Qualitative & Quantitative Analysis

2014 © Alin Veronika Qualitative & Quantitative Risk Analysis

Determine the project overall risk ranking
Document non critical risks
Determine which risk to further analyze or go directly to risk response
planning
Determine the probability and impact
Determine which risk events warrant a response

The process of prioritizing risks for further analysis or action
by assessing and combining their probability of occurence
and impact
Assign
Probability
•  High,
Medium, Low
Assign
Impact
•  High,
Medium, Low
Calculate
the Severity
•  Probability x
Impact

•  Describe in qualitative terms:
–  High, moderate, low
•  Risk probability is the likelihood that a risk
will occur
•  Risk consequence is the effect on project
objectives if the risk event occurs

1. Estimate
Probability
• 10% through
90%
2. Estimate
Impact
• High=3
• Medium=2
• Low=1
3. Calculate
the Severity
• Probability x
Impact = Severity
4. Use Severity
to identify
• the risks worth
planning
Risk Description
Probability
(0.1 – 0.9)
Impact
(1 – 3)
Severity
(P * I))
Resources may be constrained due to
team members working on multiple
projects with conﬂicting priorities
70%
2
1.4
Signiﬁcant schedule delays may occur
because the team is unfamiliar with the
new application
80%
3
2.4

•  A condition based on the combined probability
and impact scales
•  Risk probability scale:
–  General scale : 0.0 (no probability) up to 1.0 (certainly)
–  Ordinal scale : very unlikely to almost certain
•  Risk impact scale:
–  Ordinal scale : very low, low, moderate, high, very high
–  Cardinal : linear or non linear

Medium
High
High
Medium
Medium
High
Low
Medium
Medium
High
High
Medium
Medium
Low
Low
Probability
Impact

Probability-Impact (P-I)
matrix: the multiplication of
t h e s c a l e v a l u e o f
probability and impact (P x
I). The result is classiﬁed
into high risk, moderate
risk, or low risk

… or numeric:

Risk Score = P x I

Very Low
0.1
1
Low
0.3
2
Moderate
0.5
3
High
0.7
4
Very High
0.9
5
Negligible
0.1
1
Low
0.3
2
Moderate
0.5
3
Severe
0.7
4
Catastrophic
0.9
5

Code Risk Probability Effects
R1 Organisational financial problems force
reductions in the project budget.
Low Catastrophic
R2 Difficulties to recruit staff with the skills
required for the project.
High Catastrophic
R3 Key staff are ill at critical times in the
project.
Moderate Severe
R4 Software components that should be
reused contain defects which limit their
functionality.
High Severe
R5 Changes to requirements that require major
design rework are proposed.
Moderate Severe
R6 The organisation is restructured so that
different management are responsible for
the project.
High Severe

Code Risk Probability Effects
R7 The database used in the system cannot process
as many transactions per second as expected.
Moderate Severe
R8 The time required to develop the software is
underestimated.
High Severe
R9 CASE tools cannot be integrated. High Low
R10 Customers fail to understand the impact of
requirements changes.
Moderate Low
R11 Required training for staff is not available. Moderate Low
R12 The rate of defect repair is underestimated. Moderate Moderate
R13 The size of the software is underestimated. High Moderate
R14 The code generated by CASE tools is inefficient. Moderate Negligible

Negligible
Low
Moderate
Severe
Catastrophic
Very High
High
R9
R13
R4, R6, R8
R2
Moderate
R14
R10, R11
R12
R3, R5, R7
Low
R1
Very Low

•  Approach: Expected monetary value analysis. It computes
the expected monetary outcome (according to different
statistical criteria) of a decision/risk
–  Technique: Decision tree analysis. Technique that helps
solving the EMV analysis.
•  Approach: Modeling. Provide a model of the project.
–  Technique: Sensitivity analysis. Helps determining which
risks have the most impact by examining one variable
at a time. (Tornado diagrams)
–  Technique: simulation, Monte Carlo technique.

Example 1:
•  You are organizing the international conference.
There is 20% probability that paper prices will
increase by 15%, thus costing you IDR 2 million in
funding. What is the expected monetary value of
the cost increase?
•  EMV = 0.2 * 2,000,000 = 400,000 rupiahs.

Risk
Probability
Maximum $
Impact of Risk
Contingency $
required
A
40%
(30,000)
(12,000
B
35%
20,000
7,000
C
50%
40,000
20,000
D
20%
70,000
14,000
Total
Add $29,000 to your budget for
contingency reserve needs
29,000
You are a project manager of construction project. You identify
that there are four risks affect your project.

