Before you’re able to do a project risk analysis, you have to acknowledge that risk is going to happen in your project and you’ll need to be prepared with a risk management plan. By planning for risks, you begin the process of knowing how to identify, monitor and close out risks when they show up in your project.
Part of that risk management process is risk analysis. It’s a project planning technique that helps you to mitigate risk. There are also tools that can assist. You should at the very least, have a risk tracking software tool to identify and list those risks.
Definition of Risk
Hopefully, you’re familiar with the basics of project risk management. (if not, more in a bit.) Risks are anything that can potentially disrupt any component of your project plan, such as your scope, schedule, costs or your team. Since every project is unique, no two projects are likely to have the same risks.
It’s up to managers and their teams to identify risks, prioritize their impact, and create risk management plans where appropriate in case those risks become real issues. But it’s important that you also have to understand what is meant by “risk analysis” in reference to project risk management.
Risk Analysis vs. Risk Identification vs. Risk Management
People frequently confuse risk analysis with risk identification and risk management. Let’s clear these project management concepts up before we continue.
What Is Risk Analysis?
Risk analysis is the process that figures out how likely that a risk will arise in a project. It studies the uncertainty of potential risks and how they would impact the project in terms of schedule, quality and costs if in fact they were to show up. Two ways to analyze risk are quantitative and qualitative. But it’s important to know that risk analysis is not an exact science, so it’s important to track risks throughout the project life cycle.
What Is Risk Identification?
Risk identification is also a risk management process, but in this case it lists all the potential project risks and what their characteristics would be. If this sounds like a risk register, that’s because your findings are collected there. This information will then be used for your risk analysis. Though this process starts at the beginning of the project planning phase, it’s an iterative process and continues throughout the project life cycle.
What Is Risk Management?
Finally, risk management is the overall process that project managers use to minimize and manage risk. It includes risk identification, risk assessment, risk response development and risk response control.
Benefits of Risk Analysis
To understand risk analysis, note the importance of examining risk in methodical detail. Why? There are several reasons.
- Avoid potential litigation
- Address regulatory issues
- Comply with new legislation
- Reduce exposure
- Minimize impact
- Risk analysis is an important input for decision making during all the stages of the project management cycle
Project managers who have some experience with risk management in projects are a great resource. We culled some advice from them, such as:
- There’s no lack of information on risk
- Much of that information is complex
- Most industries have best practices
- Many companies have risk management framework
- Risk analysis is done in extremes
Risk Analysis Process
As we’ve mentioned before, the risk analysis process is a part of the broader risk management plan that project managers must oversee through every stage of the project life cycle. The risk analysis process has three main steps:
- Identify Risks
- Qualitative Analysis
- Quantitative Analysis
Once you’re done with these steps you’ll be ready to assign risks to your team members, plan risk responses and monitor risks until your project is complete.
Let’s dig deeper, and examine both qualitative and quantitative risk analysis.
Qualitative Risk Analysis
The qualitative risk analysis is a risk assessment done by experts on the project teams, who use data from past projects and their expertise to estimate the impact and probability value for each risk on a scale or a risk matrix.
The scale used is commonly ranked from zero to one. That is, if the likelihood of the risk happening in your project is .5, then there is a 50 percent chance it will occur. There is also an impact scale, which is measured from one to fine, with five being the most impact on the project. The risk will then be categorized as either source- or effect-based.
Once risks are identified and analyzed, a project team member is designated as a risk owner for each risk. They’re responsible for planning a risk response and implementing it.
Qualitative risk analysis is the base for quantitative risk analysis, and it’s beneficial because not only do you reduce uncertainty in the project, but you also focus mostly on high-impact risks, for which you can assign a risk owner and plan out an appropriate risk response. Get started with qualitative risk analysis with our free risk assessment template.
Quantitative Risk Analysis
By contrast, quantitative risk analysis is a statistical analysis of the effect of those identified risks on the overall project. This helps project managers and team leaders to make decisions with reduced uncertainty, and supports the process of controlling risks.
