Risk analysis
Contents |
Abstract
WORK IN PROGRESS
- main article: Risk Management
Since risk analysis is a subpart of risk management, several correlations will be present between the two. This article will attempt to describe different approaches to analysing the risk when managing projects, portfolios and programs.
Several tools will be mentioned and explained briefly, but (in order to allow the full use of the wiki) not be described in detail.
Risk analysis essentially chooses the most appropriate method(s) for calculating the given information and delivers a collective overview of the situation, as an artisan chooses the right tool for the job and produces the individual parts for the product. Using “known knowns” and “known unknowns” (from the Cynefin framework) along with estimates made by either extrapolation based on prior knowledge or by experts, the analysis generates a better understanding enabling the user to conduct a valid risk evaluation.
Definition
Before defining risk analysis the understanding of risk as a term needs to be established. Risk is mostly defined as a probability of losing something of a specific value, mathematically speaking; the probability of the event occurring multiplied by the potential value-loss = the risk.
In order to compute this risk the analysis must receive information on the probability and the value of the potential loss. Looking at the definition of risk analysis, the ISO Guide 73-2009 states that it is the “Process to comprehend the nature of risk and to determine the level of risk” and the ISO 31000 standard describes it as the process which “provides an input to risk evaluation and to decisions on whether risks need to be treated, and on the most appropriate risk treatment strategies and methods” .
Both are correct since the process mentioned is the computational part of risk management where different aspects, variables and factors are used to estimate the risk involved with a specific feature, action, decision, condition etc. The outcome of this computation is a quantified number or percentage which can then be used as an evaluation criterion, determining either which option to select or if it is safe to proceed down the investigated path.
Main features of risk analysis
There are three different analysis method groupings within risk analysis; Qualitative, Semi-quantitative and quantitative.
- Qualitative:
Qualitative analysis methods are based on opinions and estimates. They compute the risk scenario based on few numbers and many interpretations. Outcome of these methods are usually given in levels of significance like “high”, “medium” and “low” or other word scales which are not specifically determining any actual number.
- Semi-quantitative:
The outcomes of the semi-quantitative analysis methods are based on numeric ratings using evaluation scales for probability and consequence and usually combining them using a formula, resulting in a comparable value for the risk level.
- Quantitative:
The quantitative analysis uses estimates of probability and consequence values to generate an approximation of the risk involved, represented by one specific value. The specific values, depending on the method of gathering, from different analysis can then be combined into one overall risk factor.
As risk analysis works like a processor it needs to receive some information as input before it can calculate an output which depicts reality.
These input are:
- Purpose
The purpose is the reason for analysing the risk; it assists with determining the boundaries of the analysis.
- Type of risk
Choice of models depends on the type of risk in question.
- Information available
Determines whether it is possible to conduct the analysis right away or information has to be gathered.
- Existing control features
- Consequences
The consequences can be both positive and negative, and reflect the impact of events defined in the analysis
- Likelihood / Probabilities
- Risk criteria
- Effectiveness of existing control features
- Causes of risk
- Sources of risk
- Factors influencing any of the above
Weights which scale the severity of the quantities are part of this input, as well as uncertainties and sensitivities.
- Interrelations / Interdependence
The network of relational aspects between different risks
Output:
- Assessment of the risk with the following aspects
- Description of methods used and known control features impact on the risk
- Combined Likelihood / probability depending on the description of original risk
- Consequences of different scenarios
- Description of confidence in:
- The assessment of the risk (the result of the analysis)
- The sensitivity of the result to preconditions and assumptions
- Information Uncertainty
- Information Availability
- Information Quality
- Information Quantity
- Ongoing relevance of information
- Limitations
Benefits of analysing risk
Different models used when analysing risk
The following models are all described in Annex B of the ISO 31010 standard.
Brainstorming is a very intuitive method which uses associations and connections made by possibly several people around a central subject to uncover problematic and opportunistic aspects affecting the subject. This qualitative information is then used to gather as much quantitative information as possible in order to complete the further analysis.
- Structured or semi-structured interviews:
The structured or semi-structured interview can be used for gathering information from numerous sources. These interviews do not have to be done face to face since questionnaires are also considered within this model.
The Delphi technique is essentially a brainstorming process where the participants are kept anonymous but are able to see the collected work of all participating in the process. It is used to reach some kind of consensus around the subject in question.
- Check-lists:
Check-lists are built from previous experiences and often list known risks, control features and/or hazards gathered through prior assessments or lessons learned.
PHA is used when there is little information available and as the name states normally in the beginning of e.g. a project, in order to uncover potential hazards influencing the further development.
HAZOP is a qualitative method which studies the current activities in order to access the risk involved. It usually examines existing operations like procedures and products as well as processes and the system around them.
HACCP is mainly used in the industry which produces items for consumption where infections are of vital importance. The critical control points are then indicating areas within the production where errors can lead to loss of quality or worse.
- Toxicity assessment:
Toxicity assessment is used when looking at risk related to the environment and how the introduction of a source of harm affects it.
SWIFT is normally used at workshops by the facilitator to make the participants introduce risk into their chain of thought by using a set of specific questioning words along with the catchphrase “what if?” .
When conducting a scenario analysis, one or several future scenarios are developed based on the participants’ thoughts and ideas on where the future might bring us. Then doing back-casting in order to determine the events needed to reach the scenario and evaluating the risks of these events.
- Business impact analysis (BIA):
The BIA investigates the risks capable of disrupting the organisation’s operations as well as the current controls in place and how well they will handle the disruption.
RCA is often used after an event has taken place with the aim of preventing it from happening again. By constantly questioning for the reason why an event occurred, turning the reason into an event and repeating the question the RCA attempts to discover the fatal event which set several chains of actions into motion.
- Failure modes and effects analysis (FMEA) / failure modes and effects and criticality analysis (FMECA):
FMEA is essentially an error tool attempting to map out the different possible ways for processes, systems or components are able to fail and thus not fulfil the designed purpose. FMECA expands FMEA by ranking the outcomes against each other and thereby identifying the most critical failures.
FTA is a method used to develop your typical trouble shooting guide where it is possible to locate the cause of an undesired event by deductive reasoning.
ETA can be used to generate the probability of the control features working or not working with regards to a specific event happening. Contrary to the FTA, the ETA can be used before the event has actually happened as a hypothetical reasoning method. It can be used both quantitative and qualitative.
- Cause-consequence analysis:
- Layers of protection analysis (LOPA):
- Sneak analysis (SA) / sneak circuit analysis (SCI):
- FN curves:
- Risk indices:
- Consequence/probability matrix:
Reference
ISO Guide 73-2009 – Risk Management Vocabulary
ISO 31000 - Risk management - Principles and guidelines
ISO 31010 - Risk management
International Journal of Project Management 32 (2014) - Vahid Khodakarami , Abdollah Abdi - Project cost risk analysis: A Bayesian networks approach for modelling dependencies between cost items
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