•  If Risk C occurs, how much is left in contingency
reserves?
–  Contingency Reserves
: $ 29,000
–  Total required for Risk C
: $ 40,000 (negative risk)
–  Remaining amount

: $ -11,000
•  If Risk A occurs, how much is left in contingency
reserves?
–  Contingency Reserves
: $ 29,000
–  Total required for Risk A
: $ 30,000 (positive risk)
–  Remaining amount

: $ 59,000

20

Choose the
Vendor
Vendor A will cost
$70,000?
Vendor B will cost
$63,000
Delay will cost you
$17,000
No Delay – No Cost
Delay will cost you
$17,000
CNo Delay – No Cost
10%
Initial Cost
Risk Cost
Probability
Total
Vendor A
$70,000
$17,000,000
10%
$71,700
Vendor B
$63,000
$17,000,000
15%
$65,550
90%
15%
85%

23

•  Sensitivity analysis is a technique used to show the
effects of changing one or more variables on an
outcome.
•  For example, many people use it to determine what
the monthly payments for a loan will be given
different interest rates or periods of the loan, or for
determining break-even points based on different
assumptions.
•  Spreadsheet software, such as Excel, is a common
tool for performing sensitivity analysis.

24

Negative impact
Positive impact
•  To r n a d o D i a g r a m s i s
generally the result of
Sensitivity Analysis
–  A diagram to analyze project
sensitivity to cost or other
factors
–  Ranks the bars from greatest
to least on the project
Analysis to deﬁne the risk that has the most
potential impact on the project

•  Introduce Monte Carlo Analysis as a tool for
managing uncertainty
•  Demonstrate how it can be used in the policy
setting
•  Discuss its uses and shortcomings, and how they
are relevant to policy making processes

Copyright
©
2004
David
M.

q  It is a tool for combining distributions, and
thereby propagating more than just summary
statistics
q  It uses random number generation, rather than
analytic calculations
q  It is increasingly popular due to high speed
personal computers

q  “Monte Carlo” from the gambling town of the
same name (no surprise)
q  First applied in 1947 to model diffusion of
neutrons through ﬁssile materials
q  Limited use because time consuming
q  Much more common since late 80’s
q  Too easy now?

•  Takes an equation
–  example: Risk = probability × consequence
•  Instead of simple numbers, draws randomly from
deﬁned distributions
•  Multiplies the two, stores the answer
•  Repeats this over and over and over…
•  Then the set of results is displayed as a new,
combined distribution

•  A model to translate the uncertainties into
potential impact to project objective. Performed
using Monte Carlo techniques
•  Monte Carlo Simulation can be used to determine
how much the project or how long it will take

•  Could write this program using a random number
generator
•  But, several software packages out there.
•  Using Crystal Ball or @Risk
–  user friendly
–  customizable
–  r.n.g. good up to about 10,000 iterations

OPPORTUNITIES
•  EXPLOIT
•  SHARE
•  ENHANCE
•  ACCEPTANCE
THREATS
•  AVOID
•  TRANSFER
•  MITIGATE
•  ACCEPTANCE

Avoidance
Is a very appropriate
tool for working with
undesirable risk in many
circumstances
Changing the project
plan to eliminate the risk
or condition or to
protect the project
deliverables from its
impact
Transfer
Transferring the risk
impact to a third party
together with the
ownership of responses
Contractual agreements
and insurance are
common ways to
transfer risks
Mitigation
Means to make it less
e.g. using proven
technology to lessen the
probability that the
product does not work),
reducing the risk event
value (e.g. buying
insurance, use of ﬁxed
contract), or both
Acceptance
Accepting the
consequences
Acceptance can be
active (e.g.by developing
a contingency plan to
execute if the risk event
occurs) or passive (e.g.by
accepting a lower proﬁt if
some activities overrun)
May be the best strategy
if the cost or impact of
the other strategies is too
great

Enhance
Share
Accept
Exploit
Trying to remove
any uncertainty
Examples of
directly exploiting
responses include
assigning the
organization’s
most talented
resources to the
project to reduce
the time to
completion, or to
provide better
quality than
originally planned
In order to share a
positive risk, the
project seeks to
improve their
chances of the risk
occurring by
working with
another party
Examples of
sharing actions
include forming
risk-sharing
partnership,
teams, special
purpose
companies, or
joint ventures
This strategy is
used to
increase the
probability
and/or the
positive impact
of an
opportunity
Examples of
enhancing
opportunities
include adding
more
resources to
an activity to
ﬁnish early
Accepting an
opportunity is
willing to take
advantage of it
if the
opportunity
comes along,
but not actively
pursuing it

Negative Risk Response Strategies Positive Risk Response Strategies
AVOID
(Eliminate the Cause)
TRANSFER
(Find 3rd party to be
accountable or do work)
MITIGATE
(Reduce probability and/or
impact)
EXPLOIT
(Enable the Cause)CAUSE
OUTSOURCE
PROBABILITY &
IMPACT
Negative or Positive
Risk Response Strategies
ACCEPT
(No actionable response)
Remove

ac?vi?es

or
people

Ex:

