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How Much Is That Doggy In The Window?

Nyse_wall_street_2I was planning on writing about risk analysis and quantification for this post, and I was wracking my brain to figure out a good segue into the topic. So I must remember to send a nice hand-written note to the executives at AIG, Morgan Stanley, Freddie and Fanny and Lehman Brothers.

In my last post, we covered ways to identify risks in your projects.  Now we need to quantify those risks... in other words, figure out how potentially bad they can be.  Our goal here is not to have exact numbers, but to be able to make intelligent decisions about whether to spend money and energy to avoid or mitigate the risk.

The calculation to figure out the "cost" of the risk (otherwise known as Expected Monetary Value, or EMV), is pretty simple.  First, you should determine the probability that the risk event will occur (e.g., there's a 20 percent chance Sally will quit unexpectedly). Then calculate the impact of the risk event should it occur (e.g., if Sally quits, it will cost us $40,000 to backfill her position).  EMV is simply the product of the two numbers.  So the "Sally Risk" is worth 20 percent x $40,000 = $8,000.

What? You say you don't have time to put an exact probability or dollar figure to each risk?  I don't either. In one of my most successful risk management projects (a highly complex program involving hundreds of resources and a detailed process/system overhaul), we created a very simple 5x5 grid to calculate risk:

Risk_quantification

The program executive, the technical lead, and I sat down over a long meeting and threw out the first number that came into our head for each risk.  (Surprisingly, we agreed the first time about 90 percent of the time; for those where we disagreed, we had some great dialogue.) We then multiplied the two numbers together to come up with a composite risk score. If the risk score was higher than eight (8), we paid attention to it. For those which scored less than 8, we revisited them about once a month.  So it's not necessary to do complicated Monte Carlo calculations, difficult computer-generated models, or expensive and time-consuming in-depth research.  Risk analysis and quantification can occur very quickly, yet still provide you with the ability to make quick decisions about the important project risks on which you should focus.

Like the $85 billion ones.

Carpe Factum.

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Comments

Who knew it could be so simple, yet hugely impactful at the same time?

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