We've already seen that the two principal characteristics of a risk that we take into account we analyze them the impact and the likelihood. So we draw a chart with impact along the vertical axis, and likelihood along the horizontal axis. And back is our basis taking each risk we identify and plotting is on that chart. And a good way to do that is to use a flip chart and put the risks on sticky notes. Now we'll start with the likelihood axis because this is very tricky. Human beings are particularly bad at estimating the likelihood of uncertain events.

We don't by and large, have good Intuition around probability theory, most of us don't have a sophisticated understanding of statistics and probability theory. Of course, because projects tend to do new, unusual novel even unique things. We don't have a basis of statistics to work from, even if we did have a good understanding of statistics. So keep your likelihood scale simple. The more complex you make it, the more you fall for what's known as the precision trap, where you mistake precision for accuracy. Don't be tempted to use percentages unless you really do understand statistical theory and you have the basis for estimating percentages.

Don't be tempted to use clever descriptive language like plausible, possible probable, because those words don't have a meaning that is sufficiently precise, to make them useful. For my money, the best scale for the likelihood is a three point scale, low, medium high. If you want to be more precise than that, then I am prepared to accept very low, low, medium, high and very high. Anything more sophisticated than that can only be justified by deep understanding of the statistics of likelihoods and the statistics of your particular case. So cool, new project managers working on relatively straightforward projects. This is enough for you.

Now, on the impact scale, you can be more precise. And the first thing to do is to ask yourself, whether you care more about the impact on one aspect of the project or another. So for example, if you're particularly interested in the impact on deadline on deadlines and schedule because it's a time driven project, then set yourself on impact scale based on time. So your first level of impact might be a day or two delay. The next level might be a week or two delay, the next level a month or two delay, or maybe the next level might be a quarter or two or a year or so. So, you've there got a not necessarily an England scale, but a reasonably well defined scale of impacts, you could look at financial impact.

If you're working on a project, with a total budget of around a million, you might define a scale that starts with problems that will cost you hundreds of dollars or hundreds of pounds, thousands of dollars or thousands of pounds. 10s of thousands, hundreds of thousands, or millions. If you were interested in reputation might get a little cautionary note from a regulator. Or maybe a little line entry in a trade journal, or local paper. Maybe there's a full scale article in a trade journal or paper feature article about what you've done wrong. Or maybe it appears in the national press, or at the top level, in the front of national press, maybe on the evening news.

So, you can define a very effective impact scale by thinking about impact of what and what are the major kind of cutoff points where the impact takes a leap. If you don't have a specific impact in mind, then you can go for a generic scalar. My favorite generic scale starts with actions. The lowest level of risk in terms of impact is one where to put things right you need to take a corrective action simple corrective action. A higher level of risk will be one where you need to plan your way out of the problems and you need to stop the project and come up with a new plan. Then we've got the level of risk, which says, actually, you need a whole new way of thinking about doing the project if you're to deliver the project as originally hoped, so a strategic level of plan a master plan level.

Next, nothing you can do will allow you to meet all of your objectives. You are going to be over budget, you are going to be behind schedule, your quality is going to be compromised. And then the top level for most people, there's one where the goal is compromised. You know, if this, if this risk materializes, you will not achieve your project. Clearly, it is possible for a risk to have an impact that goes beyond the project people are severely hurt. The reputation of your organization is seriously damaged.

Clearly, if you're working on a project with those kind of risks, you need to fully understand risk management and project management to grow To a degree that goes beyond what you can learn in this simple course. Then you simply plot your risks onto the chart. And often we define regions of the charter, a green region represented green for go fairly safe, no little a few concerns. I amber or orange region indicating some concerns where you clearly need a strategy of how you're going to handle the risk. And then a red zone where for risks in that zone basket of strategies, and many organizations will define a top right hand corner of the graph where the risks are so serious in terms of impact and likelihood that if a risk can't be moved outside of that graph of that zone, and the project must be canceled. And the boundary to that is known as the risk tolerance boundary.

And to make that really work, you've got to be prepared to change capital projects with risks in that zone can't be shifted. You can clearly allocate numerical values to your levels of impact as your levels of likelihood. And therefore each risk can be allocated a single one digit one number score by multiplying those together rather like a times table. If you do that, you get a precise number. Remember that precision is not the same as accuracy. That number is just a representation of the level of risk it is not a precise measure of the risk.

But as a useful tool to think through the level of concern and therefore how much action you should be taking. This kind of approach can be very useful. In the next video, we'll then look at what are the six strategies that you can deploy to move risks to a level which you are more likely to win