Section Summary – Quantitative Risk Analysis

In this section, we had taken a detailed look at the Quantitative Risk Analysis process. In this chapter, we are going to Summarize whatever we have learnt so far with respect to Quantitative Risk Analysis

Before we begin, let me warn you that, this chapter is going to be one of the longer summary chapters as we have covered a lot of ground in the past few chapters about Quantitative Analysis.

• Quantitative Analysis is usually performed on a sub-set of the identified risks that are of high impact/priority
• While Qualitative Analysis is quick and cost effective, Quantitative analysis can be more time consuming and costly.
• In smaller projects, we may even opt to ignore this step whereas for large projects, Quantitative analysis is extremely valuable
• Quantitative Analysis is repetitive and may occur multiple times throughout the life of the Project
• The Inputs used in Quantitative Analysis are:

o Risk Register
o Risk Management Plan
o Schedule Management Plan
o Cost Management Plan and
o Organizational Process Assets

• The Perform Quantitative Risk Analysis activity has two groups of tools & techniques. They are:

o Data Gathering & Representation Techniques

 Interviewing
 Probability Distributions

• Continuous Distributions
• Discrete Distributions
• Uniform Distributions
• Etc

o Quantitative Risk Analysis & Modeling Techniques

 Sensitivity Analysis
 Expected Monetary Value Analysis
 Modeling & Simulation

• Interviewing in general, is used to quantify the probability and impact that risks may have on our projects objectives. The information gathered during these interviews would be dependent on the type of probability distributions that we are looking to use. Typically, we will conduct such interviews with SME’s (Subject Matter Experts) to get their take on the risk and its impact
• 3 point estimate = (O + 4 * ML + P) / 6 where O is the optimistic estimate, ML is the most likely estimate and P is pessimistic estimate
• Standard Deviation (SD) = P – O / 6. Here again – P is the pessimistic and O is the optimistic estimate
• A Probability Distribution graphically displays data and represents both the probability as well as time/cost elements. So, by seeing a distribution, we can not only get an understanding of the probability but also the impact it will have on other elements like time or cost
• Continuous Distributions are typically used for cost, time and quality metrics
• The values shown in a continuous distribution are infinitely divisible (time, mass, distance etc.)
• Actually speaking, there are many different types of continuous distributions. For the RMP Exam we will need to know about:

1. Beta
2. Triangular
3. Uniform
4. Normal
5. Lognormal and
6. Cumulative

• Discrete Distributions are used to show uncertain events where the probability of occurrence can be calculated accurately and are based on a whole number
• There are several types of discrete distributions, like:

a. Discrete Uniform
b. Binomial
c. Hypergeometric
d. Etc…

• The purpose of sensitivity analysis is to determine which risks have the highest potential impact on project objectives. Our goal is to single out those important risks so that we can respond in a more effective manner
• During Sensitivity Analysis, we will be using all the quantitative information gathered for the risks up until now, along with other information from the Project Management Plan. Remember that these risks are expected to have a significant impact on the project objectives like cost, time, quality etc. So, the corresponding plans from the Project Management Plan too may be consulted when the analysis is performed
• Tornado Diagrams are a very common way of displaying results of sensitivity analysis. They compare the importance of variables that have a higher degree of uncertainty to the more stable variables
• Expected Monetary Value Analysis calculates the average outcome of future scenarios that may or may not occur
• EMV Analysis calculates the Monetary Value of the Impact of this scenario if it occurs in future – Today
• Formula for Expected Monetary Value: EMV = Probability * Impact
• Decision Tree Analysis is used to make decisions based on the risks that could impact us in the various possible scenarios we may encounter in future. It calculates the Expected Future Value of an activity based on the current impact & probability of all risks
• Modeling and Simulation – Converts uncertainties into potential impacts on Project Objectives that are specified at a detailed level
• In simpler terms – We are going to try to understand the potential impact risks will have from the whole project’s perspective
• The most commonly used technique under the Modeling & Simulation category is the “Monte Carlo Technique”. It is performed using Software to perform iterative Simulations

Now that we have successfully completed our Quantitative Analysis, the next step is to update the Risk Register with all our findings just like we did after finishing Qualitative Analysis. Updates to the Risk Register will be our next section.

