Figure 10-2 One example of a 5 x 5 risk summary grid template
Monday, July 25, 2011
10.3 Tools for Risk Management
Standard tools for risk management include risk matrices; also called risk summary grids, and risk registers. There are also tables of definitions and guidelines that aid in using the matrices and registers. A methodology useful for reducing risk through proactive and planned build and test steps is called design iteration. These tools and design iteration are described in this chapter. Other tools aiding or supporting the identification of risks include fault trees, worst case analysis and failure modes analysis. Risk burn down charts that display how the total expected value of all identified risks is reduced with time as mitigation actions are completed are useful in monitoring the overall progress of risk mitigation and the effectiveness of budgeting for risk management.10-1
10.3.1 Risk Summary Grid - The risk summary grid is a listing of the top ranked risks on a grid of probability vs. impact. The risk summary gird is excellent for showing all top risks on a single graphic and grouping the risks as low, medium or high. Typical grids are 3 x 3 or 5 x 5. An example 5 x 5 template is shown in Figure 10-2.
The 5 x 5 risk summary grid enables risks to be classified as low, medium or high; typically color coded green, yellow and red respectively, and ranked in order of importance. Relative importance is the product of probability and impact. Note that the definitions for low and medium are not standard. The definition used in Figure 10-2 is conservative in limiting low risk to the five squares in the lower left of the grid with risk values of 0.5 or less. Medium risks have values of 0.7 to 3.5 and high risks have values from 4.5 to 8.1. Others, e.g. the Risk Management Guide for DOD Acquisition10-2 (An excellent tutorial on risk management), define the entire first column plus six other lower left squares as low risk.
Identified risks are assigned to a square according to the estimates of their probability of occurrence and impact to the overall activity. In Figure 10-2 there is one medium risk, shown by the x in the square with a probability 0.5, impact 7 and therefore having a relative importance of 3.5. The numbers shown for impact are arbitrary and must be defined appropriate to the activity for which risk is being managed.
Some risk management processes described on the web use letters rather than numbers to rank risk probability in constructing risk summary grids. The objective is to assign either a probability numbers or letter to each risk. To do this it is necessary to make a judgment of the likelihood that the risk occurs. The table shown in Figure 10-3 provides reasonable guidelines for such judgments. Thus, if the likelihood of an event occurring is judged to be remote then assign the probability of 0.1 or the letter A. If it is highly likely assign 0.7 or D. It may be argued that guidelines are needed for what is remote or likely. Unfortunately this wouldn’t help as there is always some guess work or judgment required. If several members of a team discuss the likelihood then they can probably reach agreement and this is adequate. It is important for the novice to understand that it isn’t essential that the probabilities are exact. The objective is to come close enough to compare the relative probabilities of several events so that the events can be prioritized in relation to their relative risk or relative probability of occurrence.
Figure 10-3 Guidelines for assigning probability numbers or letters to risk based on judgment criteria.
After assigning a probability to a risk it is necessary to make a judgment of the impact of occurrence of the risk. A risk event can cause an unexpected cost or cost increase, a slip in the schedule for achieving some related event or reduce the quality or technical performance of some design requirement. It is also possible for the risk to impact two or even all three of the cost, schedule or quality measures. The table shown in Figure 10-4 provides one set of guidelines for assigning impact numbers 1, 2, 3, 4 or 5 to a risk event.
Figure 10-4 Guidelines for assigning impact numbers to a risk event.
Costs can be defined as either percentage of budget, as shown in Figure 10-4, or in actual monetary units. Similarly schedule can be defined as percent slip, relative slip or actual time slip.
A risk summary grid template using the guidelines provided in Figures 10-3 and 10-4 is shown in Figure 10-5.
Figure 10-5 A less conservative risk summary grid template using the guidelines provided in Figures 10-3 and 10-4.
The process using a 3 x 3 risk summary grid typically assigns probability of risks as 0.1, 0.3 or 0.9 and impacts as 1, 3 or 9. There are three squares for each of the low, medium and high risk classifications with relative importance values ranging from 0.1 to 8.1 according to the products of probability and impact. An example of a 3 x 3 risk summary grid template is shown in Figure 10-6.
Figure 10-6 An example template for a 3 x 3 risk summary grid.
Specific process details or numerical values are not important. What is important is having a process that allows workers and managers to assess and rank risks and to communicate these risks to each other, and in some cases to customers. The simple risk summary grids are useful tools for accomplishing these objectives and are most useful in the early stages of the life cycle of an activity and for communicating an overall picture of risks.
The identified risks are collected in a list and the ten or so with the highest risk values are numbered or given letter identifications. The associated numbers or letters are then displayed in the appropriate square on the risk summary grid. In use the risk values of each square are either not shown in the square or made small so there is room for several risk identifiers in a square. The risk summary grid then provides a quick visual measure of the number of high, medium and low risks. In the early stages of a project it should be expected that there are more risks in the high and medium categories than the low and as risk mitigation progresses the number of high risks are reduced.
Having identified the risks and ranked them the team must decide what to do with risks that are assigned as Low, Medium or High. One set of guidelines is shown in the table provided in Figure 10-7.
Figure 10-7 Example guidelines for actions for each level of risk.
Again, the specific guidelines a team employs is not as important as it is for the team to have agreed upon guidelines appropriate to their work and organization and to follow them.
10-1 The Manager’s Guide for Effective Leadership by Joe Jenney, AuthorHouse, 2009
10-2 Risk Management Guide for DOD Acquisition, Sixth Edition (Version 1.0), Department of Defense, August 2006 http://www.dau.mil/pubs/gdbks/risk_management.asp