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Sensitivity Analysis

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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

  1. Create a project plan with the risk factor being analyzed at the “most likely” or nominal level.
  2. 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.
  3. 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.
  4. Based upon the magnitude of the impact, consider how to modify the project plan to accommodate the risk.
  5. 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.
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  • 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.

Lesson notes are only available for subscribers.

Risk Matrix
05m:25s
Negative Risk Response
05m:59s

PMI, PMP, CAPM and PMBOK are registered marks of the Project Management Institute, Inc.

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