Project Risk Management-20188

Analysis of Risk
External and Internal Environmental

analysis
Risk Analysis
• What is risk ?
• Risk is probability that actual outcome will be
different from expected
• We work with certain assumptions but will the
assumptions hold true till the end of the
project ?
What makes our assumptions
wrong
• There is risk that project cannot run
successfully because of uncertainties in
external environmental factors like social
economic factors.
• There is risk that project cannot deliver the
desirable deliverables because of intenal
environmental problems
• The source or cause factors of risk are inside
as well as outside
Scope of risk management
• The purpose is not to choose the risk free project
because high risk project can also earn the high
return
• The purpose is to
a. understand the potential source of risk and to
determine the extent of damage of the risk
b. Select the projects – not essentially the low risk
project
c. See if the impact of risk can be minimized
d. Ranking of projects risk wise in portfolio
Framework of Risk Management
- Risk Identification
- Risk Quantification and project ranking
- Risk Mitigation
A. Risk Identification is identification of different
sources of risk
B. Risk quantification:
- Expected value method
- Failure Mode effect Analysis
- Sensitivity Analysis
- PERT
C. Risk Mitigation
Minimize the impact of the risk factor

Minimize the probability of risk factor
SOURCE OF RISK:
OUTSIDE ENVIRONMENT
INSIDE ENVIRONMENT
A.
A. SOCIAL RISK
What are the cause factors of risk in the society ?
- Lack of support from the local community
- Emergence of conflict among the local
stakeholders
-In migration or outmigration
- etc
B.Cause factor of Economic risk
• Inflation
• Forex fluctuation
• Pattern of demand supply
• Recession
• Interest rate
C.Cause factors of Political risk
- Unstability of government
- Change of the government policies
D.Internal sources of RISK
• Many sources of risk are inside the organization
Employee turnover
Weak project identification
Weak control system
Use of debt – adding financial risk
Change in management
Technical risk factors
Quantification of Risk
Expected Value Method
Project A has expected benefit of Nrs 50,000
Project B has expected benefit of NRs 80,000
Quantification of Risk
Expected Value Method
Project A has expected benefit of Nrs 50,000
Project B has expected benefit of NRs 80,000
Probability of Success of Proj A 80%

Probability of Success Proj B 40%
Expected value = Net benefit * Probability
Risk Quantification
• Failure Mode Effect Analysis:
Risk Score is calculated on the basis of three
components
Severity ,Hideability and Probability of
occurrence of the Risk event
It is qualitative as well as quantitative
• Severity:
The probable impact or damage to the project if
the risk event occurred
For example what is the impact of high inflation
to an activity in the project
LOW (1) 3 5 7 9 HIGH(10)

• Hideability
• What is the chance that the effect will be
lately detected
LOW (1) 3 5 7 9 HIGH(10)

Calculate the total Risk score by multiplying all
three values
You can calculate the risk score for one activity/
or for the whole project
• EXAMPLE:
• Suppose you have made a technical change in
your production process
• One of the relevant source of risk is
technological risk ie to what extent the new
technology will support the system
Technological support to the system
• Severity:
The probable impact or damage to the project if the risk
event occurred ie what will be the damage if the
technology did not support the system
• Hideability
What is the chance that the effect will be lately detected,
ie will the effect of new technology be seen early or
too late
• Probability of risk event
What is probability that the new technology will fail ?
• The failure mode analysis is done to identify
the high risk events that require mitigation
plan(see example)
• The failure mode analysis is done to compare
the risk score of two options of conducting an
activity
Example Risk Management Table
Project :Start phase of new gift shop
with intnsive promotion Time :45 days
Risk Event Likelihood Severity Hideability Risk Score
Brochure Not 2 8 2 32
Ready in time
Website not 4 9 2 72
ready in time
Bank finance not 3 8 5 120
in time
Chance of 2 8 7 112
misunderstandin
g among
promoters
others
Risk Management Table
Project :Start phase of new
Time :45 days
gift shop
Risk Event Likelihood Severity Hideability Risk Score Mitigation
Planned
Brochure Not 2 8 2 32
Ready in time
Website not 4 9 2 72 Use simple
ready in time versions first
Bank finance not 3 8 5 120 Approach multiple
in time banks
Chance of 2 8 7 112 Increased
misunderstandin interaction
g among
promoters
Sensitivity Analysis Example
PROJECT A
Revenue(Rs) 10,000 Cost of Capital
( in Thousand) 13.50%
Material 8100
Labor 450
OH 200
Net Benefit 1,250

