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Sensitivity Analysis

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

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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

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, cost and benefit.
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.
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.

00:05 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.

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