Strategic decision-making is extremely important for organizational survival. There could be different types of organizational strategies. For example there are strategies that could be based on a business line, diversification, innovation, brand etc. It is important to say that the steps needed to select the different organizational strategies have risks. Risk analysis helps companies obtain a better perspective for selecting the best strategies.
Companies that use risk management at the portfolio level are able to identify and manage the positive and negative risks that affect several projects and programs to achieve their strategic goals. Companies that want to survive and grow need to select projects that create both a high value portfolio and keep a good balance in the portfolio in terms of risk. In fact, the best portfolio does not fundamentally contain the projects with higher priority but it contains a balance of projects in terms of risks.
A good portfolio of projects includes projects with different levels of risks. Selecting the top prioritized projects without looking at projects’ risks may form a high risk project portfolio, which increases the risk of total failure for an organization (Archer and Ghasemzadeh, 1999). In addition, to create a high performing project portfolio, companies should not only take into account project risks, but they should also consider risks at a different levels such as strategy, portfolio, and program risks.
According to the level of available information a company has, there are two methods of risk analysis: qualitative and quantitative.
Qualitative and quantitative approach
Some organizations use qualitative risk analysis to identify project risks. This approach is valuable when it is not possible to quantify impacts and probabilities of risks. This method is based on expert judgment and existing databases.
Studies report that companies consider the use of expert judgment as the most effective qualitative technique for risk analysis. Expert judgment and existing databases are used for listing and evaluating risks. To evaluate project risks in a portfolio, companies can use a risk breakdown structure (RBS) for a specific portfolio.
An RBS helps companies organize project risks into groups in order to create a clear overview of all risks. In addition, the RBS is also used to evaluate different risks for candidate projects in a portfolio and to determine a project risk factor that is helpful to balance the level of risks in a portfolio. A quantitative risk factor can be evaluated for each candidate project according to qualitative evaluation of risks on an analogous RBS. The use of RBS in determining the project risks was suggested by Hillson for mixing qualitative and quantitative risks.
It is important to consider that companies that use different RBSs to analyze project risks will obtain a lower level of consistency in assessing the risks of candidate projects. This will happen due to the variation in the number of risks from one project to another. At the same time, it is possible to consider a similar RBS for one project type in order to evaluate the risk of candidate projects in a consistent way.
Portfolio risk factor
Projects that are riskier have higher risk factors. Portfolio risk factor helps companies compare the risk level of various portfolios. In addition, the risk factor is used to optimise the rank of candidate projects more accurately.
The portfolio risk factor depends on project and program risk factors. It is important to consider that this can be only evaluated when all the project and program risk factors are available. Moreover, the program and portfolio risk factors cannot be evaluated when the project risk factors are assessed with a combination of qualitative risks and quantitative risks. In fact, it is not possible to evaluate program factors by considering risk factors generated by using different scales.
Companies can use sensitivity analysis to select the weight of a risk factor. In fact, according to the level of risk a company is prepared to accept the sensitivity analysis helps to identify the variations in projects ranks. This way companies can select the most valuable projects while considering a limited budget.
Keep in mind
Risk analysis helps companies obtain a better perspective for selecting the best strategies. Risk analysis at the project level should concentrate on project characteristics and objectives and put aside the strategic objectives of an organization (Sanchez et al., 2009). According to the level of available information a company has, there are two methods of risk analysis: qualitative and quantitative. Riskier projects have higher risk factors. Companies can use the sensitivity analysis to select an appropriate weight for the risk factor considering the organization’s risk acceptance level.