EMV process is used in the Decision Tree analysis, which visually maps out activity decision paths. As an example, if a deliverable for a project has two suppliers, and it is known that any delay in the crucial deliverable will result in additional resource idling/alternative costs of $1,000 per day, and that supplier "A" price is $20,000 and supplier "B" total price is $22,000, and that using "A" has a 10% risk of being 3 days late and that "B" has a 5% chance of being 2 days late, then the Decision tree would look like this:
Supplier Selection
--- {Supplier A
---{Risk of being late: .10 x $1000 x 3 = 300
---{Total EMV: $20,000 + 300 = $20,300
--- {Supplier B
---{Risk of being late: .05 x $1000 x 2 = 100
---{Total EMV $22,100
Sorry, the boxes didn't copy over from my MS-OneNote - but I think you get the concept.
As you can see, Decision trees are very numerical, but in real life, numbers don't tell the whole story - perhaps supplier "A" has other benefits such as better support (hopefully that has been factored into the overall supplier risk rating).
That's all for now folks - hope you found this primer on risk management methods to be useful..or at least interesting.
Business projects carry risk - for time, cost, scope and quality - but they can all be expressed in monetary terms, for in business everything is Dollars (or Euros or Yen or other currency). Project managers and risk managers for businesses need to quantify risks and estimate costs for budgets, forecasts and management reporting. How do they do that? Here are some ways:
SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is often used to describe at a high level the risks faced by a project. Strengths and Weaknesses deal generally deal with internal and project specific areas and Opportunities and Threats are more external or market facing environmental issues.
The risks are detailed in the Risk Management knowledge area of the PMBOK guide from PMI.
The risk register is a list of all the major threats to a project, and is an output of the Identify Risks process, and is then used as an input to other processes to further qualify, quantify and assess threats.
Qualitative Risk and Quantitative Risk assessment methods are used to assess the priority, urgency and impact of risks; as with many other things, some subjectivity is involved in deciding probability of risks. One of the tools and techniques for performing Qualitative Risk analysis is the Probability-Impact matrix, which rates the possible threats on their likelihood of occurring and then the impact if they did happen. Quantitative analysis then assigns monetary and impact measurements to the threats.
The PERT or three-point estimate is widely used and works this way:
3 likely scenarios - Pessimistic, Optimistic and Most Likely estimates - are gathered from experts, and then a weighted average is used:
(Pessimistic Estimate + (4 x Most Likely Estimate) + Optimistic Estimate)/ 6
Note: the 4 for the Most Likely Estimate is to give it a 4x weight in the weighted average - hence the term - as per the other two.
Example: Estimates for a software application range from 10 weeks(Pessimistic) to 7 weeks (most likely) to 5 weeks (Optimistic).
So the three-point estimate would be: (10 + (4x7) + 5)/6 => (10+28+5)/6 => 43/6 => 7.15 weeks.
Monte Carlo simulation is a complex modeling technique, and not one that many Business analysts and PMs are likely to have to work through.
Sensitivity Analysis looks at various project objectives and measures how uncertainty would impact each objective. It is also known as a Tornado diagram due to its funnel like shape.
Expected Monetary Value (EMV) is used to capture cost and benefit of an uncertain outcome, based on statistical probability. As an example, if a person has to pick a winning athlete in a four way race (and assuming all 4 are more or less equal in their abilities), and it costs $1 to bet and a $2 payoff (if he guesses correctly), then EMV for this outcome could be expressed thus:
1 in 4 chance of winning (25% or .25), 3 of losing (75% or .75):
(.75 x 0) + (.25 x 2) = 0 + .5 = 0.5 (50 cents)
Net EMV = -1 + .5 = -0.5 (the -1 is the cost of the bet).
A negative EMV is a risk and a positive EMV is a benefit. However, don't use this as a reason to blow your savings at the casino :).