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This chapter is from the book

Risk Management

  • Plan Risk Management—11.1
  • Identify Risks—11.2
  • Perform Qualitative Risk Analysis—11.3
  • Perform Quantitative Risk Analysis—11.4
  • Plan Risk Responses—11.5

PMI's risk management philosophy is based on a proactive approach to preventing negative risks and enhancing positive risks. Key points to remember about risk include

  • Risk can be either positive or negative. Positive risks are opportunities; negative risks are threats.
  • A risk breakdown structure (RBS) is used to organize risk in a hierarchical structure.
  • Monte Carlo analysis is a technique using simulations and probability in determining quantitative risk analysis.
  • Risk categories are important in classifying risk.
  • Probability and impact are both needed to assess risks.
  • Quantitative analysis is generally reserved for high-probability, high-impact risk.
  • Risk management planning and risk response planning are not the same activities.
  • Risk identification is an iterative process that is performed throughout the project, not just during planning.
  • Decision tree analysis is a technique using probabilities and costs for structured decision making.
  • Five of the six risk management processes are conducted during the planning process group.
  • The risk register is an important tool for capturing and tracking risks.

The risk methodology is a definition of how risk will be managed. It includes the approach, tools, and techniques to be used for the project. The approach details how the steps of the risk process will be conducted. For example, the approach could specify that risk analysis will be conducted at the end of each planning meeting. The tools can include the risk register, the risk breakdown structure, the probability and impact matrix, and checklists.

Risk Management Planning and Risk Response Planning

The risk management plan includes the risk methodology, roles/responsibilities, budget, execution timing, and definitions for risk categories, probabilities, and impacts. It is a summation of how the project team will carry out the remainder of the risk management activities for the project. The risk management plan should not be confused with the risk response plan, which is where the project manager captures responses to specific risks that have been identified during the risk identification process.

The risk management plan is the single output of the plan risk management process. Table 4.10 shows the inputs, tools and techniques, and outputs for the plan risk management process.

Table 4.10. Plan Risk Management Inputs, Tools and Techniques, and Outputs

Inputs

Tools and Techniques

Outputs

Project scope statement

Planning meetings and analysis

Risk management plan

Cost management plan

Schedule management plan

Communications management plan

Enterprise environmental factors

Organizational process assets

Risk Breakdown Structure (RBS)

A risk breakdown structure (RBS) is a tool that can be used to organize risks in a hierarchical fashion. The structure is defined using the risk categories. Even if an RBS is not used, risk categories are still defined in risk management planning. Risk categories can include

  • Technical—Risk associated with using new technology.
  • External—Risk associated with forces or entities outside the project organization. External risks can include external suppliers, customers, weather, and market conditions.
  • Organizational—Risk associated with either the organization running the project or the organization where the project will be implemented.
  • Project Management—Risk associated with project management processes.

Risk Probability and Impact

Probability can be defined as the likelihood that a risk will occur. It can be expressed mathematically (.2) or as a relative scale (low, medium, high). The definition for probability is developed during risk management planning.

Impact is the effect a risk has if it does occur. It can also be defined on a relative scale or mathematically. The definition for impact is developed during risk management planning.

The team documents in the project management plan detail how probabilities and impacts are measured. For example, a red/yellow/green scale might be used, where high-probability, high-impact risks are red; low-probability, low-impact risks are green; and so forth. A probability and impact matrix can also be used; for an example, refer to PMBOK Fourth Edition, Figure 11-10.

Risk Identification, Analysis, Response Planning, and Monitoring/Controlling

In the risk management process, completing the risk management plan is the first step. After the plan is in place, according to PMI the next steps in the risk management process are

  • Identification
  • Analysis (qualitative and quantitative)
  • Response planning
  • Monitoring/controlling (discussed in Chapter 6, "Project Control")

Identify Risks

The identify risks process is determines the risks that might affect the project and characterizes those risks.

Obviously, the ability to identify risks is key in an effective risk management process. Keep in mind that identifying risks is not just the project manager's responsibility; team members, subject matter experts, customers, stakeholders, and others are involved in this process. Table 4.11 shows the inputs, tools and techniques, and outputs for the identify risks process.

