The Risk Methodology

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 not the same as the risk response plan.

Risk Breakdown Structure

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.

• Organizational Risk associated with either the organization running the project or the organization where the project will be implemented.

• Cost Risk associated with project costs. This could include uncertainty in costs for materials or human resources.

• Schedule Risk associated with time estimates for completing tasks.

• Resource Risk associated with obtaining the necessary resources for the project.

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 Figure 11.8.

Both probability and impact are necessary for evaluating risks.

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")

Understand the difference between qualitative and quantitative risk analysis. Qualitative evaluation is a prioritization based on probability and impact. Quantitative evaluation uses techniques to further advance the specific probabilities and impacts of project risks. For instance, modeling techniques such as Monte Carlo determine the overall effect of risks on project objectives and are typically used for highprobability, high-impact risks.

Risk Identification

Risk identification is determining the risk that might affect the project and characterizing those risks. The inputs for risk identification include

• Commercial databases

• Industry/academic/benchmarking studies

• Information from internal database (lessons learned)

• Scope statement, including WBS

• Risk management plan

• Project management plan including schedule, budget, and network diagrams

The WBS is an important input to risk planning. Each element of the WBS can be reviewed to determine if there is an associated risk.

Obviously, the ability to identify risks is key in an effective risk management process. Keep in mind that risk identification is not just the project manager's responsibility; team members, subject matter experts, customers, stakeholders, and others are involved in this process. Table 4.2 summarizes tools used for risk identification.

Table 4.2. Risk Identification Tools

Tool	Application
Documentation reviews	Review key project documents including the lessons learned from previous projects, commercial databases, the scope statement, risk management plan, and project management plan.
Brainstorming	Team members and experts outside the team participate in a facilitated session to develop a comprehensive list of risks, which are then categorized.
Delphi technique	A consensus-gathering technique that relies on experts in an anonymous process. A questionnaire is used to gather input, the results are summarized, and then distributed.
Interviews	Interviews are a main source of data gathering. They target the same audience as brainstorming or Delphi, but do so in a more personal setting.
Root cause analysis	This tool is also used in quality management. By addressing the causes of risks, the project manager can classify and effectively plan responses to the risks.
SWOT analysis (strength, weakness, opportunity, threat)	Analyzing the project across these perspectives can broaden the results of the risk analysis.

The Risk Register

The risk register is the output of risk identification. The risk register contains the following fields:

• Risk description

• Date identified

• Category

• Potential responses

• Current status

Risk identification is not a one-time event occurring during the planning process. It should be conducted throughout the project, including during major milestones and when a risk occurs.

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 it is that 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 and 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.

Quantitative risk analysis looks at those risks that are prioritized high during qualitative risk analysis. The goal of this process is to quantify possible outcomes for the project, determine probabilities of outcomes, further identify high-impact risks, and develop realistic scope, schedule, and cost targets based on risks.

A key tool used in quantitative risk analysis is decision tree analysis. Using a decision tree diagram (see Figure 4.1), the impact of different scenarios is captured. Both probability and cost are used, resulting in an expected monetary value (EMV).

Figure 4.1. 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 4.3.

Table 4.3. Decision Tree Analysis Sample Data

	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.

There are four responses to negative risks:

• Avoid

• Transfer

• Mitigate

• Accept

For positive risks, responses include

• Exploit

• Share

• Enhance

• Accept

They are summarized in Table 4.4.

Table 4.4. 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 taking place 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.

Risk triggers are indications that risks have occurred or are about to occur. They are identified during risk identification and monitored throughout the project.

Risks should be reevaluated when the following events occur:

• A risk trigger is identified.

• A change request is approved.

• Key project milestones.

• End of project phases.

• Deviations detected in variance and trend analysis.

• Corrective or preventive actions are implemented.