## Definition Of Risk

Risk is a measure of the probability and consequence of not achieving a defined project goal. Most people agree that risk involves the notion of uncertainty. Can the specified aircraft range be achieved? Can the computer be produced within budgeted cost? Can the new product launch date be met? A probability measure can be used for such questions; for example, the probability of not meeting the new product launch date is 0.15. However, when risk is considered, the consequences or damage associated with occurrence must also be considered.

Goal A, with a probability of occurrence of only 0.05, may present a much more serious (risky) situation than goal B, with a probability of occurrence of 0.20, if the consequences of not meeting goal A are, in this case, more than four times more severe than failure to meet goal B. Risk is not always easy to assess, since the probability of occurrence and the consequence of occurrence are usually not directly measurable parameters and must be estimated by statistical or other procedures. Risk has two primary components for a given event:

• A probability (likelihood) of occurrence of that event

• Impact of the event occurring (amount at stake)

Figure 17-1 shows the components of risk.

Conceptually, risk for each event can be defined as a function of likelihood and impact; that is,

Risk = f (Likelihood, impact)

In general, as either the likelihood or impact increases, so does the risk. Both the likelihood and impact must be considered in risk management.