Risk Analysis

After identifying the risks, the next action is to determine their relative importance to one another and their respective probability of occurrence. The ranking of importance depends largely on the goals and objectives that the agreement must achieve.

There are three basic approaches for analyzing risks: quantitative, qualitative, and a combination of the two.

Quantitative risk analysis uses mathematical calculations to determine each risk's relative importance to another and their respective probabilities of occurrence. The Monte Carlo simulation technique is an example.

Qualitative risk analysis relies less on mathematical calculations and more on judgment to determine each risk's relative importance to another and their respective probabilities of occurrence. Heuristics, or rules of thumb, are an example.

A combination of the two uses both quantitative and qualitative considerations to determine a risk's relative importance to another and their probabilities of occurrence. The precedence diagramming method, which uses an ordinal approach to determine priorities according to some criterion, is an example. Whether using quantitative, qualitative, or a combination of the techniques, the results of the analysis should look like Exhibit 2.

Exhibit 2. Analysis Result

Risk

Probability of Occurrence

Impact

Unable to assess the level of services provided by a vendor

High

Major

Locking into an unrealistic long-term contract

Low

Major

Select a vendor that has a short life expectancy

Medium

Major

Paying large sums to terminate agreements

High

Minor

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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