How can you make effective decisions if risk cost data is derived by sticking a finger in the air?
Sword GRC Blog
“How can you make effective decisions if risk cost data is derived by sticking a finger in the air?”
Risk Cost Impact Formula – one of many innovations within Sword GRC’s 2022 Active Risk Manager solution set – solves the problems that stem from inaccuracy when calculating the cost impact of risks within project risk management. Global Marketing Manager, Jenny Ritson-Smith explains:
“Risk management and cost control are closely intertwined, after all, completing a project within budget and attaining desired profitability are typically key markers of success. The problem for risk professionals is that each risk carries associated costs and when trying to calculate total risk cost impacts, there are many factors to consider. Some factors will be known, such as daily operating costs and equipment rental, but other components may be unknown, even to the person identifying and assessing the risk.
“How can you make effective decisions if risk cost data is derived by sticking a finger in the air? For known risk costs items, risk owners may resort to ‘best-guessing’, entering values into their risk register based on previous project experience and market knowledge. Or it might be that the organization does keep records of cost items, in the form of spreadsheets which require constant manual updates. The problem is that neither of these methods are reliable or effective for risk cost impact assessment. Both result in increased workloads for risk professionals and worst still, inaccurate risk cost assessments.
“Just to add to the problem, as cost items are ‘live’, these values are constantly subject to change, depending on market conditions, the supply chain and so on. Every time there is a change in value, the risk or project manager has to notify the risk owner so that they can update the risk cost impact. Once again, this is ineffective – if changes are neglected risk information can easily be out-of-date; it creates more workload and introduces scope for human error.
“Recognizing the scale of the issue for risk owners – particularly within complex or large-scale projects – Sword GRC has developed Risk Cost Impact Formula, an innovative tool within ARM that ensures accuracy within risk cost impact assessment.
“Values for cost items are defined at folder level – per project, department or business unit to suit – negating the use of spreadsheets and the problem of siloed information that can be out of date or inaccessible. With all risk information contained within one central repository, ‘a single source of truth’, risk owners can call on the values and use the formula builder to calculate the risk costs.
“Previously, risk owners would have had to work costs out manually, using spreadsheets, a calculator, or worse still, by just hazarding a guess. The beauty of Risk Cost Impact Formula is that the formulas are dynamic, so any change in value only needs to be made in one central folder location and that change is reflected throughout the solution.
“This not only saves time, but removes the issue of changes to cost items being forgotten. And with greater accuracy in the data that risk professionals are working with, risk management overall can only be more effective.
“Risk professionals will appreciate that what may appear to be a simple and small change in cost can actually have a ‘ripple effect’, greatly impacting the entire project. By running different scenarios using different cost items, project or risk managers can determine – and importantly, evidence – where the best cost savings can be made. And when undertaking Monte Carlo risk analysis, the greater precision means that project contingency costs can be identified more accurately, helping underpin decisions around funds management. Should monies be kept in reserve for contingency, or could some of those funds be better utilised elsewhere within the project?
“Essentially, new Risk Cost Impact Formula will help risk professionals and project managers to be more confident in calculating the profitability of a project. And when it comes to accountability and full transparency, the tool provides an audit trail of exactly how cost impacts were arrived at.”
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