Question

(Software Project Management)

A project has following risks (R), associated likelihood (L) and impact (I), and the risk reduction cost (C) and resulting reduced risk likelihood (L') of some planned risk reduction measures:

(R)	(L)	(I)	(C)	(L')
R1	20%	$75,000	$5,000	5%
R2	1%	$1,000,000	$20,000	0.5%
R3	8%	$200,000	$8,000	6%

a) Calculate the risk reduction leverage for each of the above risks.

b) Based on your analysis in a) above, for which risk(s) would it be worth implementing the planned risk reduction measure(s)?

Answer 1

Given :

(R)	(L)	(I)	(C)	(L')
R1	20%	$75,000	$5,000	5%
R2	1%	$1,000,000	$20,000	0.5%
R3	8%	$200,000	$8,000	6%

a) Risk reduction leverage : Risk reduction leverage calculate the value for the 'return on investment' for measures taken to reduce risk and thus can be used to prioritize possible countermeasures.

First we will compute the Risk Exposure before the measure was taken and after the measure was implemented.

Risk Exposure : Probab. of risk occurring * Total loss if risk occurs

RE Before

R1 : 20% * 75000 = 15,000

R2: 1% * 1000000 = 10,000

R3 : 8% * 200000 = 16,000

RE After

R1 : 5% * 75000 = 3750

R2: .5% * 1000000 = 5000

R3: 6% * 200000 = 12,000

RiskReductionLeverage = Reduction in Risk Exposure(RE before- RE after) / Cost of countermeasure

For,

R1 = 15,000-3750 / 5000 = 2.25

R2 = 10,000-5000 / 20000 = .25

R3 = 16,000-12000 / 8000 = .5

b) Highest RRL shows that the measures taken to reduce risk are the most cost- effective.

So, in this case R1 attributes to the highest rrl and therefore will have most optimum cost-effect