The process of managing potential and unforeseen events that may occur during a project, risk management involves identifying as many risks as possible, minimizing their impact, responding when they materialize, and implementing a contingency plan to cover the results. Scenario analysis is a useful technique for assessing the significance of each potential risk event.
Scenario analysis starts by listing all potential risk events and evaluating each one according to its likelihood or probability, impact, and detection difficulty. Analysts create a relative or numerical scale that measures the severity that each risk poses for a project. For example, a risk event concerning a hardware malfunction that happens during installation has a low likelihood, but a significant impact on the time and quality of the service provided and is very difficult to detect. The product of the probability, impact, and detection difficulty determines the total risk value of the event.
Scenario analysis results can also help companies eliminate risks altogether while managing projects rather than merely minimize one or two of them.