Risk is the probability of occurrence of an event or activity that might have an adverse effect on the project, including on cost, schedule, safety, scope, or quality. It is therefore important to plan for risk management.

Risk management involves identifying risks, analyzing the impact of risks, and subsequently devising a risk response plan. Quantitative risk analysis involves assigning numeric ratings to the identified risks to demarcate high and low value risks.

The basic purpose of performing a quantitative risk analysis includes deriving:

• A prioritized list of quantified risks;
• Quantified cost and time contingency reserves; and
• The probability of meeting cost and schedule requirements for the project.

For quantifying risks, the following details are required:

• The exhaustive list of risks;
• The tolerance limits of the stakeholder;
• The cost estimate for all the resources required to complete the project; and
• The time estimate for completing all the activities of the project.

Once the above listed details are available, Quantitative Risk Analysis can be performed using the following tools and techniques:

Assessing: This is a data gathering phase in which stakeholders and project team members met to discuss information about past project experiences and their relevance to the project risks. The information to be documented will depend on the kind of probability distribution that will subsequently be used for analyzing the results. This information can also be used for verifying the credibility of the analysis.

Valuing: The expected monetary value is calculated by multiplying the probability of occurrence of a risk event with the value of the risk event. If cost is a major governing factor for the project, then the risks with higher expected monetary value need to be addressed as a priority.

Simulation: While performing a simulation, a model of the system or process is used to derive the expected results. The Monte Carlo analysis can be used to quantify risks.

Decision Tree Analysis: The decision tree is a useful tool for choosing an option from various alternatives. It is used to explore different options and the outcome of selecting a specific option.

Sensitivity Analysis: This technique is used to determine the risks which are likely to have the highest impact on the project. In sensitivity analysis, the effect of each risk is examined while keeping all other uncertain elements at baseline values.

It is important to observe the trends which are likely to appear during Quantitative Risk Analysis. Monitoring risks gives the opportunity to perform further analysis of the risks that pose the maximum threat to the project and then devise an appropriate risk response plan and also to determine the effectiveness of risk mitigation strategies.

PM Pathway’s risk management tools are designed to facilitate the determination of project risk consequence levels, record project risks and mitigation strategies and determine residual project risk, all in an easy reporting format.

Watch the video related to risk management

Edge Zarrella is the global head for Information Risk Management at KPMG. He shares with Enterprise Innovation (www.enterpriseinnovation.net) the issues relating to risk management and how it impacts a company’s ability to innovate.

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