Prev: Modeling and Simulation

Next: Introduction - Updates to Risk Register after Quantitative Analysis

Inputs Used In Quantitative Risk Analysis

In the previous chapter, we took a high level introductory look at Quantitative Risk Analysis. Next, we are going to look at the inputs that we will be using in this process.

The inputs that we will utilize for performing Quantitative Analysis are:

1. Risk Register
2. Risk Management Plan
3. Cost Management Plan
4. Schedule Management Plan &
5. Organizational Process Assets

Trivia:

If you are someone who is still using the 3rd edition of the PMBOK guide you will find some major differences between the guide and what you are seeing above. First off, the 3rd edition just lists the Project Management Plan as an input while the 4th edition (Which I am following & strongly urge you do too) splits them up and lists down the individual plans. In fact, the 3rd edition lists down the Risk Register & the Risk Management Plan as separate inputs while they too are part of the Project Management Plan.

Let us now take a detailed look at each of these items…

Risk Register

In one of our previous sections, we took a detailed look at the Risk Register. To refresh our memory, the Risk Register contains all the information about the risks we have identified so far. Almost all the information in the risk register will be useful for our analysis but, from a quantitative analysis perspective, we will focus especially on:
a. Risks set aside for Additional Analysis &
b. Risk Categories used

Trivia:

I have said this numerous times but let me repeat – Remembering how each item will be used for a certain activity/process will help you remember them because, if you know what it is used for and when it will be used, you can relate to it better. So, don’t just try to memorize the inputs, try to understand them.

Risk Management Plan

The Risk Management Plan, as we all know is the heart of all Risk Management activities in our project. During quantitative risk analysis, we will use the following elements of our Risk Management Plan:

a. Risk Management Methodology
b. Roles & Responsibilities
c. Budgets available
d. Timing Information
e. Risk Categories
f. Risk Breakdown Structure
g. Stakeholder Risk Tolerance
h. Reporting Formats

As you might remember from our earlier section that was dedicated to the Risk Management Plan, the plan actually contains a lot more information that what is listed above. If you can’t remember all of them, you can go back to that section to review them once again.

Trivia:

From a layman perspective, the Risk Management Plan is the background and the Risk Register is the front & center of our quantitative analysis.

Cost Management Plan

The Cost Management Plan provides the necessary information we need to establish the criteria for controlling the project costs. Before we can numerically analyze the risks, we need to analyze and identify the best approach possible. We can use the cost management plan to select the best structure and techniques that will suit our project, from the ones available. Without the Cost Baseline information (which is present inside the cost management plan) taking this decision could be very difficult.

We can also use the cost management plan to analyze the numeric impact of the risks that we have identified on our project’s costs.

Schedule Management Plan

The Schedule Management Plan provides the necessary information we need to develop and control the Project’s Schedule. It will help us develop controls on how we will approach or rather handle our Project’s schedule. Things like the overall schedule, network diagrams etc. will be required to understand the impact that the risks we have identified will have on our Project.

Trivia:

Think of a scenario where we have uncovered a potential positive risk that can help reduce the project schedule by 3 months and improve profits by 25%. Would you want to pass-up on an opportunity like that? I am sure your answer would be, No Way. I would want to capitalize on the opportunity. This is exactly where Quantitative Analysis comes into picture. If you have all your facts readily available about the threat or the opportunity, we can take better informed decisions.

Organizational Process Assets

Organizational Process Assets are used as input to almost every single activity that you may take up as part of Project Management or Risk Management. So, it is no wonder that you see it here as well. We will use the following items from the Organizational Process Assets during Quantitative Risk Analysis:

a. Information from previous similar projects, including actual outcomes and risk analysis performed
b. Techniques used, lessons learned etc.
c. Studies of similar projects conducted by Risk Specialists
d. Industry or Proprietary Risk Databases

Items c & d, may or may not be available for everyone but if your organization uses proper Project Management processes, items a & b should be readily available. Using these can help save time as well as improve the efficiency of our current activities.

Trivia:

Though not explicitly listed as an input to Quantitative Analysis, the Project Scope statement gives us the boundaries of what the project is supposed to accomplish. We need to keep this in perspective to ensure that we do not deviate from our boundaries while performing our Risk Management activities.

Prev: Introduction to Quantitative Risk Analysis

Next: Tools & Techniques in Quantitative Analysis