Risk: Size and Potential
Many managers, when considering risk focus only on defining the risk. A better measure adds some complexity, but offers greater insight includes impact (cost), likelihood, and timing.
4 points to consider:
1. Define the risk
2. Quantify the risk
3. Establish the likelihood
4. Determine the timing the risk
By quantifying and establishing the likelihood for the risk, the manager better understands what she might have to deal with. Does she have several relatively small risks with high degree of occurrence? Does she have one formidable risk, but the event of it happening is small?
By identifying the risk, and the potential for occurrence, the manager can rank the severity and determine how to handle.
Until the analysis is run, no clear picture exists identify the magnitude of risks. One tool I use is a simple two dimensional graph. The y-axis is the severity (cost) and the x- axis is the likelihood (probability).
Creating a visual image makes it easier to communicate with stakeholders by showing the challenges facing the project. If a risk has a low potential to happen, and a low cost, it makes more sense to invest time and resource against risks with greater threats. An easy way to run this analysis is to multiply the potential cost of the risk by its probability:
Risk Cost Probability Value
A $100 X .20 = $20
B $50 X .25 = $12.5
C $40 X .75 = $30
The weighted value shows that Risk C, has the greatest potential impact. That’s not to say, the others do not need to be considered, but the value should serve as a guideline on where to focus attention.
Determining the timing or scheduling of the risk, allows the manager to watch for the risk. The manager knows where in the in the cycle of the project to expect the impact, and when to retire the risk, when the possibility of the risk occurring is gone. Once the threat of the risk is gone, you should not need to track a risk if you do not have.
To schedule the risks, I suggest adding a column in MS Project or similar scheduling software for risk, and identify the tasks for when the risk has the potential to occur and the task that when completed the risk is no longer material.
Also good for insight:
Repeat the exercises for opportunities, so no surprises (even good ones). Remember as a manager, you have to be on top of the events, so you consider the positive outcomes. Surprises in business are not good, even the good ones.
