risk assessment qualitative vs quantitative

What’s the Difference Between Qualitative and Quantitative Risk Analysis?

Safran Software Solutions

Effective   risk analysis   and management are fundamental to project success. Irrespective of the size or scale of your project, delivering it on time and within budget (not to mention preserving stakeholder confidence) is impossible if you don't take the time to identify, analyze, categorize, prioritize, and gauge the impact of external risks before work commences.

Two well-established methodologies dominate risk analysis: qualitative and quantitative. Yet, despite their universality, a surprising number of people within the project management bubble struggle to understand how best to deploy these methodologies.

In this article, we will define both approaches. Then, we explore why quantitative risk analysis, while mechanically more complex, is better suited to the demands of today's megaprojects.

Qualitative Risk Analysis is Subjective 

The most obvious difference between qualitative and quantitative risk analysis is their approach to the process.

Qualitative risk analysis tends to be more subjective. It focuses on identifying risks to measure both the likelihood of a specific risk event occurring during the project life cycle and the impact it will have on the overall schedule should it hit.

The goal is to determine severity. Results are then recorded in a   risk assessment matrix   (or any other form of an intuitive graphical report) in order to communicate outstanding hazards to stakeholders.

Quantitative Risk Analysis is Objective

Quantitative risk analysis uses verifiable data to analyze the effects of risk in terms of cost overruns, scope creep, resource consumption, and schedule delays. 

In layman’s terms, quantitative risk analysis assigns a numerical value to extant risks — risk A has a 40% chance of occurring, based on quantifiable data (fluctuations in resource costs, average activity completion time, logistics etc.) and a 15% chance of causing a delay of X number of days. It’s entirely dependent upon the quantity and accuracy of your data.

Mechanics of Quantitative Risk Analysis

In his   Journeymap to Project Risk Analysis , David Hulett outlines the mechanics of quantitative risk analysis.

Uncertainty and Identified Risks

Uncertainty and identified risks are two distinct factors that influence the variability of results for schedule and cost. These are the factors we're trying to quantify.

Uncertainty 

Uncertainty is background variability, distinct from variation caused by identifiable risks. It's caused by at least 3 common factors in projects:

• The inherent variability of the work not caused by identified risks
• Estimating error or error of prediction
• Bias in estimation or prediction

Uncertainty is always present at some level of impact, so its probability is 100%. Since its source is unknown, uncertainty can't be mitigated during the time of one project.

The typical expression of uncertainty is in multiplicative terms such as 90%, 105%, and 120%, where the most likely value is expressing a 5% correction for optimistic bias in the durations of the schedule analyzed.

Identified Risks

Identified risks are root causes of variability that can be measured and moderated or mitigated. There are two types of these risks:

• Project-specific risks
• Systemic risks

Quantifying an identified risk using Risk Drivers represents the   probability   that the risk will occur on this project and the   impact   the risk has on the duration of the activities it affects if it occurs.

For example: 40% probability means that the risk occurs in 2,000 of 5,000 iterations, chosen at random, during a Monte Carlo simulation. Impact percentage is a multiplicative factor chosen from a probability distribution (e.g., 90%, 100%, 120%). Due to proportionality, the multiplicative factor can be applied to long and short duration activities equally.

Which is Better for Risk Management?

The quantitative approach to risk analysis is better for managing the risk of modern projects. It provides a better means of understanding how risk and uncertainty affect project outcomes. But that doesn't mean that qualitative risk analysis is totally useless.

By ranking severity in broader terms, qualitative risk analysis is useful for gauging probability and prioritizing risk in a way that’s easy for non-project controls people to understand. This can help with stakeholder buy-in by offering a small sample of the wider risk landscape.

Speed & Simplicity vs. Accuracy & Complexity

Quantitative risk analysis relies on accurate statistical data to produce actionable insights — the kind that hasn' t been historically available. So instead, project managers used a more subjective, qualitative approach to risk management.

So while it might be quicker, the best way to get the most robust risk analysis is through quantitative means. It allows you to:

• Quantify outcomes
• Clear up uncertainty surrounding the results of initial qualitative analysis
• Set achievable cost and scheduling targets
• Assess the probability of successfully achieving these goals

High-risk industries in particular — mining, oil and gas, or construction — rely heavily on quantitative risk analysis. Indeed, it’s a legal requirement.

