(photo by Dean Hochman)
The Tornado diagram is a visual display of the sensitivity of various risks with regards to their positive or negative impact. Why is this useful? In your project you might need to take advantage of a new opportunity or if your project needs to recover a late deliverable or reduce overspending it might be worthwhile taking a risk in order to be successful. For example, this might be purchasing and implementing new software or a new piece of equipment for your project that was not available when the project began.
Tornado Diagram Analysis Criteria:
- taking the risk will result in either a positive or negative outcome
- the impact of the risk can be estimated
- the outcome is uncertain
In the Tornado diagram below there are positive and negative results for each risk. Risk A has the potential to save the project $80,000 and a possibility of losing $40,000. This makes Risk A the most sensitive because the outcome is highly variable. Implementing Risk D has variability but a much more narrow range of possible outcomes.
What if your project needed to implement a risk in order to bring costs from a position of being well overspent to almost tracking to the original budget? Look at the risks in the diagram below. With this sensitivity analysis it makes sense to implement Risk B. It has the greatest potential positive impact with the lowest negative consequences.
Of course a project manager needs to understand the risk taking tolerances of the organization. The Tornado diagram is a useful tool to visually understand the uncertainty of various risks and their potential impact on the project.