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Term
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Explanation
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relational database
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A relational database is a collection of data elements organized into separate tables (sometimes referred to as "relations") of predefined categories in a way that
makes it easier to access and combine data elements. The structure allows data from different tables to be accessed and reassembled in different ways without having to reorganize the
tables.
The concept of a relational database was developed in 1970 by Edgar Codd, of IBM, whose objective was to accommodate a user's ad hoc request for selected data in an
efficient way. The standard application program used to interface to a relational database is the structured query language (SQL). Most business
database management systems use relational databases and project portfolio management tools are often advertised as storing data in a relational
database.
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regression analysis
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A statistical technique applied to data to determine the degree of correlation among one or more variables; that is, to
quantify the extent to which the variables tend to move together. In this way, regression analysis may be used to suggest potential cause-effect relationships, although it cannot by
itself be used to prove such relationships.
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resource balancing
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A component of resource management focused on balancing the supply and demand for the
resources needed for conducting projects. Key inputs for efficient resource balancing are forecasts of the demands for various resources and the
supply of those resources. The general goal is to achieve
near 100% resource utilization without over-allocating resources across projects.
Also, called resource leveling, the process mainly involves leveling or smoothing the demand for resources by adjusting the start and end dates
for projects or the tasks that make up those projects so as to reduce peaks and valleys in resource demand.
Various software tools are available to support resource balancing. Note however, as explained in
the section of the paper on tools for resource balancing, such tools rarely if ever attempt to optimize the selection of projects based on
the people and other resources that are available. Instead, the typical approach is to select projects subject only to a constraint on total project costs (including labor costs), and
then to phase the selected projects by shifting start and end dates for tasks. Since it is typically undesirable to delay project completion dates, resource balancing mainly looks for ways to shift work that is not on the
critical path, and network analysis techniques, including PERT charts, are
often used to aid the process.
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resource management
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The field concerned with effectively managing an organization's resources, including people, money, materials, equipment, and services. A key focus is resource allocation, the
efficient deployment and use of the organization's resources. Human resource management refers to the special case of managing people resources, and the topic is typically defined to include the management of payroll and benefits, education and
professional development, and other human resource functions. Resource balancing is a key technique used for resource management.
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return on investment (ROI)
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The ratio of project income to project cost. Typically, project income is specified as the average annual net income from a project, and project cost is the total invested capital:
For example, a project that costs $100,000 and is expected to return $20,000 annually would have an ROI of 20%.
As indicated, ROI is a measure of the financial benefits obtained from a project over a specified time period in return for the required investment, with the result
expressed as a percentage. ROI is widely used (especially in the private sector) both to justify a proposed project and to evaluate, after the completion of the project, the extent to
which the desired return was achieved.
ROI is similar to internal rate of return (IRR) in that it provides a measure of "bang-for-the-buck." However, it is even simpler in
that in that it does not distinguish, nor is it sensitive to, the time at which project cash flows occur. ROI involves significant biases and is therefore not very useful for aiding
project-selection decisions.
Like IRR, ROI is most often used as a go/no-go screen for selecting projects. A minimum required ROI is specified, referred to as the hurdle rate. The hurdle rate is often based on the company's weighted average cost of capital (WACC), the average return on a portfolio of all the
firm's securities (equity and debt). Alternatively, the hurdle rate may be set higher or lower depending on the company's appetite for risk and shareholders' expectations for company
performance. Projects with ROI's less than the hurdle rate are rejected.
When used to rank projects, ROI has significant limitations. If project income varies from year to year, ROI will depend significantly on the period chosen for
computing average income. ROI also has most of the limitations of IRR. It ignores non-financial project benefits, can't properly account for project
risks and interdependencies, and does not provide a basis for quantifying the value of alternative project portfolios. Since future cash flows are not discounted, ROI ignores the
preference that should be given to projects whose cash inflows occur sooner in time. Thus, ROI is particularly unsuitable for ranking projects that produce incremental revenues or cost
savings that persist over multiple years.
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risk
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A characteristic of a situation or action wherein a number of outcomes are possible, the particular one that will occur is uncertain, and at least one of the
possibilities is undesirable.
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risk matrix
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A graphic display for visualizing and comparing risks. Initially adopted by the US military, the tool is currently used by many
organizations as a simple means for analyzing risks. The idea behind the risk matrix is to distinguish various levels for the two main dimensions of risk, (1) likelihood of occurrence
and (2) magnitude of impact. For example:
A basic risk matrix
Each cell in the risk matrix represents a possible combination of likelihood and impact. Since the seriousness of a risk is roughly related to the product of
likelihood and impact, colors (e.g., green, yellow, and red) are often used to emphasize this result. The number of rows and columns and the particular way in which they are defined
(e.g., quantitatively or qualitatively) can be varied depending on the application.
To use the risk matrix, a list of relevant risks is generated. For example, if a company is considering introducing a new consumer product, a possible risk might be
that a customer could be injured by that product. For each identified risk, the likelihood of the risk event (e.g., not very likely versus very likely) and the seriousness of the
consequences (e.g., minor cut versus serious permanent disability) are estimated. The results are then used to place each risk within the appropriate cell of the risk matrix. Risks can
then be prioritized from top-right down to bottom left.
The main benefit of the risk matrix is that it provides a visual display that differentiates high-probability/low-impact and high-impact/low-probability risks. Because
multiple risks can be displayed simultaneously, the approach benefits from the comparative ease that people have in making pairwise comparisons as opposed to the greater difficulty
associated with drawing absolute judgments. Within a risk management process, the matrix provides documentation demonstrating that risks have been identified and deliberately evaluated.
Also, the matrix can be used to show how the likelihood and impact of risks change and therefore move within the matrix, for example, over time at different stages in a project's
investment life cycle or as a result of candidate risk mitigation strategies.
Another attractive characteristic is that the matrix works well in a group decision-making environment. For example, the risk matrix can be drawn on a white board or
pages taped together from a flip chart. Post-It Notes can then be used to place risks within the matrix. The exercise promotes brainstorming
and a team approach helps avoid the extremes of too pessimistic or too optimistic views that might be expressed by individuals.
The main limitations of the risk matrix relate to the simplistic, subjective way by which risk is measured. Poor resolution often results because rows and columns are
often defined qualitatively, so that the same cells can be assigned to risks of very different magnitude. Also, due to errors in either the assessment of risks or the cells in which
they are placed, the risk matrix can mistakenly assign higher qualitative ratings to quantitatively smaller risks. The risk ratings assigned to cells are typically just a function of
the product of likelihood and impact, so the approach ignores the fact that very high consequence/low probability risks are generally of greater concern to organizations than the
product would suggest, and the error is greater for organizations with lower risk tolerance. Effective allocation of resources to
risk-reducing countermeasures cannot be based solely on the category ratings assigned by risk matrices—the effectiveness of the risk-reducing measures must be considered as well.
These and other limitations imply that risk matrices should be used with caution, and only with careful explanations of underlying judgments.
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risk mitigation
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Actions taken to reduce risks based on lowering the probability and/or impact of a risk to below some acceptable level or threshold. In the context of project management, risk mitigation typically involves revising the project's scope, budget, schedule or objectives.
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