Qualitative and Quantitative Risk Management - Essay Example

Qualitative and quantitative risk management Both qualitative and quantitative risk management approaches have their advantages and disadvantages. Sometimes quantitative approaches might be appropriate for a business organization and vice-versa depending on the situation. However, small business organizations or those with limited resources will always find a qualitative approach to risk management more appropriate. This paper aims at discussing both qualitative and quantitative approaches to risk management and give a practical application of one of them. The advantages associated to quantitative approach to risk management is that the risks are always prioritized depending on the financial impact that they have while the assets are prioritizes in terms of their financial value. The results obtained from quantitative approach can be effective in the management return on security investment risks1. The results under this approach can always be expressed in certain forms such as monetary value or percentage. When this approach is applied the accuracy of result usually increases. However, the accuracy of the quantitative approach to risk management is questionable due to the fact that the values used are usually dependent on the participants’ opinions. Due to the complexity of the calculations involved, this approach can be said to be time consuming. The situation is even made worse because of the need to reach consensus and credible results. Since the results under this approach are always presented in monetary jargon it is always hard for people who are not conversant with monetary issues to understand them. The need for expertise makes it even more complex and costly. Through a quantitative approach to risk management, risk ranking are always visible and easily understandable. This approach is also time-saving due to the ease of reaching consensus.It is also an easier approach because it does not necessitate the quantification of threat frequency. The qualitative approach to risk management does not make it necessary for risk managers to determine asserts’ financial value. This approach is also common because it makes it easier to involve people with no expertise in the field. However, the qualitative approach to risk management does not sufficiently differentiate between important risks. Due to lack of basis for a cost-benefit analysis this approach makes it hard to justify investment in control implementation2. This approach also over relies on the quality of the risk management team involved for quality results. The qualitative approach to risk management has several techniques that can either be used individually or dependently. The first types of techniques are always referred to as the data gathering & representation techniques. Data gathering & representation techniques include interviews and expert judgment. Interviews are always used with the aim of quantifying the impact and probability of risks on the project. The information sought will depend on the needed distribution parameters. Triangular distributions are always used in cases where they are in need for information on pessimistic, optimistic, and most likely scenarios. The normal distribution is used in cases where the mean and standard deviation are required. Documenting the rationale of risk range is an essential component of the risk interview because it enables risk managers to determine the reliability of the data. Expert judgment is always important for validation of data. Expert judgment can always be sourced either internally or externally. The next type of techniques is the quantitative risk analysis & modeling techniques. Quantitative risk analysis & decision tree analysis, modeling techniques include: sensitivity analysis; and simulation analysis and expected monetary value. Sensitivity analysis is always carried out with the aim of determining the risks with the highest number of potential impacts to the project. It does this through examining the extent to which variation of project elements can influence the objective of a project imagining that all the other uncertain elements are at their baseline values3. The expected monitory value analysis looks at the probability of every possible outcome, then determines the average value of the outcomes. The decision tree analysis refers to a diagram used to describe a decision that is under consideration and the implication of opting for a given option over the others. It incorporates the risks’ probability and the reward or cost of all the logical paths of events and decisions. Solving the decision tree can yield the expected value of every decision. The decision maker can, therefore, settle for the decision which is likely to yield the highest expected value. Simulation is a technique whereby uncertainties’ that are specified at a detailed level are translated into their potential impact on the objectives of the project. This project mostly uses the Monte Carlo technique. The simulation uses traditional project WBS for cost risk analysis. The process of qualitative risk analysis usually begins with risk identification. Without identifying the risk it would be challenging to manage the risk. Risk identification involves identifying anything that can go wrong during the process of project execution. Since risk identification is about quality, the more the number of individuals