Robust Risk Analysis for the Time/Expertise Poor – Part 1

I have recently spoken to several clients whom have all came to the same conclusion about the risk analysis solution they think is most appropriate. They don’t want to do it, and I have no problem with that!

Of course that’s not precisely true. The benefits of Monte Carlo techniques in risk analysis are quite well understood and there is plenty of buy-in from businesses in the Australasian region. The trouble these businesses face (particularly in the realm of project cost estimation) is that the specific process of quantifying their risks for stochastic analysis and the ensuing simulation is not well understood and the means to ameliorate this appears to be beyond their reach. The modelling and simulation components of the project risk management process are not given adequate resources to be performed well, and certainly not to the extent that they provide the most useful information.

It is the case that many companies do not employ dedicated quantitative analysts. This means they have to rely upon some (maybe one) person in the team who has a non-zero quantity of experience and possibly training with risk simulation software to create a valid and credible stochastic model. This person is also not likely to be given enough time to do said task, thus the model inevitably suffers. It is my experience that most models – and all project cost estimation models – can be improved or actually need to be fixed.

So the corporate mind is willing, but the flesh is weak. How can this be addressed? No amount of additional training will suddenly allow you to overcome your time and resource constraints. Perhaps you can’t get the budget for training anyway or don’t want to master risk analysis software when it’s not really core to your role? The solution is one that I personally endorse (and provide!) as a risk analysis consultant – custom Excel programming.

VBA for Excel is a fairly simple language to learn, yet very powerful tool for automating repetitive or sometimes complex spreadsheet tasks. A customised solution involves writing VBA code to perform the tasks we’d rather not do ourselves in the risk analysis model. The “we” here refers to companies that find themselves in the situations previously described whereby they are incapable of creating and operating these models, not necessarily though any fault of their own. In my next blog I’ll examine some modelling problems/requirements and how they might be dealt with effectively using customisation.

Rishi Prabhakar

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