Management of
Computer System
Performance
Chapter 8
Risk Analysis
Risk Analysis

Agenda

Conclusion 8
 Risk Analysis
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To understand Risk Analysis Methodologies.
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Objective:
Students should be able: to apply the spreadsheet for risk
analysis.
2
The Quantification of Financial
Risk
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During the identification process for the Business
Case several methodologies were identified and
discussed.
Each of these formulas provided for the
incorporation of variables. Risk variables consist of
two elements:
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Project Risks – Can the project be done, etc. and
Financial Risks – What will LIBOR be in 5 years?
These are the elements that must be weighed to
perform a risk calculation.
3
Project Risk and Variance

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The difference between the initial project budget and
the actual spending on the project is variance.
Causes of budget variance
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Accuracy of estimates – this is usually the biggest issue.
Errors are made when getting aggressive to win the job.
Inflation – Lately, this has been in check. Labor inflation is
a potential problem.
Availability of resources – Try to get a WebSphere
Programmer.
Use of overtime and Seasonal fluctuations in prices – if not
accounted, can trash a budget.
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Project Risk and Variance

Risk is inherent in every project.
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Risk is a fundamental ingredient of opportunity.
It is inherent in every project.
It is the possibility, not the certainty, of bearing
a loss that must be addressed.
Loss could be anything from diminished
quality of an end product to increased
cost, missed deadlines, or project failure.
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Project Risk and Variance

Risk is not something to fear, but
something to manage.


Successful Project managers and their teams
deal with risk by recognizing and minimizing
uncertainty
They do this by proactively and aggressively
addressing each identified risk area and
developing a mitigation for it..
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Project Risk and Variance

Risk should be continuously assessed
throughout the project life cycle. Successful risk
management is more than just identifying risk
factors at the start of the project;
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
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Risk must be addressed and a constant assessment of
risk throughout the life of the project must be
undertaken.
New risks are revealed during the life of a project and
work continues
Previously identified risks change. They become
either;
 more or less probable or more or less severe.
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Project Risk and Variance
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
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Ongoing risk management of a project introduces a
degree of resilience to change.
Proactive risk management involves identifying
risks ahead of time and preventing them through
reduction, transference, or avoidance.
Reduce the risk. Risk reduction tries


to minimize the likelihood that a risk will occur or,
to minimize the impact if the risk does occur.
 Ex: architecting a system with strong system security so
that the risk of data loss or corruption is reduced.
 Ex. minimizing the impact of a risk is installing an
uninterruptible power supply to your hardware.
8
Project Risk and Variance

Transfer the Risk. (this does not refer to giving it to the new PM
when you leave.)
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Risk transference reduces overall risk by ensuring that it
is handled by the most competent party.
 Ex: when a company contracts with a third-party firm to
deploy software, the customer determines that contracting
with an outside entity will result in fewer and less severe
risks than if the customer’s own people were to do it.
A company may also transfer a risk by transferring the
consequences.
 Ex. A company may have offsite data backup and storage.
 Ex: A company might choose to have an applicationhosting provider host its critical functionality in a more
secure or proven environment.
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Project Risk and Variance
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Avoid the risk.
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Risk avoidance tries to eliminate the risk by doing
something less risky. Selecting an alternative.
In the worst case this may involve canceling a project,
but in other cases it could involve sacrificing some
functional requirements to allow adoption of a
packaged solution or avoiding unproven technology.
 Ex: instead of creating open Internet access for a Webbased application, the company might choose to build a
virtual private network to provide greater security.
Note: Canceling a project, from a business perspective
may, be the correct solution.
10
Project Risk and Variance

The process for Risk Management addresses the
following elements:
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Identify risks and quantify potential damages.
Determine and document risks likely to affect the
project.
Perform on a regular basis.
Use strategies to reduce potential impact.
Address both internal and external risks.
This is done from both a Top down and Bottoms
up budget perspective.
11
Financial Risk in IT

Financial Risk is more difficult to address.
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Realities are that since the financial turmoil of the Carter
Presidency, safe guards for the financial markets have
been put into place. Predominately through the use of the
Federal Reserve and various banking regulations.
 Though
recent moves may have weakened these
regulations.
These regulations were put into place to attempt to control
the volatility of the financial markets.
Market volatility directly affects the quantification of risk in
IT projects.
 Change the interest rates, you change Future Value, etc.
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Financial Risk in IT
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One approach to this problem is to perform a series
of evaluations, using a Statistical approach such as
the Monte Carlo method.
Each model that is executed generates an expected
result.
Repeat this with a sufficient frequency and you
eventually develop a curve from which a valid
deduction of the probabilities can be made and a
recommendation can be made based on the
financial calculations and parameters addressed.
13
Calculating Project Risk

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Risk can usually be calculated in terms of
tolerance.
Quantitative approaches are usually
recommended over a qualitative approach.

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Develop Risk Scenarios and address with Teams to
assess risk probability using the previous methods.
 What are the chances that the risk item will happen?
Rank the mitigation strategies
Cost the “best” mitigation strategy.
Compare the cost of incurring the risk or
mitigating it.
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Summary

Estimating costs and benefits require significant
diligence.
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The more firm data that can be collected, the more
accurate the results.
Use a consistent methodology
DCF is often a preferred method of validating a
project’s worth.
Identify and work with Risk.


Recognize it.
Mitigate it
15
Individual Paper Due


Download a presentation on IT Risk
Management from the Internet and Write a
paper based on the presentation and other
additional references.
Google search engine: IT Risk Management
ppt.
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