Advanced Risk Management Techniques
Advanced Risk Management Techniques
Building the risk register, identifying risks, performing qualitative analysis, coming up with risk response
strategies, and proactively monitoring for risks are the tasks forming the foundation of basic risk
management. What techniques should project managers master in order to go beyond? In this article,
we recommend two specific advanced risk management techniques. Project managers should master
quantitative analysis techniques, and in particular, Expected Monetary Value (EMV) is a good place to
start. They should also master the use of the risk contingency reserve in order to improve the
predictability of project outcomes. This step involves being able to calculate the risk contingency
reserve, track its use throughout the project, and communicate the risk contingency reserve to the team
and stakeholders. By developing their skill in these techniques, project managers can become more
effective risk managers and help their teams identify the greatest threats and opportunities on projects.
Quantitative Risk Analysis
There are many ways to perform quantitative risk analysis on projects. The Guide to the Project
Management Body of Knowledge (PMBOK Guide) lists several techniques, including the following1:
Sensitivity analysis, which is used to display risks sorted by their potential impact on the
project. Because the sensitivity analysis resembles a funnel cloud, it is often referred to as a
tornado diagram.
Modeling and simulation techniques use advanced analysis to display how risks can
potentially impact project outcomes. One of the most popular examples is Monte Carlo
analysis, where a project model is computed and run in repeated iterations to produce a
histogram of probable project outcomes based on project parameters and risks. By using
Monte Carlo, project managers can see projected outcomes and what is most likely based
on the clustering of outcomes.
Expected Monetary Value (EMV) is a simple technique in contrast to the others. EMV is the
product of the probability of a risks occurrence and the impact of the risks in days or
dollars. For example, if equipment breakdown is a risk on a project that has a 40% chance of
occurrence and the impact would be $10,000, then the EMV is (10000*0.4) = $4,000.
For the purposes of setting up risk contingency reserve, EMV is a good start. EMV is simple to calculate
and, in most cases, should not require teams to provide new information since they should have
provided probability and impact already.
1 Project Management Institute (2013). Guide to the Project Management Body of Knowledge (PMBOK Guide), Fifth Edition. Newtown Square,
PA: Project Management Institute.
Figure 1 shows a sample risk register with probability, impact, and the resulting EMV. In this example,
ten basic risks have been identified, with a total EMV of 10 days and $23,000.
Id
Risk Description
Probability
(%)
25%
Impact
Impact
(Delays in (Loss in
# of days)
$)
EMV
(Delay)
EMV ($)
20 $4,000
$1,000
50%
8 $1,000
$500
70%
0 $7,000
$4,900
50%
50%
0 $15,000
10 $5,000
0
5
$7,500
$2,500
10%
0 $5,000
$500
10%
20 $5,000
$500
30%
20%
30%
0 $10,000
15 $10,000
0 $2,000
0
3
0
$3,000
$2,000
$600
10 $23,000
Feb-14
Mar-14
Apr-14
May-14
Contingency Reserve
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Conclusion
In this article, we have examined how project managers can use advanced techniques to take their risk
management to the next level. While many quantitative analysis techniques exist, EMV is a simple way
to get started. Once project managers are familiar with EMV, they can use it to start building risk
contingency reserves for their projects. They can then use risk contingency reserves to communicate a
range of realistic outcomes for projects. By using risk management to illustrate potential deviations from
the project plan, project managers improve risk management practices in their organizations and
expand their own credibility.
Like all advanced techniques, utilizing advanced risk management techniques takes some time and
effort to set up, meaning that some justification may be required to free up the resources. The benefits,
however, are worth the effort. We have seen advanced risk management techniques improve project
delivery capability in numerous organizations, and argue that the time and effort to set up these
techniques is well worth it.
For more about the advanced techniques discussed in this article, visit RefineMs blog. We also offer
consulting and training on risk management and other project management topics.
References
1. Project Management Institute (2013). Guide to the Project Management Body of Knowledge
(PMBOK Guide). Newtown Square, PA: Project Management Institute.