Net margin 12.5% B/C ratio 14%
PROJECT B
Revenue 9,000
Material 7300
Labor 400
OH 100
Net Benefit 1,200

Net margin 13.3% B/C ratio 15%
Sensitivity Analysis Example
PROJECT A
+10 % Normal -10%
Revenue(Rs) 10,000 10,000 10,000
( in Thousand)
Material 8910 8100 7290
Labor 450 450 450
OH 200 200 200
Net Benefit 440 1,250 2,060 1,620 72900 V

4% 12.5% 21%
PROJECT B
Revenue 9,000 9,000 9,000
Material 8030 7300 6570

Labor 400 400 400
OH 100 100 100
Net Benefit 470 1,200 1,930 1,460 59211 V

5% 13.3% 21%
• Sensitivity Analysis is to measure the degree
of sensitivity of the output with respect to the
change in Input cost
• Sensitivity Analysis can be done in NPV and
IRR as well
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
-80000 20000 21600 23328 25194 27210
At cost of capital 13.23% NPV is Rs 533
IRR as well
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
-80000 20000 21600 23328 25194 27210
At cost of capital 13.23% NPV is Rs 533
At Cost of capital 14.23% NPV is Rs 423
At Cost of capital 12.23 % NPV is Rs 663
NPV spread is Rs 240
IRR as well
Criteria:
What is the fluctuation of the NPV with change in cost
of capital
What is the fluctuation of NPV with change in interest
rate
What is fluctuation of NPV with change in cost of equity
etc
IRR as well
- Sensitivity analysis can be done to see the fluctuation
in NPV with change in cost of Capital
- Many changes in economic variables bring change in
cost of capital for example interest rate, inflation,
risk free rate, required return of investors – all bring
change in cost of capital
- When there is chance of drastic change in demand of
project output then the cash has to be revised,
making the sensitivity analysis bit complicated
PERT Calculation Sheet
OptimisticMost Likely PesimisticExpected SD VAR

o m p (o+4m+p)/6 (p-o)/6 SD ^2
A 3 6 9 6.00 1.00 1.00
B 2 4 8 4.33 1.00 1.00
C 2 3 5 3.17 0.50 0.25
D 6 8 12 8.33 1.00 1.00
E 5 7 9 7.00 0.67 0.44
F 1 2 3 2.00 0.33 0.11
9.1
9.1
C
6
3.1 E
A 6 7
6
0
F
0
D 16.1 18.1
B 16.1
2
18.1
4.3
4.3 8.3
7.8
- 3.5 S
How to use pert diagram in risk management?
• We can identify high risk activities(having high
variance)
• We can identify routes with high variance
• We can allocate buffer for high risk activities
• We can allocate route managers for high risk
paths as per pert diagram
• We can further analyze the activities with high
variance
Risk Mitigation
• How to respond to risk?
- Minimize the likelihood of risk event
- Minimizing the chance of damage
Risk mitigation
A.Minimize the likelihood of risk event
- Relationship with suppliers and stakeholders
- Proactive management( for internal factors)
RISK MITIGATION
B.Minimize the damage
•Analyze the risk during planning
•Continuous monitoring
•Plan for the back up
•Transferring risk
•Sharing the risk
Suppose you are a member of team setting stall
and paticipiting in international trade fair in
bhrikuti mandap for 7 days.
The objective is to maximize the awareness of
your products and get some additional sales as
well.
Identify at least seven risk factors that can
hamper your program – using failure mode
analysis and also plan the mitigation for high risk
factors.
Conduct sensitivity analysis with
respect to inflation
Project ABC Project DEF
Project 90000 110000

revenue
Material cost 45000 46000
Labor cost 20000 24000
OHead 5000 5500
Net benefit 30000 34500

Project Risk Management-20188

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Analysis of Risk

External and Internal Environmental

Minimize the impact of the risk factor

Probability of Success of Proj A 80%

LOW (1) 3 5 7 9 HIGH(10)

LOW (1) 3 5 7 9 HIGH(10)

Net Benefit 1,250

Net Benefit 1,200

Net Benefit 440 1,250 2,060 1,620 72900 V

Material 8030 7300 6570

Net Benefit 470 1,200 1,930 1,460 59211 V

OptimisticMost Likely PesimisticExpected SD VAR

Project 90000 110000

Labor cost 20000 24000

OHead 5000 5500

Net benefit 30000 34500

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