Quantitative Risk Analysis
Risks need to be assessed in regard to their business impacts, so that business decisions can be made promptly. Strategies should be built and decided based on the quantitative value of the risk. Managers must decide on whether to spend $500,000 to avoid a delay in a project. How long that delay is impacts the revenues earned by the enterprise. Knowing to what extent the risk may impact the profits, allows the manager to perform the business case analysis to determine if a $500,000 investment earns a fair return. More often, we take decisions to avoid or reduce all risks. Or, we might prioritize the perceived risks based upon a qualitative assessment. This method is appropriate, but it doesn’t go far enough in that it doesn’t take the step in assigning budgets to the risk response or mitigation plans.
Tools exist that allow the project manager to make these assessments, such as Monte Carlo analysis and Project Evaluation and Review Technique (PERT –Yes PERT – it’s not just an estimation building tool!). However, the results of this analysis should not be left as an answer to a trivia question to be discovered at some later date. They need to be incorporated into the risk response planning process to form the framework that constrains the catalog of possible solutions to just those which make sound business sense. In assessing what the business case will bear, project teams can better understand the profit engines for their projects. And return the most value to their organizations. And that is what it’s all about.
How do you assign a quantitative value to the business impacts of the risks in your projects?