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#48: Add Risk-Based Analysis to Your Consulting Toolkit

Posted By Mark Haas CMC FIMC, Wednesday, May 13, 2009
When clients ask for my "best guess" of what will happen in the future, I don't want to lowball my estimates just to cover my reputation, but am looking for a better way to give an estimate.

Our job as consultants is to give the best of our experience, knowledge and abilities to help improve change the future for our clients. Suppose your client asks for an estimate of cost, timing, volume, or any other object for which there is uncertainty in its calculation. You do your market research, go into your own files for comparables, ask client staff for data and then calculate your best guess of an answer to the question. Unfortunately, your answer is most certainly wrong. Misestimating any input parameter will throw off your answer. But there is a better way to approach this common consulting challenge.

A probabilistic (also called stochastic) estimate uses distributions of input parameters rather than single (point) estimates. Estimate or use historical data for the lowest, most likely and highest estimates of input parameters (e.g., unit price, task duration, customer order volume, training impact) and combine them mathematically to create a range of likely output values. The result is a far more useful distribution of estimates. Instead of one estimate of, say, profitability for an investment, you can say to your client that there is a 90% probability of at least a $1 million profit, and a 20% probability of at least a $1.5 million profit. This gives your client a better sense of the real range of possibilities, and allows you to answer the real question of "What are the odds we'll lose money on this deal?”

Tip: Every consultant should understand the principles of risk analysis. One of the best tools to generate these kinds of probabilistic estimates is an add-in for Excel spreadsheet called @RISK. It provides a framework to ask deeper questions about the nature of a client's processes and provides you insight into the greatest areas of leverage for your consulting services. Finally, risk-based estimates are also useful to find out which of your recommended interventions are likely to have the greatest impact on the client's condition.

© 2009 Institute of Management Consultants USA

Tags:  consulting process  risk analysis 

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