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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 PlanningThe 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.
Risk Breakdown StructureA 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
Risk Probability and ImpactProbability 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.
Risk Identification, Analysis, Response Planning, and Monitoring/ControllingIn 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
Risk IdentificationRisk identification is determining the risk that might affect the project and characterizing those risks. The inputs for risk identification include
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.
The Risk RegisterThe risk register is the output of risk identification. The risk register contains the following fields:
Qualitative and Quantitative Risk AnalysisQualitative 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.
Responses to Positive and Negative RiskAfter 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:
For positive risks, responses include
They are summarized in Table 4.4.
Risk Monitoring and ControllingThe 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.
Risks should be reevaluated when the following events occur:
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