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Qualitative Risk Analysis

Updated on January 5, 2024
Article byNanditha Saravanakumar
Edited byShreeya Jain
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Qualitative Risk Analysis?

Qualitative risk analysis in project management involves assessing risk factors in operations through non-numerical and non-quantifiable information. The idea is to determine an activity to produce quick results with minimum resource utilization and research investment. Such an analysis is done to receive primary observations.

Qualitative Risk Analysis

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Qualitative risk analysis involves evaluating the likelihood and impact of these risks and developing appropriate mitigation strategies. Industries such as pharmaceuticals, manufacturing, and software development commonly use qualitative risk analysis to ensure they identify and manage potential risks effectively. Moreover, it helps identify potential risks, enhance decision-making, and prioritize risk mitigation.

Key Takeaways

  • Qualitative risk analysis refers to identifying, assessing, and evaluating the risk factors in a particular project or activity using non-numerical information and determining the exposure and intensity.
  • It is not concerned with numbers, ratios, probabilities, modeling, etc. Instead, it seeks to understand the intangibility, emotion-motivated decision-making, expert opinions, wisdom of the crowd, diagrammatic analysis, cause-effect relationships, etc.
  • The opposite of this is the quantitative method which entirely depends on numbers. Quantitative and qualitative risk analyses are essential for organizations that want a broad view.

Qualitative Risk Analysis Explained

The qualitative risk analysis approach assesses risks based on subjective judgments and qualitative information. Therefore, it focuses on understanding risks’ nature, characteristics, and potential impact without assigning numerical values.

Furthermore, businesses use quantitative and qualitative risk analysis as two approaches to assess and analyze risks differently. Thus, qualitative analysis is subjective. It deals with intangible insights and inputs beyond numbers. Moreover, the quantitative analysis evaluates the risk in terms of numerical data. Both these are important if the organization is looking for a broad view.

Therefore, this analysis includes survey methods, diagrammatical research, verbal inputs and opinions, comparative study, and research online content to understand the likelihood of an outcome. Often, it is as simple as labeling the inherent risk as low, medium, and high. 

Thus, by combining qualitative and quantitative approaches, organizations can make informed decisions, develop robust risk management strategies, and enhance the overall quality of their project planning.

Therefore, all one has to do is choose an analysis method. Then, based on the method’s requirements, they can collect the necessary information, organize it, and conduct the study. For example, communicating with experts, identifying weaknesses, studying the market, etc. Once the team completes this process, management will gain a basic understanding of the risk. Through this, they can understand the types of risk, the exposure from each, and their intensity. 

Besides performing a qualitative risk analysis, specific steps are followed:

  • Identify risks
  • Assess risk characteristics
  • Rank or categorize risks
  • Document Findings
  • Communicate and Engage

Additionally, industries often utilize this type of analysis when they lack quantitative data or precise measurements or when they require an initial risk assessment.

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Methods

Let’s study some ways to conduct a qualitative risk assessment.

#1 – SWOT Analysis

A simple understanding of an organization’s strengths, weaknesses, opportunities, and threats is among the best risk gauges. Since most companies regularly conduct a SWOT analysis, it will not take up any extra time and effort from the management. Hence, due emphasis should be given to the identified weaknesses and threats. Moreover, the administration should also ensure that these risks should be alleviated to the maximum in the following analysis.

#2 – Bow-Tie Analysis

This is a standard method used in risk management. It is a pictorial representation showing the flow of processes from causes to consequences. Therefore, it enables the identification of gaps and areas where the chances of risk are high. A detailed analysis will also include the triggers, barriers, controls, etc. Thus, after assessing and evaluating the risk, it will be easy to eliminate them.

#3 – Decision-Tree Method

A decision-tree diagram is often used in many types of analysis. It identifies all the possible outcomes of an activity. Then, these outcomes are given a numerical value associated with the intensity of risk. Depending on this, the management can reduce the risk exposure.

#4 – Delphi Method

The riskiest outcomes are listed and evaluated in this method. Opinions and comments from experts and professionals are collected. Besides, the risk intensity is reviewed based on these responses. The result is an outcome of the wisdom of the crowd. But here, the group is more related to the company’s field and can therefore give informed opinions.

Examples

Refer to these examples of qualitative analysis.

Example #1

Suppose, the government of the US invited tenders from a few construction companies to lay a bridge connecting an emerging industrial town to the nearest airport. The bridge would decrease the commute time by four hours. However, the tender mentioned that the payment would only be made after the completion.

Further, the tender demanded a response within two days. Given the limited time, the company conducted quick qualitative research by communicating with various concerned departments. The management identified it as a high-risk project and rejected the tender invitation.

Example #2

When the Russia-Ukraine war struck, large financial firms in the United States made losses owing to their inability to manage geopolitical risks. This type of risk requires a more subjective analysis rather than numbers. Banks usually measure their risk using numerical data.

But that did not save them from losses during the onset of the war. For instance, Goldman Sachs lost about $300 million, while Citigroup estimated a loss of $3 billion. As a result, experts have warned that multinational banks should increase their expertise in geopolitical risk management.

Advantages And Disadvantages

Here is a comparative study detailing the positives and negatives of qualitative analysis.

Advantages

  • Time and effort – Qualitative risk assessment methods are widely used for their quick results. If an organization is supposed to make an urgent decision, it can conduct a qualitative analysis within a few hours. Later, they can conduct detailed quantitative research by investing more time and effort.
  • Intangibility – Organizations deal with people – investors, employees, customers, etc. When it comes to humans, it is often required to go beyond numbers and assess using emotions. Hence, this is where quantitative risk analysis falls short. There have been many times when numbers have failed to understand the crowd.
  • Simplicity – The results produced through qualitative studies are simple to measure and understand. Sometimes, when these results need to be communicated to the public, it is best to keep them simple.
  • Less cost – Qualitative analysis method is very cheap. Often, it doesn’t require any financial investment. It is possible to gain basic information from the internet at zero cost. Or it might involve only the organizational stakeholders, again reducing the cost of research.

Disadvantages

  • Comprehensiveness – The biggest issue with qualitative research is that it doesn’t present the complete picture. Quantitative analysis is also necessary for it to be helpful. Thus, the success rate of a standalone qualitative study is questionable.
  • Reliability – Certain assessment methods, such as the Delphi analysis or the survey method, might be prone to biases. People might perceive risks differently, leading to reduced reliability.
  • Vagueness – The high subjectivity might make the information too difficult to discern. Therefore, this would lead to the inability to accurately form an opinion and evaluate the risk.

Frequently Asked Questions (FAQs)

1. When to use qualitative risk analysis?

Qualitative risk assessment is the most appropriate when an organization is required to evaluate the project risk but only has a little time. In such urgent situations, they can conduct a preliminary qualitative study and detailed quantitative research later. It is also ideal if a firm is short of funds.

2. What are the steps involved in qualitative risk analysis?

The steps in qualitative risk analysis typically include:
a. Identifying and documenting potential risks.
b. Assessing the impact and likelihood of each risk qualitatively.
c. Prioritizing risks based on their potential impact.
d. Developing risk mitigation strategies.
e. Implementing and monitoring the effectiveness of risk mitigation actions.

3. Can qualitative risk analysis be used alone?

Qualitative risk analysis is often used as an initial assessment to identify and prioritize risks. It can provide valuable insights and guide decision-making. However, quantitative risk analysis usually uses numerical data and statistical methods for more accurate and precise risk assessment.

This has been a guide to what is Qualitative Risk Analysis. Here, we explain the topic in detail with its examples, methods, advantages, and disadvantages. You can learn more about it from the following articles –

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