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You can’t have risk management without performing a risk analysis first. What type of methodology should you use to conduct your assessment? Comparing qualitative vs. quantitative risk analysis methods can help you determine which is the right fit for different situations.
Risk assessments play a huge role in the decision-making process for healthcare organizations, financial businesses, manufacturers, SaaS developers, and other enterprises. Each type of risk assessment has pros and cons, such as the flexibility and lower cost of qualitative analysis versus the precision and data-backed reliability of quantitative analysis.
A qualitative risk analysis relies on your team’s experience, opinions, and professional judgment. The findings are subjective because similar experts may arrive at different conclusions based on their experiences.
To be as accurate as possible, businesses often use a risk matrix or map for qualitative risk assessments. This grid — usually 5×5 — rates the likelihood of events on one axis and their severity on the other. By assigning ratings from very low to very high, it’s possible to identify the most likely and most dangerous risks.
A quantitative risk analysis is the exact opposite of a qualitative assessment. Instead of using expert opinions, it relies on solid historical data, verifiable statistics, and precise figures. For example, streaming businesses can look at sales data, customer lifetime value statistics, ad revenue, and subscriber habits before making decisions.
Remember when Netflix rolled the dice by cracking down on password sharing? That data-backed decision, a great example of quantitative risk analysis, ended up boosting revenue by 8% and adding 9 million more subscribers.
When comparing qualitative risk analysis versus quantitative risk analysis, don’t make the mistake of thinking it’s an either/or decision. In reality, many enterprises use both types of risk assessments to create a comprehensive view of organizational risk. These frameworks shine in different areas, but they both work well.
Qualitative and quantitative risk analysis techniques are vital for cybersecurity. For example, qualitative analysis can help identify potential threats based on employee behavior, while quantitative analysis can evaluate the financial impact of data breaches using historical data. Whether your organization uses a governance, risk, and compliance framework or integrated risk management, both approaches require in-depth assessments and ongoing risk management.
Qualitative risk assessments are ideal for risks that are difficult to quantify. More often than not, these risks involve the human element. Some examples include:
Just because qualitative risk assessments are subjective, that doesn’t make them untrustworthy. Expertise is invaluable in many contexts, from network design to construction materials.
A qualitative risk analysis:
Most of the time, qualitative risk assessments are the first choice for enterprises.
There’s no need to jump blindly into a new situation or learn by trial and error. Use qualitative risk analysis.
Some situations have so many variables that it would take a supercomputer to parse them all. Instead of getting mired down in theory, your team can make a judgment call that safeguards your interests.
Don’t have historical data? That’s not a problem with this type of risk analysis. Even engineers prefer qualitative assessments when it’s impossible to gather enough trustworthy data.
Instead of looking at the fluid nature of qualitative analysis as a weakness, treat it as a strength. Be adaptable. Assign scores to each risk based on urgency and severity. Tackle the most urgent issues first, but keep monitoring low-priority issues. As more time passes, you may end up upgrading these low-risk threats or dismissing them.
Quantitative risk assessments are the gold standard for decision-making. They rest on solid data and accurate numerical ratings. For this reason, enterprises usually turn to quantitative analysis when they need to make long-term and large-scale plans involving projects, financing, budgets, and investments.
A quantitative approach is fantastic for improving your organizational processes. It can help you set realistic targets for productivity gains, efficiency, overhead reductions, and return on investment.
Often, the conclusions are unambiguous. You can see the direct relationship between costs, benefits, risks, and rewards. This means less arguing and better decisions.
Any business that involves carefully balancing costs, working capital, revenue, and risks can benefit from a quantitative model:
The bottom line is that executives and shareholders prefer specific figures, not opinions — even if those opinions come from experienced managers.
Due to the increased time and expense associated with statistical analysis, it’s smart to save quantitative risk analyses for critical decisions:
Many organizations use a decision tree to work through complex multi-step processes effectively.
When game studios need to gauge player reception to a video game launch, they have to use a qualitative risk analysis. There are just too many variables for a numerical approach. Studio leaders have to make measured decisions for proceeding or pulling the plug. Some low-budget projects shock everyone and go viral.
On the other hand, when national brands have to decide whether to open a new location or expand manufacturing facilities, they often spend months gathering data points. A quantitative risk assessment helps them calculate precise figures.
Qualitative risk assessments are fast, flexible, and relatively inexpensive, but they’re also subjective. Quantitative assessments are detailed, precise, and definitive, but they require a lot of time and money. Both are important for data security and compliance in today’s high-speed, high-risk business environment.
Whether you choose qualitative risk analysis or quantitative risk analysis, you can make more accurate decisions with cutting-edge analytics software. Gather logs, reports, and data points across your workflow automatically. See how Compyl drives risk frameworks right away.
