Business is an environment of chance and reward. Projects and opportunities arise, and the decisions you make could result in a profitable experience or loss. 70% of all projects undertaken are over the pre-defined budget, with 85% of them being behind schedule. It is of prime importance to make educated decisions that maximize benefits while minimizing the possibility of negative impact or risk. Risk analysis is an essential practice that organizations should implement.
92% of CEOs unanimously agree that understanding the role that risk plays in project selection or within the organization is detrimental to a business’s success in the long term. The concept of risk analysis ensures a company is adequately prepared to take on a project. This is handled by certified executives explicitly employed for the same. While it is nearly impossible to predict the future, it is critical to understand the components that contribute to positive decision-making skills.
What Is Risk Analysis?
Risk analysis works as a key practice within management to minimize, if not eradicate, factors that could negatively impact an organization. Could being the key term, the element of surprise is not welcome in business environments. Risk analysis or management works to foresee uncertainties and ensure these are addressed before they arise or that methods to solve the same are in place.
Using Risk Analysis methods are helpful when an organization is trying to:
- Plan multiple projects down the pipeline to identify and mitigate as many prospective problems as possible
- Decide whether or not to move along with the project to completion
- Improve the management and potential safety hazards within a professional environment
- Create a “Plan B” in unforeseen unavoidable circumstances, including potential equipment malfunction, theft, staff unavailability, or natural calamities
- Implement change within the organization, such as adjusting processes to compete against new market entrants or legal policy changes
To conduct a risk analysis, companies have to identify possible threats to the organization and stakeholders. These risks include human, operational, reputational, procedural, and business processes wise, financial, technical, natural, political, and even structural threats. Basic tools to assess these situations in-depth include conducting a SWOT analysis to understand perception, Failure Mode, and Effects analysis to discover existing threats and Scenario Analysis, which uncover future threats.
Running through lists of these threats helps companies understand relevance and magnitude. It is just as critical to understanding how the organization works from a granular level. When all processes, chains of communication, and internal structures are identified, it becomes simpler to identify where possible breakdowns could occur. Considering the perspectives of different stakeholders within the organization can also help fully understand the “risks.” Team members conducting projects would be able to offer more detailed insight on possible faults that could translate downwards than a team leader would.
Once risks are identified, they become quantifiable through tools such as the Risk Impact/Probability Chart or formulas, including “Risk Value = Probability of Event x Cost of Event.” This stage happens slowly as it involves the most technical aspects of the risk deduction process, allowing for accuracy within decision making. Closing this assessment stage is a problem-solving mechanism. This includes avoiding the risk, sharing the risk, accepting the risk, and controlling the risk. Each decision offers beneficial qualities to the business while helping them understand where problems are developing and employing the path of least resistance.
Qualitative vs. Quantitative Risk Analysis
Qualitative and Quantitative risk analysis methods function to assess the same criteria at different capacities. Fundamentally the difference lies between subjective and objective understandings.
Qualitative risk analysis functions on subjective understanding. The concept focuses on understanding the probability of an event happening over the project life cycle and the magnitude of its impact. The main objective of qualitative analysis is to measure the intensity of what could occur. With that information, graphical representations are known as a “Risk Assessment Matrix” can be put together to visually depict possible deterrents to all stakeholders for better decision-making skills. The qualitative assessment focuses on organizing potential hazards into categories and understanding whether these events are based on the source or based on effect.
Quantitative risk analysis works on objective understanding. Utilizing data that can be verified and analyzed, the risks involved in exceeding budgets, consumption of resources, delays in schedules, and scope creep can be almost accurately identified. While the end result is the same as the deduction on qualitative analysis, this method is more science-centric and helps place assessment in a chain of logic.
Qualitative assessment primarily occurs at the risk level. It is a case-based or subjective understanding of the likelihood and magnitude of events. This kind of evaluation usually is quicker and easier to perform and requires no special software or tools. On the other hand, quantitative assessments occur on a project level. It offers the most likely estimates of measurable outcomes, including prospective timelines or costing. While this method is time-consuming and would require a more specialized set of tools, it offers a solid framework for a plan of action.
While both qualitative and quantitative risk analysis schemes work well individually, they work best when employed together. This offers companies a 360 degree perspective on tackling risks both in terms of numbers and perception. Utilizing risk analysis methods help companies engage in meaningful and sustainable business activities. In business environments, minimal risk environments are more important than unstable rewards.
I hope you have enjoyed reading this post on “Qualitative vs. Quantitative risk analysis”. If you want to upskill in the field of IT Risk Management, do check out the CRISC Certification training offered by Invensis Learning. This program is in line with the ISACA’s CRISC (Certified In & Information Systems Control) certification exam.