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Qualitative and Quantitative Risk Analysis

written by: Amanda Dcosta • edited by: Marlene Gundlach • updated: 5/19/2011

Risk Analysis is often conducted in two different ways – Qualitative and Quantitative. For a proper risk assessment of any project plan or project management system, it is vital to understand the basic defining difference between them.

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    Risk analysis is an essential managerial perception that is needed to identify existing and potential threats, vulnerabilities, and other workplace hazards that can compromise the performance of any organizational set-up and overall performance. However, it is essential that such risk analysis is compatible with the requirements and functional configuration of the system where it is being used.

    For example: When project risk analysis is conducted, its approach, extent, and scope should be molded to be in harmony with the project size, availability of data for analysis, availability of time, and expenditure limitations of the project team.

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    Qualitative or Quantitative?

    Risk analysis is conducted in two significant ways — qualitative and quantitative risk analysis. These two type of risk analysis can be conducted simultaneously or in a chosen order, and even within a defined period gap. Sometimes, business managers and project leaders are unable to differentiate between these two approaches. It is vital to understand the basic defining difference between them.

    Understanding Qualitative Risk Analysis

    The objective of conducting a qualitative risk analysis is to acquire safety against recognized risks and to increase the alertness of management, team members, and all personnel who are vulnerable to them. This method of risk analysis is designed to identify issues that are looked upon as project management impediments, but have the potential to become definite risk factors.

    A detailed qualitative analysis will also delve into the resources which are more susceptible to such risks. The purpose is to identify rectifying measures that can incorporated to restrict or remove the causes that have given rise to such risks and to ensure that these safety measures become a part of risk-related analytical protocol for future reference.

    Understanding Quantitative Risk Analysis

    Quantitative risk analysis is more focused on the implementation of safety measures that have been established, in order to protect against every defined risk. By using a quantitative approach, an organization is able to create a very precise analytical interpretation that can clearly represent which risk-resolving measures have been most well-suited to various project needs. This makes the quantitative approach favored by many management teams since risk assessments can be clearly represented in the empirical forms like percentages or probability charts, since it emphasizes using tools such as metrics.

    Computerized Risk Management Risk analysis methodology is increasingly becoming computerized. This means using either the qualitative or quantitative approach or a combination of both in the form of various software applications. This method also uses some analytical tools.

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    Risk Analysis Tools

    • Preparing Resource Scope Statements: Defines all project inputs that need to be analyzed as a part of the risk analysis procedure and this includes defining expected performance levels.
    • Pricing of Assets: The project’s resources database can be broken down into individual units, including tangible components that have been clearly-priced and non-tangible units that deliver certain cost-savings or other recognized benefits.
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    Advantages of Qualitative Risk Analysis Software

    Project managers as decision-makers are susceptible to biased perception — this means that due to psychological factors such as individual cognition or being under-motivated, personal perception may be compromised and potential risk factors may be overlooked. This is often called Disadvantaged or Selective Perception.

    Example: Negative cost estimates for a project could be overlooked when a project manager’s personal preference for a certain project influences his decision. He could also over or under-estimate other critical parameters, which could be detrimental to the organization’s requirements.

    Solution: When present, perceived, and supposed risks can be clearly-defined and represented in the form of a database, such issues are solved, i.e. perceptional risks are negated.

    • A decision-maker is bound to make decisions based upon the available data and not personal viewpoints.
    • The software has several tools like gradings regarding every aspect of an impending decision including its impact and adherence to team requirements.
    • Decisions are no longer affected merely due to the volume of detailed information available and this helps to remove representative heuristics (evaluating importance of an entity based upon the extent of related information available).
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    Advantages of Quantitative Risk Analysis Software

    Quantitative analysis cannot function without the availability of detailed data regarding every historical/contemporary risk and measures taken to resolve them. Such data needs to be updated constantly, based upon team inputs and should serve as a handy tool to create risk-solving solutions.

    Solution: Prepare a detailed analysis for every project resource and systematically representing it in the risk management software database.

    • Software-centric quantitative analysis can import data from qualitative charts and use it to create solution for existing risks.
    • Many quantitative risk analysis software applications offer simulations to help the team members and management understand the practical approach to mitigating risks.
    • Event Chain Method — this theory is often used to structure analytical quantitative risk softwares. It suggests that each project is affected by many external factors which are continuously recorded in the software. These events stimulate a set of reactions within the team, which catalyzes a set of events. The criticality of these events helps to identify which external factors are detrimental to the project performance and can be labeled as Risks.

    A well-conducted risk analysis should be able to weed-out existing discrepancies and ensure that reasons for such inconsistencies are highlighted and resolved. The ideal approach is to create an integration of qualitative and quantitative risk management software tools to create a more comprehensive analytical approach. This can be understood as a Hybrid Risk Analysis Approach.