Sensitivity Analysis

Quick reference

• 00:05 Hello again, I'm Ray Sheen.
• 00:07 Let's talk now about a type of risk analysis called the sensitivity analysis.
• 00:13 This technique is considered to be a quantitative analysis.
• 00:17 Quantitative analysis are normally conducted for the high priority risks,
• 00:21 the reds and the yellows.
• 00:23 It is a quantitative technique because we will calculate the impact for this risk.
• 00:28 The sensitivity analysis is often used for
• 00:30 risk with high uncertainty, either uncertainty of occurrence or
• 00:34 uncertainty about the magnitude of the impact when they occur.
• 00:37 Therefore it is often use when the estimate or the impact is very large where
• 00:41 the event is outside of the control of the project team.
• 00:45 This technique can be use with both positive risk opportunities and
• 00:49 negative risks threats.
• 00:51 The analysis is sometimes called a what if analysis.
• 00:54 The project team will analyze the risk under several scenarios
• 00:58 to understand what would happen to the project if the risk occurs.
• 01:03 So how do you create a sensitivity analysis?
• 01:06 First, we create a project plan with a risk factor in what I would call
• 01:10 the nominal or most likely condition.
• 01:13 This becomes the baseline that we will use for the analysis.
• 01:17 Now hold everything else in the project plan constant, and
• 01:20 change just that one factor to its worst case.
• 01:23 A comment here.
• 01:24 I said hold everything else constant.
• 01:26 But of course, if going to the worst case, this impacts other task schedules or
• 01:31 costs, you need to include that effect.
• 01:34 Determine the overall project impact on the key project goals and
• 01:37 objectives, when the risk is at its negative extreme.
• 01:42 Now we do the exact same thing except that we vary the risk to its best case
• 01:46 condition.
• 01:47 Again, determine the impact on project goals and objectives.
• 01:51 I realize that both the best case and the worst case are unlikely, but
• 01:55 we determine these conditions to assess the magnitude of the risk.
• 01:59 Based upon the magnitude of the impact,
• 02:01 determine if this is a risk that requires action.
• 02:05 Obviously, the larger the impact, the greater the need to take action.
• 02:08 However, some risks have a high positive impact and low negative impact, and
• 02:12 some just the opposite.
• 02:14 Some have a high impact in both directions and
• 02:16 some have a low impact in both directions.
• 02:19 Understanding the best case and worst case should lead to informed risk response.
• 02:24 A tactic that we use to express the results of the sensitivity analysis
• 02:28 is the Tornado Diagram.
• 02:30 The diagram creates a visual representation of the risk sensitivity.
• 02:35 The chart shows the project impact of the best case and worst case and
• 02:39 nominal conditions.
• 02:41 If you have done a sensitivity analysis for several risks,
• 02:44 the chart is normally organised so
• 02:46 that the risk with the greatest difference from the worst case to the best case
• 02:50 is on top, and the one with the smallest difference is at the bottom of the chart.
• 02:55 In this case, there are six risk identified with the biggest risk, vendor's
• 02:59 selection, having the potential to impact the project's schedule by six months.
• 03:04 And the smallest risk, vendor delivery, only impacting the project by one month.
• 03:09 Now in this case the chart is using schedule impart for the impact axis.
• 03:13 Sometimes the chart is structured using the project cost on the impact axis or
• 03:17 the project benefit on the impact axis.
• 03:20 The nominal or most likely condition,
• 03:23 which is the baseline plan is the zero point on the impact axis.
• 03:27 If you put a risk response into your project plan,
• 03:30 it would probably change the zero point or the spread of the risk.
• 03:35 For instance, if you change the project plan to add a vendor pre qualification
• 03:39 task, that might reduce the spread from best case to worst case down to just
• 03:44 one month, and shift the most likely by several weeks.
• 03:48 The sensitivity analysis is an excellent tool to explain the stakeholders and
• 03:53 team members the potential impact of risks.
• 03:56 In fact, I found it to be helpful when attempting to get permission to
• 04:01 deviate from the standard project management methodology in
• 04:05 order to take advantage of positive risk opportunities.

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