involved the better the outcome. The process then goes to the impact analysis stage where the potential impacts of the risks that have been identified are analyzed. The impacts can be categorized as either low, medium, high, or extreme. The process should also involve the estimation of the probability of the risk occurring. The probability of a risk occurring is usually categorized as either unlikely, possible, likely, or almost certain. After the impact analysis the process should go to the risk treatment stage. At this stage the risk managers should look at the possible solutions to the risks. The five options of treatment of risks under this model are: accept; mitigate; transfer; exploit; or avoid. When a risk has minimal impact to a project and the cost of mitigation is high it is always advisable to accept the risk while monitoring it. Risks can also be transferred through insurance or offering contracts to external contractors to take care of the work involving the risk. Mitigation involves doing something to reduce the effect of the risk. When the risk has a very big impact to the project, cannot be transferred, and its mitigation is costly it is always advisable to avoid the risk by revising the scope of the project. Exploitation takes place in cases where a risk has positive outcomes. Qualitative approach to risk management usually involves tools such as: mind map; lensing surveys; interviews; risk management log; and issues log4. Sample project In an offshore construction projects in the oil and gas industry risk analysis will be something of high importance. One of the methods that can be applicable in such a case is risk management log. This method will first start by identifying the potential general risks. Risk identification The risks involved in this case include: 1. Cost of construction 2. Gas or oil leakages 3. Explosions 4. Pipeline related fires 5. Theft 6. Physical damage to pipes 7. Air and water pollution Risk impact analysis These are general risks that are not associated to any date. The risks that are involved in offshore construction projects in the oil and gas industry can be cost related. Offshore construction has experienced a considerable rise in cost in the past few years. The rise in the cost of such endeavors can be advocated to the rise in fuel prices and cost of labor. As a result of advancement in technology, there has been a general increase in the complexities involved in the offshore construction projects in the oil and gas industry. This has also led to the increase in the general cost of such projects. The other risks involved include factors such as failure to find commercial quantities of gas or dry holes. Other risks involved in this process are the risks of fire in case leaked gases are accidentally ignited. This can lead to loss of lives and even damage to the pipeline system. The release of gases can also lead to explosions. Such explosions have been observed to be destructive and of negative effect to both the companies involved and the environment. Oil leakage is also another risk that such involvements face. Oil leakage leads to losses while at the same time contributes to pollution of the environment, especially if the oil ends up in water masses that are used by human beings and other animals. Response strategy With a closer look at the above discussed risks it is clearly evident that there are some actions that need to be taken so that the risks will not make the whole project unprofitable. Due to the fact that the cost of construction is inevitable, it would be advisable for the firm to accept it while at the same time monitoring it to make sure that they do not spend in a manner that they would not be able to recover in case any of the other risks materialize. However, the likeliness of there being investments with no returns in the process can be rated as a possible. Gas and oil leakage are thing that are likely to take place in the case of as offshore construction projects in the oil and gas industry. However, the probability can be rated as a possible. Due to the probability rating, the possibility of curbing, and the cost at risk, it would be advisable to mitigate this risk through making sure that the pipes uses are of strong and non-corrosive materials so that the possibility of leakage can be reduced. This will also cater oil fires and explosion. Theft of construction material is a risk that can be categorized as possible. However, due to the high cost involved in curbing the possibility of this risk occurring, it is advisable to just accept it. The same would happen to risks involving physical damages during and after the construction process. Air and water pollution is always associated to leakages. This implies that the company will have settled this risk if they opt to use strong and non-corrosive material. Therefore, this risk can be categorized as low. Bibliography Dobson, Ian, and Jim Hietala. 2011. Risk management: the Open Group guide. Zaltbommel: Van Haren Pub. Kendrick, Tom. 2003. Identifying and managing project risk: essential tools for failure-proofing your project. New York: AMACOM. McNeil, Alexander J., Rudiger Frey, and Paul Embrechts. 2010. Quantitative Risk Management Concepts, Techniques, and Tools. Princeton: Princeton University Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=617527. Ward, Stephen, and C. B. Chapman. 2011. Project risk management. Hoboken, N.J.: Wiley. Read More