PALISADE: Making better business decisions with risk analysis

Businesses make decisions every day. Where to invest, what to produce, which vendor to use, what price to charge - the list is endless. Most organisations probably base their decisions on whatever data is available - historical costs, competitors' prices, vendor estimates, etc. But how often do businesses have full, complete information? Prices change, demand fluctuates, costs rise. It's easy to make the wrong decision if you don't take all possible scenarios into account. Making the best business decisions means performing risk analysis.

Risk analysis need not be a daunting task, because software tools are available to ease the transition—for example, @RISK software produced by Palisade. @RISK is a straightforward to use add-in to Excel that allows users to perform risk analysis in a few easy steps. @RISK using ‘Monte Carlo Simulation’ will allow an organisation to determine how wrong the baseline outlook can be and more importantly why.

What is "Monte Carlo Simulation?" When we use the word simulation, we refer to any analytical method meant to imitate a real-life system, especially when other analyses are too mathematically complex or too difficult to reproduce.

Without the aid of simulation, a spreadsheet model will only reveal a single outcome, generally the most likely or average scenario. Spreadsheet risk analysis uses both a spreadsheet model and simulation to automatically analyse the effect of varying inputs on outputs of the modelled system.

One type of spreadsheet simulation is Monte Carlo simulation, which randomly generates values for uncertain variables over and over to simulate a model. Thus giving users the ‘best guess’ results and aiding the decision making process.

Halcrow Group has been using Monte Carlo simulation for some time having implemented @RISK for Portfolio Optimisation and Budgetary Compliance. Halcrow Group Ltd specialises in the provision of planning, design and management services for infrastructure development worldwide. With interests in transportation, water, maritime and property, the company has commissions in over 70 countries. It has a network of 73 offices around the world (27 of which are in the UK), nearly 6000 employees, and an annual turnover of more than £280 million.

For Environment Agency projects, Halcrow employs @RISK in the risk quantitative stage to set risk budgets at the start of each phase of the project commission. Starting with the ‘sunny day estimate’ of the project risk, it identifies, assesses and quantifies every potential threat that could affect (ie increase) this base figure.

For example, severe weather could lead to a delay in the collection of survey data, with knock-on effects for related work. Or poorly articulated project outputs can result in tasks with weak focus that lead to inefficient resourcing and the need for reworking. Equally, novel techniques might fail to deliver robust results, again leading to abortive work and an overall delay to the programme. Other hazards that can potentially affect NCPMS projects include: increases in material costs; changes to the team; equipment failure; delay for required approvals; unforeseen ground conditions and errors, etc.

Using @RISK for ongoing risk quantification on individual projects allows Halcrow to monitor progress against original budget incentive thresholds and potentially allows the NCPMS to make strategic decisions on allocating funds across the whole portfolio of Flood Defence projects.

@RISK Shows “Most Effective Use” of Public Funds

Tim Wells, project manager at Halcrow, comments: “Halcrow’s line of business makes robust risk analysis an essential part of our daily lives, and the Environment Agency’s core principles reinforce this way of working. Palisade and @RISK provide us with a flexible product that is easy to use, as a result of which we are able to maximise our own revenues on projects. In addition they ensure that the Environment Agency is accountable to the UK public by putting its funds to the most effective use to guard against flooding.”

About Palisade

Palisade Corporation is the world’s leading developer of software and services for risk and decision analysis. Founded in 1984, Palisade’s leading products include @RISK, the DecisionTools Suite and NeuralTools to name a few. These products provide decision makers with Monte Carlo simulation, optimisation, statistical analysis, decision analysis and other cutting edge techniques. The DecisionTools Suite is included within five of today’s top MBA textbooks, and is established as the risk and decision analysis tool of choice by the world’s leading business schools, and Fortune 500 companies. Palisade products are being used by over two thirds of today’s FTSE 100 companies.

About @RISK

Palisade’s @RISK is the world’s most widely used risk analysis tool. Users replace values in their spreadsheet with @RISK distributions to represent uncertainty and then simulate the model using powerful Monte Carlo simulation methods. @RISK recalculates the spreadsheet hundreds (or thousands) of times. The results: distributions of possible outcome values. This not only tells you what could happen, but how likely it is it will happen. Results are displayed graphically and through detailed statistical reports. Sensitivity and scenario analysis identify critical factors which drive risk.

@RISK Benefits Summary

• Factoring in all variables
• Show all possible outcomes
• Minimises uncertainty
• Identify opportunities and avoid pitfalls
• Apply Monte Carlo simulation to see all possible outcomes in your Excel models
• Works in Excel where you’re comfortable
• Uncover the risks in your research, business or activity
• Use historical data to describe uncertain factors
• Instantly examine different scenarios with stress analysis
• Identify key risk drivers with sensitivity analysis
• Extensive chart and reports communicate results
• Easy to use and navigate

Development is also well underway for major new releases of @RISK and the DecisionTools Suite, including PrecisionTree and TopRank. Driven entirely by customer feedback, these new 5.0 versions will raise the bar for risk and decision analysis software.

“We have worked hard to include as much user input as possible into these new releases,” said Sam McLafferty, President and CEO of Palisade. “We are confident the end products will meet business needs across many industry sectors.”

New Interface, New Features

Far more than a set of mere cosmetic changes, the upgrades acknowledge and meet numerous customer mandates, and take advantage of the improvements with Excel 2007. Chang¬es to @RISK, PrecisionTree, and TopRank include a more intuitive user interface that is completely integrated into the spreadsheet environ¬ment. Users no longer need to leave the spreadsheet model itself. All graphs and reports are directly linked to an Excel model. Further¬more, @RISK 5.0 adds new Six Sigma reporting and other features.

Excel 2007 and @RISK 5.0: No More Limits

@RISK 5.0 takes full advantage of the greatly increased capacity of Excel 2007’s worksheets. @RISK’s unlimited capacity for distribution functions in models, coupled with Excel 2007, means that users will be able to construct and simulate larger models than ever before without having to spread across different worksheets. @RISK has never limited users modelling capacity, and now with Excel’s new worksheets, users will enjoy nearly unlimited modeling freedom. Plus @RISK’s new simulation engine runs models faster than before.

Corporate-Wide Usage with Ease

@RISK 5.0 is designed to better meet the needs of corporate-wide usage. It features @RISK Libraries, enabling customers to share specific probability distributions, parameters, and simulation results across workgroups.