Fortunately, as technology has evolved, so too has the way we perform quantitative risk analysis. New tools are available to help improve the validity of your risk analysis and understa nd the steps needed to mitigate potential issues.

Use High-Quality Risk Analysis Platforms

Safran Risk provides best-in-class quantitative risk analysis, resulting in the best possible insight into the risks and their potential impact on the successful execution of your project or portfolio.

Safran Risk   gives you all the data yo u need to perform effective analysis from a single p latform. Safran Risk Manager is a powerful qualitative risk analysis platform that has earned its place in the project control community.

Safran Risk Manager   takes a holistic approach to risk management and  integrates seamlessly. 

About The Author

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What Is Risk Assessment?

Understanding risk assessment, risk assessments for investments, risk assessments for lending, risk assessments for business.

• Fundamental Analysis

Risk Assessment Definition, Methods, Qualitative Vs. Quantitative

Risk assessment is a general term used across many industries to determine the likelihood of loss on an asset, loan, or investment. Assessing risk is essential for determining how worthwhile a specific investment is and the best process(es) to mitigate risk. It presents the upside reward compared to the risk profile . Risk assessment is important in order to determine the rate of return an investor would need to earn to deem an investment worth the potential risk.

Key Takeaways

• Risk assessment is the process of analyzing potential events that may result in the loss of an asset, loan, or investment.
• Companies, governments, and investors conduct risk assessments before embarking on a new project, business, or investment.
• Quantitative risk analysis uses mathematical models and simulations to assign numerical values to risk.
• Qualitative risk analysis relies on a person's subjective judgment to build a theoretical model of risk for a given scenario.
• While a stock's past volatility does not guarantee future returns, in general, an investment with high volatility indicates a riskier investment.

Risk assessment enables corporations, governments, and investors to assess the probability that an adverse event might negatively impact a business, economy, project, or investment. Risk analysis provides different approaches investors can use to assess the risk of a potential investment opportunity. Two types of risk analysis an investor can apply when evaluating an investment are quantitative analysis and qualitative analysis.

Quantitative Analysis

A quantitative analysis of risk focuses on building risk models and simulations that enable the user to assign numerical values to risk. An example of quantitative risk analysis would be a Monte Carlo simulation . This method—which can be used in a variety of fields such as finance, engineering, and science—runs a number of variables through a mathematical model to discover the different possible outcomes.

Qualitative Analysis

A qualitative analysis of risk is an analytical method that does not rely on numerical or mathematical analysis. Instead, it uses a person's subjective judgment and experience to build a theoretical model of risk for a given scenario. A qualitative analysis of a company might include an assessment of the company's management, the relationship it has with its vendors, and the public's perception of the company.

Investors frequently use qualitative and quantitative analysis in conjunction with one another to provide a clearer picture of a company's potential as an investment.

Other Risk Assessment Methods

Another example of a formal risk assessment technique includes conditional value at risk (CVaR) , which portfolio managers use to reduce the likelihood of incurring large losses. Mortgage lenders use loan-to-value ratios to evaluate the risk of lending funds. Lenders also use credit analysis to determine the creditworthiness of the borrower.

Both institutional and individual investments have expected amounts of risk. This is especially true of non-guaranteed investments, such as stocks, bonds, mutual funds , and exchange-traded funds (ETFs) . 

Standard deviation is a measure applied to the annual rate of return of an investment to measure the investment's volatility . In most cases, an investment with high volatility indicates a riskier investment. When deciding between several stocks, investors will often compare the standard deviation of each stock before making an investment decision.

However, it's important to note that a stock's past volatility (or lack thereof) does not predict future returns. Investments that previously experienced low volatility can experience sharp fluctuations, particularly during rapidly changing market conditions.

Lenders for personal loans, lines of credit , and mortgages also conduct risk assessments, known as credit checks. For example, it is common that lenders will not approve borrowers who have credit scores below 600 because lower scores are indicative of poor credit practices. A lender's credit analysis of a borrower may consider other factors, such as available assets, collateral , income, or cash on hand.

Business risks are vast and vary across industries. Such risks include new competitors entering the market; employee theft; data breaches; product recalls; operational, strategic and financial risks; and natural disaster risks.

Every business should have a risk management process in place to assess its current risk levels and enforce procedures to mitigate the worst possible risks. An effective risk management strategy seeks to find a balance between protecting the company from potential risks without hindering growth. Investors prefer to invest in companies that have a history of good risk management.

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