Whether you’re an experienced project manager or just getting started, keep in mind that all projects, big or small, have risks. And these uncertainties can have a positive or negative effect on your objectives and outcomes. It is also true that risks vary by project. Therefore, understanding why and how to conduct risk analysis on projects can help you manage threats and opportunities.
For most projects, you can use effective risk management methods to efficiently identify, evaluate, categorize and manage the main risks. Let’s get started by introducing you to some tips to simplify your project qualitative risk analysis.
5 Tips for Project Qualitative Risk Analysis
- Use a Probability and Impact Grid
- Create the Grid in a Spreadsheet
- Chose a Simple Scale and Define It
- Set a Threshold of What Risks to Address
- Determine a Risk Score
- Facilitate a Discussion of Divergent Views
1. Use a Probability and Impact Grid
Impact and probability are the two main components of qualitative risk analysis. Probability estimates the likelihood of an event occurring. Impact estimates the relative consequences of dealing with the event. This impact is evaluating the implications for cost and schedule.
These estimates are not precise. Using a scale like the one in the image of 1-10, you can estimate the probability and impact of an event and allowing you to have a facilitated discussion with stakeholders and determine where to plot the identified risks on the chart. This grid allows for easy collaboration. This visual representation of each risk makes the interaction with stakeholders simpler and makes it easier to agree on probability and impact a particular risk.
2. Create the Grid in a SpreadsheetThe easiest way to create a probability and impact grid is to use a spreadsheet. You can graphically depict the stakeholders’ ranking which makes is easy to understand, discuss and prioritize risks with team members and other stakeholders. The grid also allows you to sort many risks quickly and to easily share in virtual meetings.
3. Chose a Simple Scale and Define ItThere are many options of how you can create a scale. However, make sure you have definitions for your scale. It is important to establish and agree upon the definition of the scale so your stakeholders will not misinterpret or create their own definitions. For example, if you are going to use a 1-10 scale, a rating of 1 may be defined as “no real impact” and 10 may be defined as project failure. It should define probability – the likelihood a risk will occur and impact – the effect a risk will have if it occurs. Also see a simpler definition for the 1-10 scale in Figure 5.4 page 127. You can use any scale that makes sense to you and your stakeholders like 1-5 or high, medium, or low.
Figure 5.4 page 127: 1-10 Scale with Definitions Risk Management – Tricks of the Trade® for Project Managers – Third Edition
Figure 5.4 page 127: High, Medium, Low
Risk Management – Tricks of the Trade® for Project Managers – Third Edition
4. Set a Threshold of What Risks to Address
When a threat is great enough that the risk becomes unacceptable or an opportunity significant enough that action should be taken to benefit the project on a predetermined scale, you need to set a threshold for what risks you will address. Risks below this threshold will be identified but not dealt with meaning there will be no contingency plans created to deal with these risks. No special action needs to be taken to prepare for these risks as the probability and impact is low enough that additional time and effort aren’t necessary. Active acceptance of risks that score above the threshold require a response strategy. The response strategies could include actions to avoid, mitigate, or transfer negative risks or exploit, enhance, share positive risks.
5. Determine a Risk Score
Defining a risk score for each risk is one way to determine your risk threshold. Your risk score is the calculation of probability times impact (P x I = Risk Score). The example in figure 5.8 shows scores for each risk and how those scores might be evaluated for setting the risk threshold.
If an organization had a risk governance rule that the threshold was 50 (on a 1-80 scale), then all risks 50 and over would need active acceptance (e.g. further actions to be taken such as setting aside contingency to offset the effect of the risk) and those under 50 would be passive acceptance (requires no action beyond documenting the decision). Risk can be detailed by high, medium, and low risk scores. For example:
- Risk above the threshold, also known as high risk, must be dealt with via qualitative analysis or plan risk response. The risks that are characterized as high risks have both a high impact and likelihood of occurrence. The often require immediate strategies of avoid or exploit.
- Risks with a medium score might mean considering mitigation/enhancement/transfer/share efforts or qualitative analysis. The characterization is dependent on the organizations defined threshold.
- Risks with a lower score get documented or put on a risk register or watch list. The risks that are characterized as low, or very low, risks have both a low impact and likelihood of occurrence.
Figure 5.8 page 132: Example of a Risk Score Risk Management – Tricks of the Trade® for Project Managers – Third Edition
- Yellow: Low risks. Simply document (low) on the Watch List.
- Peach: Medium risks. Consider moving to Perform Quantitative Risk Analysis and/or Plan Risk Responses process. They needs contingency responses like mitigate, enhance, transfer and share.
- Tan: High risks. Move to Perform Quantitative Risk Analysis and/or Plan Risk Responses process. Theses need responses like avoid and exploit.
6. Facilitate a Discussion of Divergent Views
When leading stakeholders in a qualitative risk analysis discussion, differences of opinions may emerge. Be prepared for the disagreement and move toward agreement and consensus on the analysis of each risk.
When leading stakeholders in a qualitative risk analysis discussion, differences of opinions may emerge. Be prepared for the disagreement and move toward agreement and consensus on the analysis of each risk. You might have to establish ground rules for the discussion and decision making to avoid conflict.
Communicating information about risks helps keep the team and your stakeholders invested in the success of the project. Maintain open communication and intentionally ask questions. Listen to the answers to capture the views of your stakeholders and team members by documenting assumptions, concerns, and outcomes. These efforts will promote accountability, help manage expectations and improve you and your team’s efforts to manage project risk.
Build Your Qualititative Risk Analysis Project Skills
As you continue to develop and practice your risk analysis skills, consider taking RMC’s instructor-led course on Risk Management Tricks of the Trade® for Project Managers. Simply contact us to learn more. If you prefer to study at your own pace, we also offer a Risk Management eLearning course or our book Risk Management – Tricks of the Trade® for Project Managers.
You can also listen to our recorded webinar Five Tips for Easy Qualitative Risk Analysis and earn 1 free PDU.