Risk Monitoring

 

Risk Monitoring is the activity of monitoring progress toward resolving each risk. We conduct a weekly risk assessment meeting to discuss the risk resolutions and to identify the new risks. Every project involves risk of some form. When assessing and planning a project, we are concerned with the risk that the project might not meet its objectives.

 

1)      Risk identification and ranking: In any project evaluation we should attempt to identify the risks and quantify their potential effects. One common approach to risk analysis is to construct a project risk matrix utilizing a checklist of possible risks and to classify each risk according to its relative importance and likelihood.  Note that the importance and likelihood need to be separately assessed – we might be less concerned with some thing that, although serious, is very unlikely to occur than with something less serious that is almost certain. Their importance an likelihood classified as high (H), medium (M), low(L), or exceedingly unlikely (-). So that projects may be compared the list of risks must be same for each project being assessed.

Risk

Importance

Likelihood

Software never completed or delivered

H

-

Project cancelled after design stage

H

-

Software delivered late

M

M

Development budget exceeded =< 20%

L

M

Development budget exceeded >20%

M

L

Maintenance costs higher than estimated

L

L

Response time targets not met

L

H

            Table : A fragment of a basic project risk matrix

2)      Risk and net present value: Where a project is relatively risks it is common practice to use a higher discount rate to calculate net present value. This risk premium, might for example- be an additional 2% for a reasonably safe project or 5% for fairly risky one. Projects may be categorized as high, medium or low risk using a scoring method and risk premiums designated for each category.

3)      Cost benefit analysis: A rather more sophisticated approach to the evaluation of risk is to consider each possible outcome and estimate the probability of its occurring and the corresponding value of the outcome. Rather than a single cash flow forecast for a project, we will then have a set of cash flow forecasts, each with an associated probability of occurring. The value of the project is then obtained by summing the cost or benefit for each possible outcome weighted by its corresponding probability.

4)     


 


Risk profile analysis:  An approach which attempts to overcome some of the objections to cost benefit averaging is the construction of risk profiles using sensitivity analysis. This involves varying each of the parameters that affect the project cost or benefits to ascertain how sensitive the project profitability is to each factor. We might, for example- vary one of our original estimates by plus or minus 5% and recalculate the expected costs and benefits for the project 


By studying the result of a sensitivity analysis we can identify those factors that are most important to the success of the project. We than need to decide whether we can exercise greater control over them.

1)      Using decision trees: There are many situations, however, where we can evaluate whether a risk is important and, if it is, indicate suitable course of action. Such decision will limit Decision Trees are useful tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can explore options, and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action. This makes them particularly useful for choosing between different strategies, projects or investment opportunities, particularly when your resources are limited.

How to Use the Tool

                                                              i.      You start a Decision Tree with a decision that you need to make. Draw a small square to represent this on the left hand side of a large piece of paper, half way down the page.

                                                            ii.      From this box draw out lines towards the right for each possible solution, and write a short description of the solution along the line. Keep the lines apart as far as possible so that you can expand your thoughts.

                                                          iii.      At the end of each line, consider the results. If the result of taking that decision is uncertain, draw a small circle. If the result is another decision that you need to make, draw another square. Squares represent decisions, and circles represent uncertain outcomes. Write the decision or factor above the square or circle. If you have completed the solution at the end of the line, just leave it blank.

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