qualitative vs quantitative risk analysis

Risk management is key to a project’s success. Regardless of the size and complexity of the project, it helps complete the project with minimal obstruction. However, many organizations chose to ignore it, considering it an additional burden. 

In today’s article, we will discuss two project risk management processes and see how they help complete the project with the least hurdle and save money.

Risk management has two risk analysis processes:

  1. Qualitative Risk Analysis
  2. Quantitative Risk Analysis

Both processes serve the same purpose but employ different tools and techniques and differ in the level of precision and output.

Qualitative Risk Analysis

It is a subjective risk analysis technique, as the name would imply. The qualitative risk analysis process always preceded the quantitative risk analysis process.

Many businesses prefer to use the qualitative risk analysis method solely for smaller projects because the quantitative risk analysis approach is resource and time-intensive.

In qualitative risk analysis, risks are rated according to how serious and likely they are to have an impact on various stakeholders. This process aims to generate a list of prioritized risks to focus on.

In qualitative risk analysis, you will examine risks for severity and likelihood of occurrence during the course of the project. After that, you will find the risk ratings using the risk assessment matrix. The risk rating can be high, serious, medium and low.

You will order the risks on a risk assessment matrix as shown below.

Risk Assessment Matrix in Qualitative Risk Analysis

The risk assessment matrix is a great communication tool to communicate the risk information to stakeholders to decide on the next course of action.

Examples of Qualitative Risk Analysis

  • Initially, the absence of a team member is considered a low-rank risk, but when her absence starts causing trouble, the project managers increase the risk rating. This is an example of a change in perception of risk.
  • The project was running in full swing, and suddenly, the rain started. This was an identified risk, but due to rain, some areas became slippery and caused several near-misses. This risk was not identified, so the project manager noted this as a new risk. This is an example of new risk identification.

Tools & Techniques of Qualitative Risk Analysis Process

You can use the following tools and techniques in this process:

  • Expert judgment
  • Brainstorming, Meetings, Interviews
  • Risk assessment matrix
  • Risk categorization
  • And more.

Quantitative Risk Analysis

The quantitative risk analysis process is objective because it uses mathematical calculations.

Calculating risk using objective data is known as quantitative risk analysis.

You will use verifiable data to examine the impact of risk on your project objectives during this process such as schedule baseline, cost baseline, scope baseline, etc.

After performing a qualitative risk analysis, the quantitative risk analysis process is carried out. Organizations utilize this procedure for significant and complicated initiatives since it demands resources and time.

Examples of Quantitative Risk Analysis

  • Your organization gets a project to build a refinery. This is a large and multi-year project and is estimated to be completed in five years. For risk analysis of this project, you have started collecting data. It took two months for you to collect the data. Now you have started the quantitative risk analysis process. This is an example of large data on the risk and its impact.
  • You have completed qualitative risk analysis and see that many risks have a high rating score above seven (up to a rank scale of 10). Therefore, you want to perform a quantitative risk analysis to calculate the risk impact and get resources from the management. This is an example of qualitative risk analysis that needs to be validated.

Tools & Techniques of Quantitative Risk Analysis Process

  • All qualitative risk analysis techniques
  • Monte Carlo simulation
  • Influence diagram
  • Sensitivity analysis
  • Decision Tree analysis

Difference Between Qualitative Risk Analysis and Quantitative Risk Analysis

The following are the key differences between qualitative and quantitative risk analysis:

  • Qualitative risk analysis is a subjective analysis, while quantitative risk analysis is an objective analysis based on verified data.
  • Simple projects require only qualitative risk analysis, but larger projects require qualitative and quantitative risk analysis.
  • Qualitative risk analysis techniques are expert judgment, brainstorming, meeting, risk assessment matrix, etc. In contrast, quantitative risk analysis techniques are influence diagram, decision tree analysis, Monte Carlo simulation, expected monetary value, etc.
  • Qualitative risk analysis is used when a new risk is identified, or there is a change in the risk perception of stakeholders. Quantitative risk analysis is used when you need to validate qualitative risk analysis or when the stakes are high.

Which Process Should You Use For Your Project?

If you can, employ both methods. However, using a quantitative risk analysis process is not advantageous if the project is small and you are short on resources. For smaller projects, a qualitative risk analysis is sufficient.

Qualitative risk analysis enables you to rank the risk by using a risk assessment matrix that shows the risk rating. Using this, you may create your risk response plan and gain the support of stakeholders.

You will order the risks on a risk assessment matrix as shown below based on these ratings.

How to Perform Qualitative and Quantitative Risk Analysis

The steps to perform qualitative and quantitative risk analysis are as followers:

Step-I: Develop Risk Management Plan

The first step is to develop a risk management plan. Here you will define the risk definition, how to identify risks, probability impact criteria, and criteria for developing a risk response plan.

You will also define whether to use only the qualitative risk analysis or you will use quantitative risk analysis as well.

Step-II: Identify Risks

You will identify project risks in this step. Try to collect as many risks as possible.

You can begin collecting the risk by analyzing the process assets of your company, such as contract documents, project management documents, lessons learned, etc.

You can brainstorm with your team members first, and then approach other stakeholders. You can have one-on-one meetings with key stakeholders.

You will keep track of risks and any pertinent data on a risk register.

Step-III: Perform Qualitative Risk Analysis

In this step, you analyze the risks to prioritize them. You will determine their likelihood of happening and the consequences; then, using the risk assessment matrix, you will rate the risks. 

Now you can see if the risk has “high,” “medium,” or “low” ratings.

You will separate high-ranking risks from low-ranking risks. Low-ranking risks will be placed on a watch list, and high-level risks will be dealt with using risk plans.

Now you can move on to the risk quantitative risk analysis process if the plan says so. Otherwise, you will start developing the risk response plan.

Step-III: Perform Quantitative Risk Analysis

You have received high-ranking risks from the previous step.

Now you will quantitatively analyze the risk. You will determine their probability of occurring risk and the value of the impact. You will multiply these values to find the expected monetary value.

You can also use decision tree analysis and Monte Carlo simulation to reach choices.

Step-IV: Develop Risk Response

Now you will develop risk responses to identified and qualified risks. Risk response strategies for positive risks and negative risks are separate.

Do not forget to develop a risk response plan for positive risks.

After developing the risk response plans, you will assign the risk owner to monitor and implement the risk response plans.

Step-V: Control Risks

Here, the risk owners will monitor the risks, and once the risk occurs, they will implement the risk response plan and update the risk register.

However, if any unidentified risk occurs, you will develop and workaround and manage the risks.

Summary

You may qualify and quantify risks with the aid of qualitative and quantitative risk analysis, which will further assist you in creating a plan for handling risks. Employ the qualitative risk analysis approach for your risk management plan even if you decide not to use the quantitative risk analysis.