Table 4.11. Identify Risks Inputs, Tools and Techniques, and Outputs

Inputs

Tools and Techniques

Outputs

Risk management plan

Documentation reviews

Risk register

Activity cost estimates

Information gathering techniques

Activity duration estimates

Checklist analysis

Scope baseline

Assumptions analysis

Stakeholder register

Diagramming techniques

Cost management plan

SWOT analysis (Strength, Weakness, Opportunity, Threat)

Schedule management plan

Expert judgment

Quality management plan

Project documents

Enterprise environmental factors

Organizational process assets

The Risk Register

The risk register is the output of the identify risks process. The risk register contains the following information:

  • Risk description
  • Date identified
  • Category
  • Potential responses
  • Current status

Qualitative and Quantitative Risk Analysis

Qualitative risk analysis provides further definition to the identified risks in order to determine responses to them. The key terms are probability and impact. Probability is important because it measures how likely a risk will occur. A high-probability risk deserves more attention than a low-probability risk. Likewise, impact is a measure of how the risk will affect the project should it occur. A risk with low impact has a different response than one with a high impact.

Qualitative risk analysis quickly prioritizes risks in order to conduct response planning and quantitative risk analysis, if used. Using the probability of the impact and a probability impact matrix, the project manager develops a prioritized list of risks. The output to this step is captured in the risk register. Table 4.12 shows the inputs, tools and techniques, and outputs for the perform qualitative risk analysis process.

Table 4.12. Perform Qualitative Risk Analysis Inputs, Tools and Techniques, and Outputs

Inputs

Tools and Techniques

Outputs

Risk register

Risk probability and impact assessment

Risk register updates

Risk management plan

Probability and impact matrix

Project scope statement

Risk data quality assessment

Organizational process assets

Risk categorization

Risk urgency assessment

Expert judgment

Quantitative risk analysis assigns numerical values to risks and looks at those risks that are high on the list of prioritized risks during qualitative risk analysis. The goal of this process is to quantify possible outcomes for the project, determine probabilities of outcomes, further identify high impacting risks, and develop realistic scope, schedule, and cost targets based on risks. Table 4.13 shows the inputs, tools and techniques, and outputs for the perform quantitative risk analysis process.

Table 4.13. Perform Quantitative Risk Analysis Inputs, Tools and Techniques, and Outputs

Inputs

Tools and Techniques

Outputs

Risk register

Data gathering and representation techniques

Risk register updates

Risk management plan

Quantitative risk analysis and modeling techniques

Cost management plan

Expert judgment

Schedule management plan

Organizational process assets

A key tool used in quantitative risk analysis is decision tree analysis. Using a decision tree diagram (see Figure 4.3), the impact of different scenarios is captured. Both probability and cost are used, resulting in an expected monetary value (EMV).

Figure 4.3

Figure 4.3 An example of a decision tree analysis.

For this example, there are two vendors for a software package; Acme and WebCo. The details of the two options are presented in Table 4.14.

Table 4.14. Decision Tree Analysis Example Data

Acme

WebCo

Purchase cost

$120,000

$130,000

Maintenance

$75,000/year (98% reliability)

$70,000/year (99% reliability)

Failure cost

$100,000 (2% probability)

$50,000 (1% probability)

Responses to Positive and Negative Risk

After all risks are identified, options to deal with the risks must be identified. Each risk is assigned to one or more owners to carry out the planned response. The responses are documented in the risk register after it has been updated in the plan risk responses process. Table 4.15 shows the inputs, tools and techniques, and outputs for the plan risk responses process.

Table 4.15. Plan Risk Responses Inputs, Tools and Techniques, and Outputs

Inputs

Tools and Techniques

Outputs

Risk register

Strategies for negative risks or threats

Risk register updates

Risk management plan

Strategies for positive risks or opportunities

Risk-related contract decisions

Contingent response strategiesplan

Project management updates

Expert judgment

Project document updates

There are four responses to negative risks:

  • Avoid
  • Transfer
  • Mitigate
  • Accept

For positive risks the responses include

  • Exploit
  • Share
  • Enhance
  • Accept

They are summarized in Table 4.16.

