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Our best-laid plans don't always work out, often for reasons beyond our control. The COVID-19 outbreak has been an unwelcome reminder of that fact. It has also underscored the importance of anticipating risk and preparing for the worst.
A qualitative risk analysis protects your plans by identifying threats and taking steps to mitigate them before they can do real harm. This article breaks down the qualitative risk analysis process so you can give your projects and plans the best chance of success.
Qualitative risk analysis is a formal process for evaluating the likelihood and potential impact of project risks. It provides a framework for ranking risks according to the level of threat they pose to inform project risk management strategies.
Qualitative risk analysis is an important tool for managing projects and keeping them on schedule. Incorporating risks assessment into business activities more widely also supports quality and efficiency across your enterprise.
Qualitative risk analysis describes risks in subjective, relative terms. Knowing that something poses a very high risk, or a higher risk than the next factor on your list, is good enough for qualitative analysis.
A quantitative risk analysis describes the same risks in hard numbers. It may require more rigorous measures such as proof of concept testing or statistical modeling.
For example, a qualitative risk analysis for a home building project might find that a looming lumber shortage is highly likely to delay completion and send the build over budget.
A quantitative analysis might find that the lumber shortage has a 40% chance of delaying the project by more than 30 days and driving it over budget by up to 6%.
Qualitative risk analysis is an important responsibility of project managers. It should be conducted during the earliest phase of project planning and then revisited as the project progresses and conditions change.
Consider the example above of the lumber shortage. In the early phase of the project, the shortage might be little more than a rumor. By the time construction begins, supplies might be drying up and prices shooting through the proverbial roof.
Updating risk parameters throughout the project could allow you to buy at the right time to beat the price hikes.
A qualitative risk analysis consists of the following five steps:
The first step in a qualitative risk analysis is identifying potential risks to your project. The goal of this step is to capture as many risks as possible. You're not prioritizing at this point, so even if a risk seems nominal or beyond your control, you should include it.
Follow these best practices for identifying risks:
Once you have an inclusive list of risks, it's time to move on to estimating their likelihood. For this part of the analysis, you're considering just the probability of the risk materializing, not the nature or scope of damages that might result.
Following are tips for estimating probability of risks:
The next step in your risk analysis is to measure the potential business impact from each risk you've identified. In this step, you're ignoring probability completely and treating every variable as a certainty. If the event happened, what would it do to your project?
As with probability, you're working with the best estimates you can make based on available data. Once again, involving your entire project team and other stakeholders will give you the best results.
Consider these best practices for estimating impact:
Now it's time to bring all of that analysis together in a qualitative risk analysis matrix. Using the scales you established, lay out probability on one axis and severity of impact on the other.
Multiply the rankings for probability and impact across each row and column to arrive at exposure scores for every cell in your matrix. The exposure score sums up the threat level posed by risks in each cell.
The following tips will help you create a project risk matrix:
Based on your risk matrix, your team can prioritize which exposures require further action or analysis and create an actionable risk response plan.
Like other phases of qualitative risk analysis, risk response planning is subjective. Your risk tolerance and the nature of the risks you've uncovered will determine which exposures require
further action or analysis and which can be ignored. For those requiring action, you will need to choose a risk mitigation strategy. Cost-benefit analysis can help you determine which strategies are worth pursuing.
The simplest and most common risk response is acceptance: You determine that a risk is an acceptable part of the work ahead with no mitigation action required. You can also choose to avoid a risk by eliminating an activity from your project.
You may decide to transfer risk through insurance or other financial protections, or you can share a risk through a partnership or contractual arrangement. Finally, you can mitigate risk through preventive measures such as quality controls.
For larger projects, you may want to create a written risk response plan including a risk register. A risk register is a formal summary of your analysis, including a full list of identified risks, exposure scores, and recommended actions.
Risk registers are sometimes required documentation for regulatory purposes. Tasks outlined in your response plan can be assigned to team members and tracked through your existing project management system.
Use the following practices to develop an effective risk response plan:
It's a long road from vision statement to victory lap, and a lot can happen in between. Qualitative risk analysis is a relatively fast and easy way to identify threats and prevent them from ruining your plans.
It's also highly adaptable for use with projects or decisions of any type, big or small. Whether you're considering opening a new location or weighing the benefits of various organizational structure types, taking time up front for risk analysis can bring clarity and security to the road ahead.
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