Back to course

Sensitivity Analysis

Subscriber only lesson.

View pricing

About this lesson

The Risk Sensitivity Analysis is a technique to assess the magnitude of impact from a risk.

Exercise files

Download this lesson’s related exercise files.

Sensitivity Analysis.docx
230.1 KB Sensitivity Analysis - Solution.docx
204.8 KB

Risk Sensitivity Analysis

The Risk Sensitivity Analysis is a technique to assess the magnitude of impact from a risk.

When to use a Risk Sensitivity Analysis

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 and money.
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 and money.
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.

00:04 Hello again, I'm Ray Sheen.
00:06 Let's talk about a type of risk analysis called the Sensitivity Analysis.
00:11 This technique is considered to be a quantitative analysis.
00:14 Quantitative analysis are normally conducted for
00:17 the high priority risks, the reds and the yellows.
00:20 It's a quantitative technique because we will calculate an impact for this risk.
00:25 The Sensitivity Analysis is often used for
00:28 risks with high uncertainty, either uncertainty of occurrence or
00:33 uncertainty about the magnitude of the impact when they do occur.
00:36 Therefore, it is often used when the estimate of impact is very large or
00:41 the event is outside of the control of the project team.
00:44 This technique can be used with both positive risks,
00:47 opportunities and negative risks, threats.
00:50 This 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 we create a Sensitivity Analysis?
01:06 First, we create a project plan with the risk factor in
01:09 what I would call a 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
01:21 change that one factor to it's worse case.
01:24 A comment here, I said, hold everything else constant but
01:27 of course, if by going to the worse case, this impacts other tasks,
01:32 schedules or costs, you need to include that effect.
01:36 Determine the impact on the key project goals and
01:39 objectives when the risk is at it's negative extreme.
01:43 Now we do the exact same thing except that we
01:46 vary the risk to it's best case condition.
01:49 Again, determine the impact on project goals and objectives.
01:53 I realize that both the best case and
01:55 worst case are unlikely, but we determine these conditions to asses the risk.
02:00 Based upon the magnitude of the impact,
02:02 determine if this is a risk that requires action.
02:06 Obviously, the larger the impact, the greater the need to take action.
02:10 However, some risks have a high positive impact and low negative impact.
02:14 Some just the opposite.
02:16 Some have a high impact in both directions and
02:19 some have a low impact in both directions.
02:21 Understanding the best case and worst case should lead to an informed risk response.
02:28 A technique that we used to express the results of
02:31 the Sensitivity Analysis is the Tornado Diagram.
02:34 This diagram creates a visual representation of the risk.
02:38 The chart shows the project impact of the best case,
02:41 worst case and nominal conditions.
02:44 If you have done a sensitivity analysis for
02:46 several risks, the chart is normally organized so
02:49 that the risk with the greatest difference from worst case to best case is at
02:54 the top, and the one with the smallest difference is at the bottom of the chart.
02:59 In this case, there are six risks identified with the biggest risk,
03:03 vendor selection having the potential to impact the project schedule by six months.
03:08 And the smallest risk vendor delivery, only impacted the project by one month.
03:15 In this case, the chart is using the schedule impact for the impact axis.
03:19 Sometimes, the chart is structured using project cost on the impact axis or
03:24 project benefit on the impact axis.
03:27 The nominal or
03:28 most likely condition, the baseline plan is the zero point on the impact axis.
03:34 If you put a risk response into your project plan,
03:37 it will probably change the zero point over the spread of the risk.
03:42 For instance, if you changed the project plan to add a vendor pre-qualification
03:46 task that might reduce spread from best case to worst case to only one month and
03:51 shift the nominal condition by several weeks.
03:55 The Sensitivity Analysis is an excellent tool to explain to stakeholders and
03:59 team members the potential impact of risks.
04:02 In fact, I found it to be the most helpful when attempting to get permission to
04:06 deviate from the standard project measure methodology in order to
04:10 take advantage of a positive risk opportunity

Lesson notes are only available for subscribers.