How Do You Capture Operational Risk in Your Forecasts?

Drug development is a risky business. Development products carry technical and regulatory risks (PTRS), operational risks (delays and cost increases), and market risks.

Over the lifespan of a developing product, thousands of things can go wrong and cause delays or cost increases. Operational risks can be minor nuisances, but they can also be game-changing events that call for entirely new product strategies. Yet, operational risk is rarely included in product and portfolio forecasts. There are several reasons for this. One is that forecasting tools generally do not properly manage uncertainty. Timelines and product costs are usually expressed as single dates and fixed yearly values. Another reason is that if uncertainty is included in the input, there will be uncertainty in the output, which is tricky for organizations to rely on. An uncertainty-adjusted forecast provides costs, revenues, and product value ranges instead of fixed value certainty. This eliminates a single launch date, as there is now a launch window.

Portfolio forecasting should always include operational risk. Without it, the forecasts show only desired outcomes, not probable outcomes. It’s essential to understand the difference to understand the risk associated with a product or portfolio.

Here are two ways to capture risk that can be used together with the single value timelines and costs:

1. Use the risk log for each product. The risk log should be quantified, i.e., each risk should have a probability and an impact (either delay or cost increase). When generating a forecast that considers risks, the forecast tool uses Monte-Carlo simulation to include the risks and increase timelines and costs accordingly.
   

2. Analyzing past performance makes it possible to define generic risks that apply to groups of products. Then, generic risks can be applied at the portfolio level and be used to generate a realistic forecast.

By including operational risks in the forecasts, companies show product and portfolio stakeholders how to consider the risks involved. This leads to better business decisions.