Risk & Value Assignment

Isaac King-3200 words (114 bibliography)

Risk & Value Assignment (Part 2)

Theory of risk management processes and their application in the scenario together with comments on their effectiveness

Introduction

Continuing from the report on your business’ value management, a report will be constructed for you including several theories of risk management and how they can be applied to your business’ scenario, and their effectiveness within managing risk. Initially, project risk is referred to as ‘An uncertain event or condition that, if it occurred, would have a positive or negative effect on at least one project objective (Moselhi, 1993). Some of the various risk management processes used can allow projects to flourish and can be essential in preventing things from going wrong. These processes will be discussed further in more detail throughout the report.

Risk theories, definitions, and processes

Quantitative and qualitative are the two types of risks commonly used within risk analysis. Quantitative is the mathematical probability that can be calculated with certainty, which can also be referred to as the ‘Monte Carlo Simulation’. ‘Monte Carlo simulation, or probability simulation, is a technique used to understand the impact of risk and uncertainty in financial, project management, cost, and other forecasting models’ (RiskAMP). This theory allows you to see all possible outcomes of your decisions whilst assessing the impact of risk, essentially leading to better decision making in the future. Looking at your situation of moving your business’ location, implementing the Monte Carlo simulation technique could be helpful in choosing the correct location as it calculates a number of different outcomes from a decision and builds models of possible results, therefore you can discover whether your decision to move to a new building which is in a rural area, for example, is actually a good idea through probability distribution calculations. On the other hand, a qualitative risk is a risk analysis process which uses a ‘relative or descriptive scale to measure the probability of occurrence' (Skills, n.d.). Qualitative risk analyses the likelihood of each risk event occurring and its impact to determine what risk level it is at. This will give you the information you need to prioritise whatever risks you have discovered. The main difference between both risks is that qualitative is calculated on a descriptive scale to measure an outcomes probability, whereas quantitative is calculated using a numerical scale, an example of this is a ‘Risk Matrix’ scale.

Risk matrix scales can be formed from data achieved through using probability and consequence of occurrence scales, such as cost, performance, and schedules. ‘A risk mapping matrix is typically used to convert ordinal probability of occurrence and consequence of occurrence scale values to a corresponding level' (Kerzner, 2017). They include the headings ‘probability’ and ‘impact’ along with several levels of probability and impact ranging from VL (Very Low) to VH (Very High), which are coloured in shades ranging from green to red, typically. In order to come out with a numerical figure the equation to find out the ‘Risk Scope' is probability x impact, therefore a risk analyst can use this tool to measure risks within a project with ease.

Similarly, ‘Failure Mode Effect Analysis' is another technique that can work out risk by calculating three elements, those being likelihood, severity, and detectability. These are all rated on a scale of 1-10, once a figure has been worked out each element is multiplied together to work out the risk. When constructing an FMEA graph it is often said that Murphy’s Law that ‘Anything that can go wrong, will go wrong’ should be considered, and without this approach could lead to a failure to discover risks within a project. Estimating accuracy is also a common technique to work out risk, and this uses ratios to estimate whether you’re in range with your risks when you’re uncertain. So, 90% certain that you’re in range will be seen as 9:10, meaning that you’re 1:10 uncertain, and out of range. As a PM or Risk & Value consultant using this technique, it's essential to get as close to 90% confidence of a risk occurring.

Looking back at quantitative approaches to risk, the expected value can be used during a project by multiplying possibilities. Expected value can be advantageous as you do not need to perform any complex calculations. To work out Expected Value, you must multiply probabilities on possible outcomes for different scenarios. A calculation that is a lot easier than other complex calculations that are done when working out risk, such as the Monte Carlo simulation, which requires the calculation of a range of values and distributions for variables. Like expected value, comes expected time and variance, which requires the three-time estimates, optimistic time (O), most probable time (M) and pessimistic time (P). Expected time can then be calculated by using the formula, (O + 4M + P) /6. ‘Because the expected completion time should be closer to the realistic time, the realistic time is typically weighted 4 times more than the optimistic (O) and pessimistic (P) times. Once you add these values together, that sum must be divided by 6 to determine the ET’ (Erciyes, 2016).  This is more complex than expected value and will take longer to work out, therefore it’s essential to double check calculations using this technique.

In case of a risk during any project, contingency plans are put in place. They identify any alternative options for providing recovery strategies in the event of a risk. These plans are put into place on a day to day basis by governments across the world in the event of natural disasters. However, these plans can be made by anyone who fears that an issue may occur. ‘The need for drawing up contingency plans emerges from a thorough analysis of the risks that your organisation faces’ (Team, 2015). If contingency plans aren’t put into place during any project, you’re susceptible to negative outcomes and this is a dangerous thing to do if you’re leading a project as you can expect massive amounts of backlash.

Scenario -Risk Analysis in Risk Management

Qualitative Approaches

When assessing the business scenario that we’ve been presented with, in terms of risk there’s always a threat to the completion of a project and in this case, there is as well. There are various factors which suggest that risk is present within any project and they will be discussed in this report.

Risk Management is divided into risk assessment and risk control, within these two components are techniques that help discover any risk that exists in a project, and in the case of the scenario, any risks that may arise at the car garage. There are techniques that can be utilised under risk analysis. "The majority of risk management activity is based on qualitative data" (Maylor, 2010). Determining risk can be done by using several risk management techniques such as Failure Mode Effect Analysis (FMEA). This is a qualitative and systematic tool which can find possible causes of failures and the likelihood of failures being detected before the occurrence. An FMEA spreadsheet can work out likelihood, severity, and detectability on a 1-10 scale. Once a figure has been achieved for each factor, the calculation of likelihood x severity x hide-ability can be done in order to work out the risk priority number, which can show how important the risk is in comparison to others. Normally, they’re discussed and made by owners, in the case of the garage an FMEA could be created by the owner to determine the state of the mechanic’s tools. As Murphy stated, “Anything that can go wrong, will go wrong.” In this case, this is something that can go wrong and if the tools aren’t properly working then it prevents the garage from doing certain repairs. Therefore, the likelihood, severity, and hide-ability of this issue should be inputted into an FMEA graph to determine whether anything is wrong so that the owner can deal with the problem, and eventually mitigate failure. An example of a typical FMEA table can be seen below for your potential situation of repairing cars at your garage.