Insurance

Fixed
Price

Contract

Ex:
Training

Prototype

Add

ac?vi?es
or

people

Investors

Partnering

Ex:

Incen?ves

SHARE
(Find 3rd party to support and
share in gain)
ENHANCE
(Increase probability and/or
impact)

Transfer/
Share
Avoid/
Exploit
Accept
Mitigate/
Enhance
High Probability
Low Probability
Low Impact
High Impact

40

Technical Risks
Cost Risks
Schedule Risks
Emphasize team support
and avoid stand-alone
project structure
Increase the frequency of
project monitoring
project monitoring
Increase project manager
authority
Use WBS and CPM
Use WBS and CPM
Improve problem handling
and communication
Improve communication,
project goals understanding,
and team support
Select the most experienced
project manager
project monitoring
Increase project manager
authority
Use WBS and CPM

ContingencyPlans
A plan that you
implement if a
risk occurs
during project
execution.
FallbackPlans
Plan B, which
is to be
implemented if
the
contingency
plan failed.
Workarounds
Unplanned
responses for
unplanned
risks that occur
during project
execution.
Both risk and
responses are
not planned.

Secondary Risks
• Risks are generated from implementing the risk response.
• Secondary Risk should never have a higher Risk Rating
than the primary risk it is associated with.
• For example, a response to use a even organizer to
organize a conference could lead to potential even
organizer management risks. Document the event
organizer management risks as Secondary Risks.

Residual Risks
•  The remaining risk after a Risk Response Plan or Contingency Plan is
implemented.
•  For example, a response may address 80% of the risk impact, so, the
remaining 20% represents the Residual Risk.
•  Contingency Plans or Fallback Plans should be in place to respond to
known Residual Risks.
•  New Residual Risks may be discovered during a Risk Audit, log on
the Risk Register and Perform Qualitative Risk Analysis.

ContingencyReserves
Money or time
assigned to deal with
accepted risk, if they
occur.
Reserves for known
unknown risk.
ManagementReserves
Money or time
assigned to deal with
risks that occur
during project
execution.
Reserves for
unknown unknown
risk.
May require a change
to the schedule and
cost baseline

Ac?vity

Es?mates

Work
Packages

Control

Account

Project

Es?mate

Con?ngency

Reserve

Cost
Baseline

Management

Reserve

Cost
Budget

Cost of the
activities
Contingency
reserves (based
on the EMV of
the risks cost)
Management
reserves.
Project
budget
Critical path
duration
Contingency
reserves
Management
reserves.
Project
schedule

PassiveAcceptance
To accept a risk without
a contingency reserve.
No action except to
document the strategy,
leaving the project team
to deal with the risks as
they occur, and to
periodically review the
threat to ensure that it
does not change
signiﬁcantly
ActiveAcceptance
To accept a risk with a
contingency reserve,
including amounts of
time, money, or
resources to handle the
risks.

RiskReassessment
Monitor and control
risk often results in
identiﬁcation of new
risks and
reassessment of
risk, and should be
scheduled regularly
RiskAudit
Risk audit examines
and documents the
effectiveness of risk
responses in
dealing with
identiﬁed risks and
their root causes,
as well as the
effectiveness of the
risk management
process
VarianceandTrendAnalysis
Variance analysis
focuses on the
difference between
what was planned
and what was
executed
Trend analysis
shows how
performance is
trending

49

Monthly Ranking
Risk Item This
Month
Last
Month
Number
of Months
Risk Resolution
Progress
Inadequate
planning
1 2 4 Working on revising the
entire project plan
Poor definition of
scope
2 3 3 Holding meetings with
project customer and
sponsor to clarify scope
Absence of
leadership
3 1 2 Just assigned a new
project manager to lead
the project after old one
quit
Poor cost
estimates
4 4 3 Revising cost estimates
Poor time
estimates
5 5 3 Revising schedule
estimates

Risk
Event
Category

Effect to
Project
Root
Causes
Triggers
Potential
Response
Risk Owner
Probability
Impact
Risk
Score
Status

Initial
Initial
Add in this process
The Urgent List for high priority risk

Risk that are high priority place on the Urgent List. Responses are developed. Low priority
risks are placed on Watch List. Responses are developed if Risk Score increases.
The Watch List for low priority risk

•  Each Group consists of 4 people
•  Project Case Study
•  Report Outline
–  Chapter 1: Introduction
–  Chapter 2: Project Description
–  Chapter 3: Risk Management Theory
–  Chapter 4: Data Collection and Data Analysis
–  Chapter 5: Discussion
–  Chapter 6: Conclusion
•  Task Duration: 2 Weeks

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