Risk Ranking / Management Reserves

The output of traditional QRA analysis using purely Monte Carlo simulation is a tornado diagram. The diagram ranks the risks by their contribution to the overall distribution. However, this not a meaningful tool for the ValidRisk hybrid method. That is because systemic risks, as attributes of a unified system, are only meaningful as a whole. As a whole, systemic risk will be the top, and usually overwhelming, bar in a tornado diagram as is consistent with research. When a system is weak, the resultant uncertainty can strike anywhere or everywhere. Therefore, the ValidRisk tool provides two tools to direct management’s attention to the risks that matter.

For systemic risks, a spider diagram is provided. This shows which “parameters” of the parametric model are furthest from their ideal rating. Management can focus their risk treatment actions to those elements. For project-specific risks, a ranking table is provided that, like a tornado diagram, ranks the risk in order from top to bottom. However, unlike a tornado diagram, the ranking table ranks the risk in three different ways; by the expected cost value, the most-likely cost impact if it occurs, and the worst-case cost impact if it occurs. A risk may have a low EV because the probability is low; however, it may be the top risk in terms of the worst-case impact if it occurs. It is a more discriminating view of these risks than a tornado diagram.

A key use of this ranking table is to help decide if a risk event would be more effectively managed as a management reserve item than as a part of contingency. Contingency is best for funding many smaller, incremental risk impacts. If one risk has an impact (e.g., low probability/high impact) that is overwhelming, contingency is not a good funding or administrative tool for it. The risk ranking table helps identify these overwhelming risks: i.e., if the top risk’s most likely impact would consume a majority of the contingency in one fell swoop, it is better to fund it as a reserve item. ValidRisk allows such items to be analyzed in isolation; i.e., it will provide one distribution for contingency for more moderate risks and another for each risk item flagged as a management reserve.