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Friday, January 4, 2013

Risk Categorization

We have covered three of the tools and techniques used in qualitative risk analysis; namely - Risk Probability & Impact Assessment, Probability & Impact Matrix and Risk Data Quality Assessment. The next item in the list is “Risk Categorization” which we are going to learn in this chapter.

Risk Categorization

Imagine how effective our project’s risk management efforts could be if we can pin-point what areas of our project are most affected by risks? What if we know the areas of the Work Breakdown Structure WBS that are sources of multiple risks or what if we know which project phase carries the highest level of risk?

The answer to all these questions will be “Very Good” isn’t it?

The idea of Risk Categorization is to uncover areas of risk concentration so that we can create effective responses to handle them. This is because; dealing with sources of risks is easier and cost effective than dealing with each risk individually. In fact, it can have a greater level of effectiveness as well.

We can categorize risks by source using either of the following:

1. Risk Breakdown Structure – RBS
2. Work Breakdown Structure - WBS and
3. Project Phases

If you are not too sure about what this activity is all about, let’s go back to our F1 track construction example.

Let us say that during risk identification, we have identified several high priority/impact risk items related to the equipment we will be using to lay the race track. So, if we categorize these risks, the company that is supplying these machines could be a potential source of risk. The quality of machines they supply, the availability of those machines, servicing delays in case the machines breakdown during track laying activity etc. could be potential risks that we will be exposing ourselves to when we lease or rent these machines from the company.

What if we do some analysis and find out that buying those machines ourselves could cost us a bit more than what the rental company is charging us but it could eliminate all of the risks above because we know that the machine we are buying is of good quality and will be available for our use anytime we want. Moreover, once this track is constructed, we can even re-use this machine in any subsequent tracks we may take up for construction. All in all, by grouping or categorizing a bunch of risks to its source, we have created a response that can help us handle all of those risks effectively in one shot.

Now, can you understand how useful this Risk Categorization activity is in creating effective risk responses?

Prev: Risk Data Quality Assessment

Next: Risk Urgency Assessment

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