## Estimating the extent of the consequences

Not long ago, I was waiting to see my doctor when the nurse came out and told me the doctor had to attend to an emergency and would be slightly delayed. Imagine my shock when, after waiting for three hours for the doctor, I learned that he had gone to a hospital that was an hour away several hours earlier and was currently in the middle of an emergency operation! If I had known the doctor was going to be gone for several hours, I would have rescheduled my appointment. Instead, because I didn't know how long the delay would be, I wasted three hours. And, unless I wanted to wait the rest of the afternoon, I'd have to make a new appointment anyway.

After you identify the likelihood that a particular risk will affect your project, be sure to determine the magnitude of the consequences that may result. That magnitude directly influences how you choose to deal with the risk. Determine the specific effect that each risk may have on your project's product, schedule, and resource performance. When evaluating these effects, do the following:

^ Consider the effect of a risk on the total project rather than on just a portion of it. Taking one week longer than you planned to complete an activity may cause you to miss intermediate milestones (and cause the personnel waiting for the results of that activity to sit idle). However, the effect on the project is even greater if the delayed activity is on your project's critical path (see Chapter 5), which means the one-week delay also causes a one-week delay for your entire project.

^ Consider the combined effect of related risks. The likelihood that you'll slip your schedule is greater if three activities on the same critical path have a significant risk of slippage rather than just one.

Be sure to describe risks and their associated consequences as specifically as possible. For example, suppose a key piece of equipment you ordered for your project may arrive later than expected. You can describe that risk as the delivery may be late, or as the delivery may be delayed by two weeks. Just stating that the delivery may be late doesn't give you enough information to determine the effect of that delay on the overall project. It also makes estimating the possibility of that risk more difficult. Are you talking about a delay of one day? One month? Stating that delivery may be delayed by two weeks allows you to determine the effect on the overall schedule and resources more precisely. Starting early also allows you to decide how much you're willing to spend to avoid that delay.

A variety of formal techniques can support your risk estimation and assessment:

1 Decision trees: Diagrams that illustrate different situations that may occur as your project unfolds, the likelihood of each situation occurring, and the consequences to your project if it does.

Figure 8-1 illustrates a simple decision tree to help determine which of two vendors to buy a piece of equipment from. Both vendors have proposed a price of \$50,000 if the equipment is delivered on the agreed-upon date. Both vendors have also proposed they receive an incentive for delivering early and absorb a penalty for delivering late, but the amounts of the incentives and penalties differ.

Multiplying the base price plus the performance incentive for early delivery by the probability of early delivery yields the expected value of the price you pay if delivery is early. You can calculate the total expected prices for Vendors A and B by totaling the expected prices if each is early, on time, and late, respectively.

This analysis suggests that you can expect to pay Vendor A \$45,000 and have a 70 percent chance he'll deliver on time or early. You can expect to pay Vendor B \$56,000 and have a 70 percent chance he'll deliver on time or early. It looks like Vendor A is the better choice!

Vendor A

Figure 8-1:

Illustrating a Vendor simple decision tree.

Delivery Price

\$75,000

\$50,000

\$30,000

Vendor A

Figure 8-1:

Illustrating a Vendor simple decision tree.

\$50,000

Expected Price

il Risk assessment questionnaires: Formal data-collection instruments that elicit expert opinion about the likelihood of different situations occurring and their associated effects.

i Automated impact assessments: Computerized spreadsheets that consider — in combination — the likelihood that different situations will occur and the consequences if they do.