Sochi event is expected at the level of $50 billion, about five times above the initial budget. This makes the allocation of significant additional funds–those beyond the sheer need to finish the job–very unlikely. At the same time, many construction projects are behind schedule. Given the fixed date of the opening ceremony, the organizers will be forced to complete the construction by this date, no matter what. A simple logic suggests that when the deadlines are non-negotiable and funds to speed up the work are non-available, there is only one component remaining to be sacrificed: quality. And quality means safety.

Instead on focusing on “readiness” of the Sochi sports facilities, the IOC should insist on extensive audits of their quality. This may help prevent the embarrassment of future technical malfunctions. Or worse.

About Eugene Ivanov

Eugene Ivanov is a PMI-certified Innovation Management Consultant who helps organizations increase the efficiency of their internal and external innovation programs.
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4 Responses to Unknown knowns

  1. dongrgic says:

    Great post Eugene.

  2. Patrick Armstrong says:

    “Triple constraint” applying to prestige mega-projects? I doubt it. The only constraint is time. Spend and steal what you want, use whatever junk you want: it only has to stand up on The Day. The thieves have all that figured out the moment the announcement is made.

    But seriously all Olympics (OK they say there have been some that didn’t — Los Angeles and Calgary but all that means is the calculators got the ludicrous costs correctly guessed at the beginning) have resulted in immense cost overruns. All lies and projections.

    One would have expected Sochi to set a record — nothing but Nature there in the first place, and Russian corruption. (But even so $50 billion — you could build a small country for that)

    My proposal for future Olympics
    Summer — permanent site at Olympus
    Winter — permanent site Switzerland-Austria
    New Olympics — the Fully-Wired Olympics; only rules: contestants must be alive at the end of the competition and medals to be accepted by drug companies. To be held — where else? — Las Vegas.

    All Olympic problems neatly solved.

    • Eugene says:

      Hi Patrick,

      Well, the triple constraint does seem to apply to Vladivostok: apparently they stole so much money that they completely deprived the budget. As a result, schedule slipped and quality sucked.

      Sure, I heard many times that, say, Vancouver went over budget too. But Canada didn’t follow up with building a castle on a remote island to host the G8 summit next year. In Russia, Sochi follows Vladivostok and then the world soccer cup comes. It’s not a mega-occasion anymore; it’s a mega-routine.

      Love your idea on the future of Olympic Games. Eventually, it may come to an in vitro competition of muscles extracted from different athletes. BALCO is the permanent sponsor of the Games; Lance and Marion are IOC co-presidents for life.

      Cheers,
      Eugene

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