Using the Quadratic Average (Mean) in the Qualitative Risk Analysis

In this podcast, Ricardo Vargas talks about the qualitative risks analysis, sharing a model to qualify better the project risks using an qualitative analysis with numeric quantitative results by using the quadratic average calculation, allowing a simple and efficient approach for risk management.

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Episode transcript

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Hello everybody welcome to the five minutes BM podcast. Today. I'd like to talk to you a little bit about the qualitative risk analysis. I was thinking this week about how we can improve the quality of our qualitative risk analysis and try to give some more quantitative data around all the benefits of the easiness of use of the political risk analysis. If we return back to the qualitative risk analysis, we can see that what we usually do it's today create a level with the levels of risk or colors or patterns that can create, okay, very low, low, medium, or high, and very low, a very high, and right.

Do you use callers and a kind of signpost to show the risk and like try it this week. And I have been very successful doing that. It's how we can create, ah, quantitative risk analysis using a qualitative data. And what I did, if we remember returned back to definition of expected value, it's the probability times the impact that the probability of it let's suppose in the quantitative risk analysis that we have 10% of chance of $100,000 off the losses.

So 100,000 times 0.1 will be $10,000 of expected monetary value. Let's try to do the same using the qualitative data. So what I did, I took the probability and that created the rank from a very low to very high, so very low, low, medium, high, and very high each off this, I will give you a score from one to five. So very low it's equal to one very high equals to the fact and evaluating the impact side.

It's very dangerous and very hard to create only one kind of impact. So what I did, I created six different types of impact, time impact, cost, impact, quality impact, impact in security, in environmental and all the impacts and the 60 or one is the time horizontally from immediately to very long term. So it's very different to see a risk that can impact the project today or tomorrow than another one that can impact the project in six months, 10 months, one year, two years.

So it's very little and what I did in each of this, I create the decision game score system that I use it for probability So impact, very low, a low, medium high, and very high. Each of this, I gave one score from one to five, a very low one, low to medium, three high, four, very high five. Regarding that time, what I did at boot immediately means five short term means for medium term or long term to a very long term one.

So, it's the opposite of the other ratings, because for me, it's much more hard and immediately a request Risk then a very long term in the, how I calculate at the global impact and not only and simple, Average where I sum up all of them and divided by six in this case, what I did ID that Quadratic, Average how you can do that. It's only take each off the scores and calculate the potluck of each one.

So the number times the same number at all of them divided by six and take the square root. So you calculate the squares of each one. You add all of them divided by six because it's six different impacts and calculate the roof, the square root of that. Why I'm suggesting you to do that because it's much more reasonable to give a strong Valley to the upper level risks.

So when you have a five score, Risk in the regular Average, which you are doing this Risk is five times more important than a risk that receive it is only one, but when do you use this Quadratic formula, its 25 times more important? So the extreme values will be much more considerate in the total results. And with this result, you will find a member from one to five.

If you multiply this one, this number by the probabilities that I explained before in this podcast. So you'll have a number of from one mince. In fact, one and probably to one up to 25 probability, very high impact, very high. And with that, you can do this for all the reasons. This is that you may have in the project using the normal spreadsheet like Microsoft Excel. So you will not need a programming tool. You will not do that to do a simulation and you will have a final number two show up all the, your exposition.

And we can manage that. You can set a target, its okay, the target for the next month will be reduced from a 17, two 15, the overall exposition So you can track this in a monthly base or in a weekly basis and you track this in a very simple and trust me, it's very important that we keep everything very simple. And this tool, you will have something that you can insert in your balance scorecard in a very simple way, using a regular spreadsheet and a half

Speaker 1 (6m 14s): Creating ranks. And when you do that

Speaker 0 (6m 16s): With all the kind of impacts, you will have a much more broad perception of the Risk and you can create many, many pivot tables using the Excel and create a very good set of decision making tools for you to build with your risks. I hope you enjoy this podcast and see you next week with another five minutes PM. Podcast see you.

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