This chapter is from the book
This chapter is from the book
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
Cram Saver
If you can correctly answer these questions before going through this section, save time by skimming the Exam Alerts in this section and then completing the Cram Quiz at the end of the section.
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Which risk response is most likely to involve contingency reserves?
A. Transfer
B. Mitigate
C. Acceptance
D. Share
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Which of the following activities is not part of risk management planning?
A. Developing a risk management plan
B. Identifying risk categories
C. Updating risk register
D. Determining risk roles and responsibilities
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Which of the following tools and techniques are part of the perform qualitative risk analysis process?
A. Data gathering and representation techniques
B. Probability and impact matrix
C. Quantitative risk analysis and modeling techniques
D. Contingent response strategies
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Which of the following best describes the perform quantitative risk analysis process?
A. The process of determining which risks might affect your project
B. The process of ranking the relative severity of risks to determine which risks deserve the most attention
C. The process of carrying out risk response plans and evaluating risk process effectiveness
D. The process of assigning numerical values to risks in order to analyze the effect of the risks to the project
Answers
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Answer C is correct. Acceptance is when no change to the project is made to accommodate a risk. Passive acceptance requires no action beyond documenting the decision. Active acceptance includes further action, such as setting aside a contingency to offset the effect of the risk. Transferring moves the risk to a third party and there most likely would be an upfront cost associated with this response. Mitigate is taking steps to reduce the probability or effect. Sharing is similar to transferring but for a positive risk.
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Answer C is correct. Updating the risk register first happens in risk identification. All other activities occur during risk management planning.
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Answer B is correct. Probability and impact matrix is a tool and technique for the perform qualitative risk analysis process. Answers A and C are incorrect because these are both tools and techniques for the perform quantitative risk analysis process (not qualitative). Answer D is incorrect because contingent response strategies is a tool and technique for the plan risk response process.
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Answer D is correct. Perform qualitative risk analysis is the process of assigning numerical values to risks in order to analyze the impact of the risks to the project. Answer A is incorrect because it describes the identify risks process. Answer B is incorrect because it describes the perform qualitative risk analysis process. Answer C is incorrect because it describes the monitor and control risks process.
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
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Inputs |
Tools and Techniques |
Outputs |
|
Project scope statement |
Planning meetings and analysis |
Risk management plan |
|
Cost management plan |
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Schedule management plan |
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Communications management plan |
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Enterprise environmental factors |
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|
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
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Inputs |
Tools and Techniques |
Outputs |
|
Risk management plan |
Documentation reviews |
Risk register |
|
Activity cost estimates |
Information gathering techniques |
|
|
Activity duration estimates |
Checklist analysis |
|
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Scope baseline |
Assumptions analysis |
|
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Stakeholder register |
Diagramming techniques |
|
|
Cost management plan |
SWOT analysis (Strength, Weakness, Opportunity, Threat) |
|
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Schedule management plan |
Expert judgment |
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Quality management plan |
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Project documents |
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Enterprise environmental factors |
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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 |
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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 |
|
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Schedule management plan |
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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 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
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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.
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Which input is not used for risk identification?
A. Project charter
B. Scope baseline
C. Cost management plan
D. Academic studies
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In evaluating project risk, a decision tree analysis is most helpful in which of the following scenarios?
A. Describing a potential risk and the implications for each available choice and outcome associated with the risk
B. Describing a potential risk and the most likely choice and outcome associated with the risk
C. Describing a potential risk and the least likely choice and outcome associated with the risk
D. None of the above
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The identification of risks associated with a project happens when?
A. Occurs only at the beginning of a project when the risk management plan is developed
B. Is an ongoing process, regularly scheduled throughout the life cycle of a project
C. Occurs as needed throughout the life cycle of a project
D. Both C and D
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Which of the following is the only valid tool and technique for the plan risk management process?
A. Reserve analysis
B. Planning meetings and analysis
C. Expert judgment
D. Contingent response strategies
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Which input is not used for the qualitative risk analysis process?
A. Cost management plan
B. Risk register
C. Risk management plan
D. Project scope statement
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Which tool and technique is not used for the Plan Risk Responses process?
A. Strategies for positive risks or opportunities
B. Contingent response strategies
C. Risk audits
D. Expert judgment
Cram Quiz Answers
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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.
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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.
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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.
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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.
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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.
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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.