The framework introduced in the previous section provides tools for identifying and understanding the nature of risks to IT projects. The next step requires that those risks be analyzed to determine what threats or opportunities require attention or a response. Risk analysis and assessment provides a systematic approach for evaluating the risks that the project stakeholders identify. The purpose of risk analysis is to determine each identified risk's probability and impact on the project. Risk assessment, on the other hand, focuses on prioritizing risks so that an effective risk strategy can be formulated. In short, which risks require a response? To a great degree, this will be determined by the project stakeholders' tolerances to risk.
There are two basic approaches to analyzing and assessing project risk. The first approach is more qualitative in nature because it includes subjective assessments based on experience or intuition. Quantitative analysis, on the other hand, is based on mathematical and statistical techniques. Each approach has its own strengths and weaknesses when dealing with uncertainty, so a combination of qualitative and quantitative methods provides valuable insight when conducting risk analysis and assessment.
Qualitative risk analysis focuses on a subjective analysis of risks based upon a project stakeholder's experience or judgment. Although the techniques for analyzing project risk qualitatively can be conducted by individual stakeholders, it may be more effective if done by a group. This group process allows each stakeholder to hear other points of view and supports open communication among the various stakeholders. As a result, a broader view of the threats, opportunities, issues, and points of view can be discussed and understood.
Expected Value The concept of expected value provides the basis for both qualitative and quantitative risk analysis. Expected value is really an average, or mean, that takes into account both the probability and impact of various events or outcomes. For example, let's assume that a project manager of a consulting firm would like to determine the expected return or payoff associated with several possible outcomes or events. These outcomes or events, in terms of possible schedule scenarios, determine the return or profit the project will return to the consulting firm. The project manger believes each outcome has a probability of occurring and an associated payoff. The project manager's subjective beliefs are summarized in a payoff table in Table 8.3.
As you can see from Table 8.3, the project manager believes that the project has a small chance of finishing twenty days early or twenty days late. The payoff for finishing the project early is quite high, but there appears to be a penalty for completing the project late. As a result, the expected value or return to the consulting firm is $88,000. Since each event is mutually exclusive (i.e., only one of the five events can occur), the probabilities must sum to 100 percent.
Decision Trees Similar to a payoff table, a decision tree provides a visual, or graphical, view of various decisions and outcomes. Let's assume that a project is going to overrun its schedule and budget. The project manager is contemplating reducing the time allocated to testing the application system as a way of bringing the project back within its original schedule and budget objectives.
Table 8.3 Expected Value of a Payoff Table
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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.