Risk management – part 3 - Methods of assessing risk
Issue based
In this method the project is broken down into parts that cover certain issues within the project.
For example, technical issues, commercial issues or managerial issues.
These are then considered in turn.
This method is simple and does cover obvious areas.
It is a method that can generate checklists for future use.
There may be a tendency to forget yesterday’s mistakes.
It doesn’t tend to be exhaustive and does not provide an assessment of overall risk in terms of time or cost.
For example, there is an 80% chance of meeting the budgeted costs (which may be based upon the maximum cost being 100% and 80% taken as the budget with 20% being retained as a ‘contingency’).
Checklist
Whilst simple, this suffers from the same problems as the above in that one might forget previous experience and mistakes.
It isn’t exhaustive and gives no assessment of overall risk.
Scoring
This method tries to give a value that indicates the degree of risk.
It is usually based upon setting a threshold value.
For example, on a level of 1 to 10 a value of 3 may be ‘less than’ 4 and determined as safe.
A value of 4 to 6 may be considered medium risk whilst 8 to 10 could be construed as high risk.
However, the values can be seen as holding little credibility and too subjective with little leeway for experience.
The method has trouble in distinguishing impact from the likelihood of the event occurring.
For example, a risk may have a dramatic potential impact but virtually no chance of occurring so it would be insignificant.
This could obscure priorities and may miss new high risk activities.
Also, this method assumes that risk is additive and ignores some of the subtle relations which exist between activities.
Such a system would require definition of the scoring values used.
A simple example could be:
Score: < 4
No impact on project costsScore: 4 to 6
Less than 10% increase on project costsScore: > 6
Greater than 10% increase on project costsAny system would need thorough discussion and agreement.
Quantitative
This method uses the project plan (schedule) that is already in use.
It uses the cost and schedule breakdown information.
Risk is measured in the same units as the task.
For example, for durations time might be days or for costs it could be in pounds.
This makes it easier for people to understand the level of risks and makes for better decision making.
In this latter method, you are concerned with using ranges of potential values.
For example, ‘minimum’ value, ‘most likely’ value and ‘maximum’ values and employing statistical techniques to evaluate them.
This method is capable of assessing the overall risk of the project both in terms of cost or time.
The latter method is referred to more in 'The Complete Risk Management package'.