Most tools for project valuation have shortcomings that make them incapable of accurately prioritizing projects. A key source of error is accounting for risk and incorporating risk into the valuation method.
For estimating project value, we have developed a demo app that illustrates the error that is made when unlikely but risky events are not incorporated into the project valuation.
This demo illustrates the importance of accounting for risk when estimating project value. However it does not demonstrate how to incorporate risk into the valuation method - that is a separate topic. Suffice it to say that project value and risk cannot be separated - project risk is fundamentally linked with the value of a project.
Instructions For Running The Project Risk Software
Note: The Risk Demo is not yet designed for cell phones and tablets.
- Click New Portfolio to generate and prioritize 30 random projects. The projects are displayed as an efficient frontier. Click any dot to see the corresponding project data.
- Circles indicate projects whose only risk is "project risk." Project risk refers to the risk that the project may fail to deliver its promised benefits. Project risk decreases the value of a project.
- Squares indicate where risk is important. Deferral risk projects are red. Deferral risk refers to the potential for losses to the business if the project is delayed. Deferral risk increases the value of a project. "Project Risk" projects are black. Project risk refers to the risk that the project may fail to deliver its promised benefits. Project risk decreases the value of a project.
- Risk seriousness and the necessary value adjustment depend on the organization's risk tolerance. Select Adj Risk Tolerance to change tolerance for risk.
- Click Toggle Risk to see the impact of correctly valuing project and deferral risk. Notice the dramatic change (unless risk tolerance is very high) to project priorities as well as the impact on the value of the project portfolio!
Inadequate quantification of the uncertainties of the impacts of project deferral and the associated risks is a major reason that organizations defer needed investment in infrastructure and choose the wrong projects.