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About this lesson
The Risk Sensitivity Analysis is a technique to assess the magnitude of impact from a risk.
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Quick reference
Risk Sensitivity Analysis
The Risk Sensitivity Analysis is a technique to assess the magnitude of impact from a risk.
When to use
The Risk Sensitivity Analysis is normally used with risks that are considered to be high (red) or medium (yellow) during the Qualitative Risk Analysis such as with a Risk Matrix. This technique is used to quantify the impact and to aid in creating risk response plans.
Instructions
- Create a project plan with the risk factor being analyzed at the “most likely” or nominal level.
- Holding all other project assumptions constant, vary the risk factor being analyzed to its negative extreme. Assess the impact on project goals such as total project time, cost and benefit.
- Holding all other project assumptions constant, vary the risk factor being analyzed to its positive extreme. Assess the impact on project goals such as total project time, cost and benefit.
- Based upon the magnitude of the impact, consider how to modify the project plan to accommodate the risk.
- If there are multiple risks being analyzed in this manner, the results are often displayed in a Tornado Diagram which shows the positive and negative extremes. A Tornado Diagram orders the risks from top to bottom with the risks having the widest range being at the top.
- 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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