Risk Quantification

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As part of the quantification process in risk management, we need to find a way to organize the risks so that they can be dealt with in a logical way. There are two things we need to consider. The first is that the risks need to be put into groups that can then be managed by individuals who are more familiar with the nature ofthese risks. The second is that the risks need to be put into some priority order. This is because no organization will ever have the funds or manpower to deal with all the risks. At some point the level of impact and probability will be such that even the most conservative of risk takers will take that risk and accept it.

If we use probabilities between 0 and 1 to estimate the likelihood of our risks, and we use a quantitative number to assess impact, then we could multiply the two values and get the expected value for the risk. If the estimates were done consistently, then we would have a measure to rank them with the highest expected value at the top of the list and the rest below it in descending order. This is the same as the expected value analysis we did previously.

The most qualitative and simple method of evaluating risks can be used in a similar way. The most basic evaluation for risk could be to say the risk is ''likely'' and ''bad,'' using only the distinctions of ''likely'' and ''unlikely'' for probability and ''bad'' and ''very bad'' for impact.

A step toward quantitative measure might be to evaluate the risks as, ''high,'' ''medium,'' and ''low.'' Going further, the risks could be evaluated on a scale of 1 to 10 or 1 to 100. Any other system or a combination of any of these is also appropriate. There is nothing wrong in saying that a risk has a high probability of occurring and has an impact of $40,000.

The ultimate goal of this risk prioritization scheme is to get the risks into some hierarchical order. Then the resources of the project can be concentrated on the risks at the top of the list, and effort is spent first on the ones that are the most important. Depending on the risk tolerance of the organization and the stakeholders, acceptable risks may be high or low on the list.

Comparative Ranking

Comparative ranking is one tool that can be used to prioritize risks of the same level of severity. The layout of the diagram in Figure 7-5 compares each risk to every other risk. In the first comparison, the diagonal box at the top of the diagram, risk A and risk B are compared to one another. When the comparison is made, only those two risks are compared. If a group is considering the risk, consensus can be reached for each comparison, or the individual votes of each member of the group can be recorded.

After all of the comparisons are made, the total votes for each of the risks are counted, and the risks are ranked according to the highest vote count. It is important to limit the discussion to the two risks under consideration and not allow discussion of the other risks at that time.

Sensitivity Analysis

Sensitivity analysis can be performed on many of the aspects of the project, from engineering to economics. The basic idea of sensitivity analysis is to look at the parameters that affect the situation that we would like to study. By holding all of the parameters constant and allowing one parameter to have different values we can determine the overall

Figure 7-5. Comparative ranking of risks.

Figure 7-5. Comparative ranking of risks.

Comparative Advantage Quantified

effect on the situation. For example, if we were concerned about the profit to be made from a project we could determine the factors affecting profit. These might be parameters like delivery delays, changes in interest rates, cost overruns, lack of experienced personnel, and so on.

Grouping the Risks

Risks will frequently need to be grouped. This will be more important on large projects than on small ones. The general idea is that if it takes more than ten people to meet and deal with a group of risks, the meeting is too large and will be inefficient. As projects become larger it is necessary to have a series of risk management meetings, whereas in a small project, one meeting might do. To facilitate this, you can use techniques similar to the techniques that were used in the development of the work breakdown structure. In fact, the WBS itself can be used to organize meetings for risk management.

Risks should be assigned to the person who is most closely associated with where the risk will have its largest impact or to the person who has the most familiarity with the technology of the risk. A risk that takes place during the completion of a particular task and directly affects only that task should be a concern to the person responsible for that task. Of course, no task in a project is truly independent of all the others, so for more severe risks a person in the organization above the person responsible for the task may be responsible for the risk.

Oftentimes, in projects where risk is of great concern, the project manager creates the position of risk manager. This person is responsible for tracking all risks and maintaining the risk management plan. As projects become larger or tolerance for risk is low, this approach becomes more necessary.

Affinity Diagramming

Affinity diagramming is a simple tool that can be used to separate risks into groups that can then be managed separately by different groups of people on the project team. All you need for this are pads of sticky-back notes, a room with wall space, and cooperative people.

Members of the project team are brought together for a meeting. You begin the process by writing all of the risks on small pieces of paper. Post-it Notes work well for this purpose.

The members of the meeting then take their pieces of paper and post them on the wall. This is done in strict silence. Each person is allowed to move any of the posted notes. The notes may be moved as often as anyone wishes. Eventually, the notes will form into groups. When all the movement has stopped, the process is complete. At that point, one person in the group or the facilitator must document the results. Sticky-back notes will not stay on the wall for long.

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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