24.2 Perform quantitative risk analysis

A quantitative risk analysis is a further analysis of the highest risk priorities;

however a quantitative rating is assigned to develop a probabilistic analysis of the project.

In general quantitative risk analysis involves the following processes:

		Assessing the probability of achieving specific project objectives.
		Creating realistic cost, schedule and scope targets.

Inputs

		Risk register.
		Risk management plan.
		Schedule management plan.
		Cost management plan.
		Organizational process assets.

24.2 Perform quantitative risk analysis

Tools and Techniques

		Expert judgment
		Data gathering & representation techniques
		Interviewing: such interviews are carried out to gather an optimistic (low), pessimistic (high), and most likely scenarios.
		Probability distributions: these are a mathematical representation of the probability of risk events occurring (uncertain events), such as uncertainty in values of tasks durations or cost of project components.

These probability distributions typically aid in decision-making by considering the real probability of risk events occurring and using this determine the best way to approach each risk.

Quantitative risk analysis & modeling techniques- commonly used for event-oriented as well as project-oriented analysis. Common quantitative risk analysis & modeling techniques include :

Sensitivity analysis: this analysis is used to determine which risks have the greatest potential impact on the project.

This is done through examining the effect of the uncertainty of each project element to a specific project objective, when all other uncertain elements are held at their baseline values.

24.2 Perform quantitative risk analysis

			Modeling and Simulation: this is a project simulation which computes the effect of specific uncertainties of the project into their potential impact on project objectives.
			Decision Tree Analysis: this is a flow diagram usually structured where each node (represented by a rectangle) describes the risk aspect and its cost.

	Using a decision tree aid in evaluating implications associated with each possible scenario and hence a more informed project risk management decision.
	For instance, if an organization has been using a software for a while and it is not fulfilling the organization's needs anymore and the dominant stakeholders are split into three groups in terms of software usage; where group I support staying with the legacy software costing $100,000 (maintenance cost), group II support buying a new software costing $800,000 and group III support developing a new software in-house costing $400,000.
	Using the decision tree in this case will help in point out the possible negative risks and exploring all possibilities and consequences for each given option (quantifying decisions).

24.2 Perform quantitative risk analysis

Figure 24.2 highlights the decision tree analysis for this example illustrating the

Figure 24.1: Decision Tree Analysis Start

	The Buy the New Software and Build the New Software options will lead to either a successful deployment or an unsuccessful one.
	If the deployment is successful then the impact is zero.
	However, if the deployment is unsuccessful, then the risk will materialize and the impact is $2 million.
	The Stay with the Legacy Software option will lead to only one impact, which is $2 million, since the currently used software is not meeting the recent nor the future needs of the company in case of business growth.

24.2 Perform quantitative risk analysis

Figure 24.2

	Expected Monetary Value analysis (EMV): this is a statistical concept that calculates the average outcome when the future includes uncertain events, whether opportunities or risks.
	This is done by multiplying the probability of the risk with the impact.
	By doing this.

24.2 Perform quantitative risk analysis

For instance, based on the previous example the Expected Monetary Value will be calculated as follows:

			Staying with the legacy software: $ 2,000,000 * 1 = $ 2,000,000
			Buy the new software: $ 2,000,000 * 0. 5 = $ 1,000,000
			Build the new software: $ 2,000,000 * 0.3 = $ 600,000
			Now, add the setup costs to each Expected Monetary Value:
			Staying with the legacy software: $ 2,000,000 + $ 100,000 = $ 2,100,000
			Buy the new software: $ 1,000,000 + $ 800,000 = $ 1,800,000
			Build the new software: $ 600,000 + $ 400,000 = $ 1,000,000

Outputs

		Risk register updates: this is an expansion of the initially generated an updated one, since it includes the following:
		Probabilistic analysis of the project
		Probability of achieving cost and time objectives

		Prioritized list of quantified risk
		Trends in quantitative risk analysis results