How to Calculate Risk in Your Projects
Learn how to calculate quantified risk in your software architecture project and use that calculation to evaluate options and as a planning tool.
As demonstrated in Chapter 9, every project always has several design options that offer different combinations of time and cost. Some of these options will likely be more aggressive or riskier than other options. In essence, each project design option is a point in a three-dimensional space whose axes are time, cost, and risk. Decision makers should be able to take the risk into account when choosing a project design option—in fact, they must be able to do so. When you design a project, you must be able to quantify the risk of the options.
Most people recognize the risk axis but tend to ignore it since they cannot measure or quantify it. This invariably leads to poor results caused by applying a two-dimensional model (time and cost) to a three-dimensional problem (time, cost, and risk). This chapter explores how to measure risk objectively and easily using a few modeling techniques. You will see how risk interacts with time and cost, how to reduce the risk of the project, and how to find the optimal design point for the project.
The ultimate objective of risk modeling is to weigh project design options in light of risk as well as time and cost so as to evaluate the feasibility of these options. In general, risk is the best criterion for choosing between options.
For example, consider two options for the same project: The first option calls for 12 months and 6 developers, and the second option calls for 18 months and 4 developers. If this is all that you know about the two options, most people will choose the first option since both options end up costing the same (6 man-years) and the first option delivers much faster (provided you have the cash flow to afford it). Now suppose you know the first option has only a 15% chance of success and the second option has a 70% chance of success. Which option would you choose? As an even more extreme example, suppose the second option calls for 24 months and 6 developers with the same 70% chance of success. Although the second option now costs twice as much and takes twice as long, most people will intuitively choose that option. This is a simple demonstration that often people choose an option based on risk, rather than based on time and cost.