Risk Assessment: framework for combining CBA and MCDA

Risk management in portfolios, programs, and projects has the objective of setting goals and business objectives with the core vision and values of the organizations. Meanwhile, the formation of the Sustainable Development Goals (SDGs) and the required commitment from the organizations, has led to a formation of new core values and visions to be pursued. Consequently, the portfolio and project management process has developed significantly in the last years, portfolio managers must ensure that organizations competing in a dynamic and uncertain environment are aligned with their strategies, while program and project managers are responsible for implementing and successfully managing the different criteria generated by the external opportunities and threats. Yet, most of the project and program risk assessments are limited on the application of the Cost-Benefit Analysis (CBA), mainly focusing on the profitability of projects. While the CBA provides a lot of insightful economic data (e.g., NPV, BCR, IRR), project assessments should consider also social and environmental criteria (e.g., economic development, public image, environmental sustainability) to strive for success. Therefore, the scope of the article is to set a framework for the risk assessment process of programs and projects, through the combination of the traditional Cost-Benefit Analysis and the more recent Multi-Criteria Decision Analysis (MCDA), by providing a mix of tools which considers monetary goals, as also non-monetary strategic goals. This framework assumes that the first step of the appraisal, the CBA part, has already been completed, since the method is widely spread and used by most of the companies. The article will consider the limitations of this framework, providing suggestions to mitigate the typical difficulties related to the tools, facilitating the decision-making process during risk assessments. In order to provide an effective and appliable tool for the reader, this article will focus on the application of the REMBRANDT technique during the MCDA phase, and then on the COSIMA approach, used to combine the results from CBA and MCDA.

Introduction

CBA

Characteristics of the CBA analysis

MCDA

Characteristics of the MCDA analysis and the different tools.

Application

REMBRANDT technique

Description of the tool and its main features

COSIMA approach

Overall application method, shadow prices and alpha percentage