Qualitative Risk Analysis – Concept, Formula, Examples


Qualitative Risk Analysis Explained

Generally speaking, people are not great at evaluating risks. Given an opportunity, many of us will just be swayed and believe what we want to and selectively sieve out information that does not back up our case. Most people are not keen at looking at probability or likelihood in an all-inclusive way. 

Majority are most likely to forget about the risk that happened last year and we tend to focus on the most recent risk. This is the reason why you need to go through this overview of qualitative risk analysis. It offers an insight on the risks that should be prioritized to ensure we remove prejudices and provide accurate assessments. Qualitative risk analysis is also a concept which is used in Project Management Professional (PMP) exam. PMP is a product of Project Management Institute (PMI).

What is Qualitative Risk Analysis?

Qualitative Risk Analysis (RAM) is the measure of the probability of occurrence of risk and the impact through the use of relative scale. In other words, a qualitative risk analysis is a method used during a particular hazard to calculate the risk associated with it. Risk analysis is the process of laying out the probability of a particular hazard taking place and the events having consequences. Probability refers to the likeliness of a hazard to take place. In qualitative risk analysis, probability and consequences of events are evaluated verbally using a scale of a low, medium, high to point rating scale.

A risk assessment matrix is a tool that helps determine the risks needed to develop a risk response. The first step used to develop a RAM is by defining the rating scales for likeliness and impact. The rating scales are very dependent on specific details in a project, an example is when the probability of an occurrence for one project may indicate a risk of an event is unlikely to take place within the next deployments. To be able to prioritize the list of project risks, it is important to use RAM and rating scales to analyze the likeliness of an event taking place and its consequences depending on its Risk Level. A qualitative Risk Analysis can also help determine if any specific types of risks would require special or immediate attention. 

Qualitative Risk Analysis in Project Management

 In some organizations, there are project management offices whose responsibility is to oversee all projects by developing rating risk scales. The use of qualitative Risk Analysis is a subjective exercise that is practiced by the project manager and key team members who develop rating scales to determine the probability and impacts to risks. 

The major input to this process is the Project Management Plan (PMP) which mainly states how you should be analyzing and prioritizing risks based on the risk matrix and data in the project. Other inputs include the project documents, such as stakeholder register and risk register; enterprise environmental factors like commercial risk database and finally organizational process assets like info from past projects. The stakeholder register is significant because it gives you input as to who should be involved bearing the fact that assessing risks is largely subjective even when data-based categories are used for assessment. 

Qualitative Risk Analysis vs Quantitative Risk Analysis

A qualitative risk analysis ranks the recognized project risks using a pre-defined rating scale. The risks will be recorded based on their probability of taking place and the impact on project objectives should they happen. A qualitative risk analysis tends to be more subjective, hence it focuses on recognizing risks to measure both the probability of a precise risk of events happening during the project and the impact it will have on the general plan should it happen. The results are then recorded in a Risk Assessment Matrix in order to communicate outstanding hazards to stakeholders.

On the other hand, the quantitative risk analysis is a breakdown of the highest priority risks through which a numerical or quantitative rating is allocated to develop a probabilistic analysis of the plan or project. The quantitative risk analysis tends to be more objective, hence it uses verifiable numbers to examine the effects of risk in terms of cost assails, space creep, supply consumption, and schedule adjournments. The difference is mainly because quantitative risk analysis is a more scientific, data-intensive method.

Based on that explanation alone, it might sound like the quantitative method is more dependable of the two. But that is not the case because the qualitative risk analysis is effective for gauging likelihood and prioritizing risk in a way that is easy even for persons who find it hard to understand numerical. It also makes it easier to recognize areas or projects that require special attention to managing risks in real-time. They should both be conducted in a cycle to give the best possible understanding of risks and probable impact.

As we have already recognized, quantitative risk analysis relies on precise statistical data to yield actionable insights. So instead, the qualitative approach to risk management had a key advantage which was it was quicker and easier to implement. Unlike quantitative risk analysis, which relies on robust risk replicas, a high dimension of data, and in some cases, software experts, qualitative risk analysis can be performed at any time or stage of the project. 



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Qualitative Risk Analysis Techniques/Methods

There are a few techniques used when carrying out a qualitative risk analysis to determine the likelihood and impact of risk. Here are the most common techniques:

A risk assessment matrix (RAM): This is a technique used to determine which risks you need to develop a risk response for. The first step in developing a RAM is to define the rating scales for probability and impact.

Strength, Weakness, Opportunities, and Threats (SWOT) analysis: This is a tactical planning technique used to help an organization recognize strengths, weaknesses, opportunities, and threats linked to project planning.

Improvements, Challenges, Opportunities, and Risks (ICOR) analysis: This technique blends risk management practices with the SWOT analysis. A SWOT template with ICOR information puts in plain view the improvements expected, the challenges to be faced, opportunities to be realized elsewhere, and any risks involved with the event.

Delphi technique also known as Estimate Talk Estimate (ETE): This technique makes use of expert judgment to identify, analyze and evaluate risks on an individual and unidentified basis.

Decision Tree Analysis: This method is often used to help determine the best course of action wherever there is ambiguity in the consequence of possible events or projected plans.

Bow tie Analysis: This method helps to recognize and implement barriers to each of the roots and consequences disjointedly, effectively mitigating both the likelihood of risk occurrence and the following impacts, should the risk still happen.

These techniques are used based on based on the situation at hand and what you need to achieve. Sometimes, you just need to perform a SWOT analysis and with that you can make necessary plans to make a turn around.

Qualitative Risk Analysis Examples

There are several ways to accomplish a qualitative risk analysis. These techniques need varying grades of discipline and time. The following are examples of how to perform qualitative risk analysis:

  • Simple Qualitative Risk Assessment

This is mainly for small projects; the project managers may use the Keep It Super Simple (KISS) technique. This dimensional method involves rating risks as very low, low, medium, high, and very high. Example: if a risk event has a medium likelihood of taking place and a high impact, it would be considered a medium risk. 

  • Probability and Impact Assessment

This two-dimensional technique is used to rate the likelihood of a risk to occur and the impact. Rate probability and impact on a scale as 1 to 5 where 5 is the highest likelihood and impact. Then we multiply probability times the consequence to calculate our risk score. For example, we could rate risk as a probability of 4 and an impact of 5.

Probability x consequences = risk score. So, the risk score would be 4 x 5 = 20

Qualitative Risk Analysis Benefits and Limitations

A qualitative risk analysis environment will help give you the easiness to prioritize tasks swiftly and cost-efficiently. Other benefits would include: training would not be required for the project team as it uses simple assessment methods to know the frequency and the exact timing of each risk; it makes it easy to determine which risks an organization should focus on; it classifies risks according to their probability and impact.

Qualitative risk analysis has its limitations, which include: it creates no metrics rather the findings rest on the perception of the individual carrying out the study leading to bias; it evaluates each risk on a project but does not provide an overall project risk exposure nor the cost of the risk treatment; once risks fall into the same category there is no way to determine which risk should be dealt with first.

Conclusion

Qualitative risk analysis is all about the assessment of the probability of a risk to happen and the impact it would have on a project if it occurred. It generally classifies risks according to their probability and impact making it easy to determine which risks in an organization should be given priority or focus on. Project managers use the techniques to enable them to deliver their projects on time and within budget. 

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