From Plans to Reality: How to Model Operational Risks for Smarter Forecasting

As we start the new year, I wanted to revisit a key point from our recent presentation in Las Vegas: the importance of capturing operational risks in forecasting models.

Operational development risks—potential delays and cost increases—add significant uncertainty to our project investments. These risks can lead to delayed product launches and deteriorated business case value, impacting the overall portfolio.

Why does this matter? A delayed launch not only reduces the period of patent-protected sales but often lowers peak sales as well—both of which substantially impact the value of our investment.

There are two effective ways to represent delay risks in business case evaluations and forecasting models:

1️⃣ Using Ranges for Timelines and Costs

Instead of relying on fixed timelines (e.g., "Phase 2 will take 15 months"), we can replace these assumptions with distributions. For example, we might model Phase 2 to take between 15 and 18 months, incorporating a range of realistic outcomes into the forecast. The example in the accompanying image shows how a log-normal distribution can effectively capture the variability of drug

development delays.

2️⃣ Plan Data + Risk Log

Alternatively, we can use fixed timelines from project plans and supplement them with a risk log maintained by the project manager. A risk log lists potential operational risks, along with their probability and impact. This approach allows us to toggle operational risks on and off in the model, enabling analysis of whether our agreed timelines and plans are likely to hold. This added flexibility is invaluable when discussing strategy and throughput, as it highlights areas where risk mitigation might be necessary.

By incorporating operational risks into our forecasting models, we can make better-informed decisions, reduce surprises, and ensure our strategies align with real-world uncertainties.

How do you approach operational risk in your project and portfolio strategy work? Let’s start the conversation below!