Risk Analysis – Qualitative and Quantitative approaches
There’s a couple of names to scare the pants off any potential PMP® exam candidate!
Don’t worry, I’ll make them your best friends in this simple article…
The first thing to remember is that you need to do them in that order; Qualitative risk analysis first followed by Quantitative Risk Analysis second.
First however, you need to identify the risks, and put them in your risk register.
Qualitative Risk Analysis.
This consists of using the probability and impact matrix tool (PIM) to prioritize and rank the risks contained in the risk register. By doing this, you are able to focus your management time and effort on the most important risk areas. In effect, you are able to apply the 80/20 rule – 20% of the risks will cause 80% of the threats to your project objectives, hence you need to focus on those.
Each risk would be evaluated for it’s probability and impact using a numbered ranking system such as low, low to medium, medium, medium to high, and high. Or perhaps using a 1 to 10 scoring system. Each risk will have the numbers for probability multiplied together to get a priority score so that these can be ranked. Other data could be captured for each risk such as urgency or proximity, and the category (for example hardware, software, commercial, design, and so on).
Quantitative Risk Analysis.
As the name might suggest, this is quantifying (assigning a value = quantity) the ranked risks often done in terms of time or cost.
There are several tools that help in this. One is by using decision trees to arrive at a monetary amount for each risk (the extra cost incurred or time delay if the risk happened).
Another tool is expected monetary value analysis. If a risk would incur an extra $1000 and it has a 25% probablity, then the risk cost value could be seen as $250. If this was done for all the risks, then simply adding up each risk cost value could be used as a risk budget to help fund the aggregated risks.
Oh yes, and one final point. In the PMP® exam you will need to know that a risk is an uncertain event, that if it did occur, it would have an impact on the project’s objectives. But a risk can be a negtaive impact threat or a positive impact opportunity. Both have uncertainty which is what makes them both examples of a risk. I can hear you saying ” Yeah, but no one talks about the risk of winning the lottery!” Correct, but it still has uncertainty – right?
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David spent 25 years as a senior project manager for US multinationals and now develops a wide range of project-related video training products under the Primer brand. In addition, David runs training seminars across the world, and is a prolific writer on the many topics of project management. He currently lives in Spain with his wife Jude.
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