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February 7, 2010

EMV for Risk Analysis

When I meet with customers and project teams about how they are managing and assessing risk in their projects & programs, I find it quite interesting to see the different approaches from one industry to another.

For example, utility companies do a very good job of assessing and calculating risk around potential project risks and issues. Engineering & construction "owners", or those that hire contractors to build buildings, do a decent job of capital planning and assessing risks in investments and capital budgets.

But in IT project management, where I focus, risk analysis and management of risk tends to be undervalued.

Now these are, of course, generalizations. But I wanted to point this out to speak very briefly about a concept known as EMV or estimated monetary value for risk analysis. It is a good & easy way to use the risks that you've identify in your project and to use a simple formula to place a $$ value on that risk. You can then plot the probability of the impact of those risks as I'll show below.

There is a better detailing of EMV for risk analysis here.

A summary of the steps is: Assign a probability of occurrence for each risk. Then assign a monetary value for the impact of the risk if it were to occur. Finally, multiply the probability by the impact and you get the EMV. This value is positive for opportunities and negative for threats.

You can graph this as a risk chart, a tornado graph or as a distribution of probable values as I've linked to below from Oracle's Risk Management and Hyperion's Crystal Ball. The advantages of using BI tools like these for EMV is that you can get decent analysis through Monte Carlo simulations against your project schedule or your investment schedules based on the number of sample iterations you set. I also have a sample from RiskyProject below of a risk matrix where you can plot your values in 4 quadrant from least to most likely & impactful.

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