Project governance and risk management: From first-order economizing to second-order complexity

Abstract

© Cambridge University Press 2017. Introduction Until recently, the scholarship of project management has been dominated by a traditional approach reflective of foundational views about how to conduct successful projects (Morris, 2011). This traditional approach assumes a reductionist, positivist stance (Jackson, 2003; O'Leary, 2012), which follows neoclassical economics and the rationalist model of decision-making (Goode, 1997; Simon, 1979), in which analysis and action are cleanly separated in a logical sequence (Koskela & Howell, 2002; Ryle, 1984). Many of the contributions to the emergent project governance literature (Ahola, Ruuska, Artto, & Kujala, 2014) refer back to rational economic theories that theorize the firm as a nexus of contracts (Foss, 1993). Such approaches conceive of governance as a choice of form, which then drives incentives, decision rights, and accountability. In this traditional view, risk management is conceived of as a rational, linear process of identification, analysis, evaluation, and treatment (ISO, 2009) within a defined organizational context. However, the burden of calculative rationality (Levinthal & March, 1993) bestowed by the traditional approaches appears to be unbearable in practice (Guo, Chang-Richards, Wilkinson, & Li, 2014; O'Leary, 2012; Ward & Chapman, 2008; Winch & Maytorena, 2011). In this chapter, we argue that a “Third Wave” approach (Morris, Pinto, & Söderlund, 2011) to project governance and risk management is required in order to address issues of process (rather than form) and uncertainty (rather than risk). We begin with a review of how project risk management is shaped by governance. We then examine contemporary theories of risk and uncertainty and discuss their implications for governance. The chapter concludes with implications for practice. Project Governance for Risk Management: The “First-Order Economizing” Logic Two longstanding issues in the management of organizations have been to ensure that managers act in a manner satisfactory to those they are accountable to (Berle & Means, 1991), within efficiency constraints (Knight, 1921; Smith, 1776). A contemporary expression of these issues is as follows: an organization is defined as “a multiagent system with identifiable boundaries and system-level goals toward which the constituent agent's efforts are expected to make a contribution” (Puranam, Alexy, & Reitzig, 2014, p. 166).