Table 4.16. Summary of Risk Responses

Response

Description

Risk Type

Avoid

Eliminating the threat by changing the project management plan.

Negative

Transfer

Shifting the risk to a third party.

Negative

Mitigate

Reducing either the probability or impact of the risk.

Negative

Exploit

Taking steps to make the opportunity happen.

Positive

Share

Using a third party to help capture the opportunity.

Positive

Enhance

Increasing the probability or positive impact of the risk.

Positive

Accept

Taking no steps in the project because of the risk. Contingency reserves might be established.

Positive and Negative

Risk Monitoring and Controlling

The risk process is not just performed once during the planning process. Throughout the project, risks must be continually monitored, with additional analysis and risk response development as new risks are identified. Risk monitoring and controlling focuses both on identification and analysis of new risks, as well as tracking previously identified risks and risk triggers.

Risks should be re-evaluated when the following events occur:

  • A risk trigger is identified
  • A change request is approved
  • Key project milestones are reached
  • Project phases end
  • Deviations are detected in variance and trend analysis
  • Corrective or preventive actions are implemented

Cram Quiz

Answer these questions. The answers follow the last question. If you cannot answer these questions correctly, consider reading this section again until you can.

  1. Which input is not used for risk identification?

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    A. Project charter

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    B. Scope baseline

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    C. Cost management plan

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    D. Academic studies

  2. In evaluating project risk, a decision tree analysis is most helpful in which of the following scenarios?

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    A. Describing a potential risk and the implications for each available choice and outcome associated with the risk

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    B. Describing a potential risk and the most likely choice and outcome associated with the risk

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    C. Describing a potential risk and the least likely choice and outcome associated with the risk

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    D. None of the above

  3. The identification of risks associated with a project happens when?

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    A. Occurs only at the beginning of a project when the risk management plan is developed

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    B. Is an ongoing process, regularly scheduled throughout the life cycle of a project

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    C. Occurs as needed throughout the life cycle of a project

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    D. Both C and D

  4. Which of the following is the only valid tool and technique for the plan risk management process?

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    A. Reserve analysis

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    B. Planning meetings and analysis

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    C. Expert judgment

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    D. Contingent response strategies

  5. Which input is not used for the qualitative risk analysis process?

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    A. Cost management plan

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    B. Risk register

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    C. Risk management plan

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    D. Project scope statement

  6. Which tool and technique is not used for the Plan Risk Responses process?

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    A. Strategies for positive risks or opportunities

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    B. Contingent response strategies

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    C. Risk audits

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    D. Expert judgment

Cram Quiz Answers

  1. Answer A is correct. The project charter is not used. The scope baseline and cost management plan are used. Academic studies are part of enterprise environmental factors that also include commercial databases, benchmarking, or other industry studies.

  2. Answer A is the correct response. A decision tree diagram can be used to consider potential risks and all the implications associated with the risk. You can include every conceivable choice and outcome. Every option is considered. Answer B is incorrect because choice and outcome are limited to the most probable scenario. Answer C is incorrect because choice and outcome are limited to the least probable scenario. Answer D is incorrect.

  3. Answer D is the best response. Risk analysis is not limited to the beginning of a project's life cycle when the risk management plan is developed. The risk management plan should include a tool for risk assessment as a continuous process throughout the project. Risk reassessment should be a scheduled component of the project but should also have the flexibility to occur as needed at greater or lesser intervals based on the level of risk.

  4. Answer B is correct. Planning meetings and analysis is the only tool and technique defined for the plan risk management process. All of the other answers refer to tools and techniques from other processes.

  5. Answer A is correct. The cost management plan is an input for the perform quantitative risk analysis process. All of the other answers are valid inputs for the perform qualitative risk analysis process.

  6. Answer C is correct. Risk audits are a tool and technique for the monitor and control risks process. All other answers are valid tools and techniques for the plan risk response process.

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