Quantitative risk analysis counts the possible outcomes for the project and figures out the probability of still meeting project objectives. This helps with decision-making, especially when there is uncertainty during the project planning phase. It helps project managers create cost, schedule or scope targets that are realistic.
The Monte Carlo simulation is an example of a quantitative risk analysis tool. It’s a probability technique that uses a computerized method to estimate the likelihood of a risk. It’s used as an input for project management decision making.
Through qualitative and quantitative risk analysis, you can define the potential risks by determining impacts to the following aspects of your project:
- Activity resource estimates
- Activity duration estimates
- Project schedule
- Cost estimates
- Project budget
- Quality requirements
ProjectManager.com Helps Your Risk Analysis
ProjectManager.com is a cloud-based project management software that gives you real-time data to track your project and whatever risks arise during its execution.
Our online Gantt chart is a great tool to schedule projects, assign tasks and link dependencies, but it can also be used risk management tool. Collect all the data you assembled associated with the risk to a task, which has unlimited file storage. Whoever on your team is risk owner for a task can comment at the task level and @ other team members, who are then notified immediately by email. You have more control over the management of project risk.
Learn More About Risk Analysis
If we’ve only whet your whistle when it comes to discussing risk analysis on a project, don’t worry. Watch project management guru Jennifer Bridges, PMP, as she helps you visualize how to analyze risks on your project.
Here’s a shot of the whiteboard for your reference!
Thanks for watching!
Transcript: Risk Analysis Explained by a PMP
Today, we’re talking about risk analysis, “How to Analyze Risk on Your Projects.” But before we start, I wanna stop and take a look at the word “analyze,” because so many times, I hear people interchanging different words, like risk identification, risk management, risk analysis. They’re three different words, three different things.
So the Whiteboard session today, we’re gonna talk about the analysis. When we analyze the risks, we’re examining methodically in detail. And why would we wanna do this? Well, there are several really big reasons why.
First of all, we’re trying to avoid any potential litigations, address maybe any regulatory issues, or comply with new legislation. Ultimately, we’re trying to reduce our exposure and minimize the impact of any risk.
So what are some insights that we’ve had in working with so many projects? Well, first of all, we found that there’s no lack of information out there about risk. But what happens is sometimes much of the information is very complex and can be quite intimidating.
Most industries have their own best practices, and many companies have their own framework. We found that the risk analysis can be done to extremes. On some projects, it’s not done at all because they feel like they don’t have any risk. Then on some projects, it’s done to the nth degree, I mean think about it, if you’re sending a rocket to the moon with astronauts, we want to protect those people.
Risk Analysis Example
So let’s look at where and when the risk analysis is done. Well, if we look at the project management process groups, the planning process is where we start looking at the risk, and it’s done throughout the entire project. So we develop our risk management plan, identify the risks, and those are captured in our risk register.
So as a reminder, the risk register identifies all the risks, the impacts, the risk response, and the risk level. We’re ultimately looking at what the potential impacts to the activity resource estimates, the activity duration estimates, possibly the schedule, the cost estimates, budgets, quality, and even the procurements.
So when we take the risk register, then we take those items and that’s where we do the detail analysis. We do that in two parts. The first part, we perform a qualitative risk analysis, and there what we’re doing is that’s a process of prioritizing the risk for further analysis or action, depending upon the probability and the impact of those risks. The benefits of that is it helps to reduce the level of uncertainty of those risks on the project and allows us to focus on the high priority risk.
The second piece is performing the quantitative risk analysis, and what that is, it’s a process for numerically analyzing the effect of those risks on the project. The benefit of that is it helps support in decision-making to reduce the project uncertainty. Again, that can help us, number one, plan the risk responses and control those risks.
So those are some great reasons why and a few tips on “How to Analyze the Risk on Your Projects.” So if you need a tool that can help you analyze the risk on your project, then sign up for our software now at ProjectManager.com.