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How To Do Risk Analysis

Here is How To Do Risk Analysis for your project. After you have identified the risks your project faces, you need to do a risk analysis to determine which ones call for a risk response and which do not. The purpose of risk analysis is to rank the list of identified risks in order of significance or importance.  Your risk analysis focuses on qualitatively assessing the probability that the risk will occur and the magnitude of its impact if it does. You will use this qualitative risk analysis to decide which risks are important enough to warrant a risk response. Risk Management Main Page

Dick Billows, PMP
Dick Billows, PMP
CEO 4pm.com
Dick’s Books on Amazon

How To Do Risk Analysis: Step 1 – Qualitative Analysis

Qualitative analysis assesses how much the risk could hurt the project but is doesn’t use any numbers. Qualitative analysis has the benefits of being cheap and fast but it lacks precision.  You can easily do qualitative analysis by meeting with three or four team members and stakeholders in the cafeteria for coffee. You list the risks you have identified that can possibly affect the project. For each risk, you ask them to assess whether it is very likely to occur, moderately likely to occur or unlikely to occur. When you have that information from each attendee, you ask them about how much damage the risk will cause if it does occur. Will it cause just a little damage, a medium amount of damage or a lot of damage?

As you can see, this is not a very precise method but it does give you the opinions of your stakeholders and team members. If you have any risks that are very likely to occur and will cause significant damage, you will plan a risk response for those risks. The less significant risks you have identified are things you will watch out for but you won’t plan a formal risk response for them. On smaller projects, you will probably limit the risk analysis to these qualitative techniques and planning risk response(s) for the significant risks.  Small Project Risk Management 

You may also decide that one or two risks are so significant you should preform a quantitative risk analysis.  The cost of the higher-level quantitative risk analysis probably requires the sponsor’s approval. Risk Responses

How To Do Risk Analysis: Step 2 – Quantitative Analysis

Quantitative risk analysis is both expensive and time-consuming. Usually, it is done only on very large projects which face very significant risks. Only in that situation could you justify the cost and weeks or months of effort which can go into a quantitative analysis. Regardless of which quantitative risk technique you utilize, the end result is the expected value of the risk. You calculate that by multiplying the probability of the risk occurring times the magnitude of the impact if it does occur.
Here’s an example. Let’s say your quantitative risk analysis determined there is a 0.001% chance that the company headquarters would be destroyed by a tornado during the coming four months. It also estimated that the magnitude of that risk (the damage that the tornado would cause) could be valued at $800,000. Now that risk probability is pretty small but the magnitude is pretty large. To combine them into a single number that lets you make a good decision, you  would multiply that probability times the magnitude and come up with an expected value of the risk of $800. What that expected value means is that if you did this project 10,000 times with the same tornado risk, the average damage would be $800. So you can’t justify spending more than that amount ($800) to avoid the tornado risk. The quantitative risk analysis says you can have only a very limited risk response program if you must keep the cost under $800, the expected value of the tornado risk.  Presenting Your Risk Plan

 

To learn more about how to manage project risks, consider one of our online project management courses. You work privately with a expert project manager. You control the schedule and pace and have as many phone calls and live video conferences as you wish.  Take a look at the courses in your specialty.

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