Episode 253: Quantifying the Qualitative Risk Analysis (Free)

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This episode is sponsored by The Agile PrepCast for The PMI-ACP Exam:

This interview with Ricardo Viana Vargas was recorded at the PMI Global Congress 2013 North America in New Orleans.

At this year's PMI Global Congress Ricardo Viana Vargas (http://www.ricardo-vargas.com) proposed a mathematical process to turn the results of a qualitative risk analysis into numeric indicators to support better decision making regarding response strategies. It was titled "Adopting the Quadratic Mean Process to Quantify the Qualitative Risk Analysis". Or in short... Quantifying the Qualitative Risk Analysis.

We review the risk management five-level scale for probability, the mathematical "quadratic mean" process involved to calculate the numerical exposure, and how you can quite easily apply this on your own projects. And yes, these are risk management strategies for agile projects too.

Episode Transcript

Below are the first few pages of the transcript. The complete transcript is available to Premium subscribers only.

Podcast Introduction

Cornelius Fichtner: We are back here at the PMI Global Congress 2013 in New Orleans and with me is Ricardo Viana Vargas.

Podcast Interview

Cornelius Fichtner: Hello Ricardo!

Ricardo Vargas: Hi! Hi Cornelius. How are you?

Cornelius Fichtner: I'm very well, thank you! How is the congress going for you?

Ricardo Vargas: Oh yeah, very well, very well. For me, it's a great experience because the first congress I attended was in 1998 long bit. And so far, 15 congress in a row and I have never missed it once. So it's very nice. And now you see people that you met 10 years ago and it's a great opportunity for me to meet people networking, talk to people. Now, so I have the great presentations we are having here.

Cornelius Fichtner: And I did not attend last year and I don’t recognize anybody anymore it seems.

Ricardo Vargas: It's interesting. There is some core group that is always here. There is maybe a floating group that comes…

Cornelius Fichtner: …and goes.

Ricardo Vargas: Comes and goes, come not so often. But for me, it's great to be here.

Cornelius Fichtner: So we are standing here in the middle of the exhibition hall and you will probably hear dear listeners in the background. Yes, there are still people here. There are still people drinking coffee being served. Exhibitors are showing off their wares and we are in the middle of this hustle and bustle and we want to talk about adapting the quadratic means process to quantify the qualitative risk analysis.

And yes when I read this for the first time, I thought: "Oh my God! Why did I ask Ricardo to talk about this topic?" Because it seems extremely complex to convey in an audio-only podcast. But luckily a friend of mine, Josh Nankivel, attended your presentation this morning. And I can tell you, he liked it. So it was a good presentation you gave. And he said: "You know, it's not all that complex." Tell us about it.

Ricardo Vargas: Yes, yes, of course. It's very hard to analyze things using the title. So when I created this concept, I was concerned about how we can translate some qualitative into some numbers. And then it was very hard for me to put the title in the proper way.

The root of the concept, it's a way of doing the average of the impact. So this what became this title quite complex. But the concept behind is very, very simple. You can use an Excel spreadsheet and do it in 10 minutes.

Cornelius Fichtner: Okay.

Ricardo Vargas: In 10 minutes. So there is no rocket science behind this.

Cornelius Fichtner: Okay. Just as a reminder for me and the listeners, qualitative risk analysis, high, medium, low. Quantitative, you have a dollar value assigned to it, right?

Ricardo Vargas: Yes.

Cornelius Fichtner: And you say, this will cost us this much.

Ricardo Vargas: Yeah, that's perfect. Let me explain to you: What is the challenge when we use these both methods? Of course when you think about quantitative risk analysis, you see more deep analysis. You get into dollar value. You can have a more valuable approach. But the challenge is that it's much more complex to do it.

Cornelius Fichtner: Yes.

Ricardo Vargas: It's much more complex to calculate the probability of things. Then you can run a simulation. You can run a Monte Carlo simulation. You can do. But this very complex for the daily use of the project manager.

So what I did. I took the concept behind the qualitative risk analysis and then translated it into more quantitative. So what I did instead of this basic concept of low, medium, high. What we did, we elaborate this a little bit more into basically 3 components, okay.

One is the probability. The second one is what we call the impact. This impact is divided not just in a big impact. For example in the traditional qualitative risk analysis, you have impact low, medium, high. But is this impact in cost, in quality, in time?

Cornelius Fichtner: Don't know, yes. Yes.

Ricardo Vargas: Maybe it's high in time but maybe low in cost. So what I did, I spread this into 5 different kinds of impacts. Impact on time, impact on cost, impact on quality, impact on safe and security, and other kinds of impacts. So instead of you evaluating one impact, you evaluate 5 of them.

And then the third component, it's what we call proximity. It means how close is this risk to happen or not happening. For example, let's suppose you have a risk of some supplies do not arrive. But then this risk will become a problem, an issue next week or it will become nothing next week because in 1 week from now, you know if the risk happened or not.

Cornelius Fichtner: Right and after that…

Ricardo Vargas: After that, it's an issue, okay. But you have other risks that you're for example being in this and you don’t know if people will be using. But this is long term. This is 2 years from now. So it's a different approach. So this 3 components. So what we did, we translated this.

So let me explain in a very basic way how you do it. First probability: You put the rank between 1 and 5. Five means very high probability, okay. You almost expect this to happen.

Cornelius Fichtner: This is going to happen.

Ricardo Vargas: This will be a hundred.

Cornelius Fichtner: 99%, yeah.

Ricardo Vargas: 90%, 95, 98%. One means, it's very, very likely that this will happen. So it will be a very big surprise for us if this happens. So when you assess a risk, you give a score, 1, 2, 3, 4 and 5.

Then the second step is the impact. And this is what the quadratic mean comes from. So the impact, you need to evaluate. First, impact on time. For example, on that example on the paper, this is just an example. Five is this risk can impact in more than 6 months of delay, for example.

Cornelius Fichtner: Okay. So if the impact happens on this risk, a 5 means our schedule will be delayed by 5 months.

Above are the first few pages of the transcript. The complete PDF transcript is available to Premium subscribers only.