Understanding risk is critical in a wide array of fields, from business and finance to healthcare and environmental studies. Risk evaluation or assessment or scoring is one of the important steps in the Enterprise Risk Management (ERM) process. IRM’s Level 1, Level 2, and Level 3 qualifications in ERM cover detailed study of the risk assessment and risk scoring methodology. While quantitative risks can often be measured and managed with numbers, qualitative risks require a different approach, relying heavily on human judgement and intuition. This blog explores the strategies and best practices for assigning scores to qualitative risks.
Understanding Qualitative Risks: Qualitative risks refer to risks that cannot be easily measured or quantified but are nonetheless important to consider. Examples may include damage to brand reputation, loss of key personnel, or regulatory changes. While these risks don’t lend themselves to direct numerical measurement, businesses can assign scores to them using qualitative risk analysis methods.
Assigning Scores: The Basics to qualitative risks involves ranking them based on their potential impact and the likelihood of occurrence. These rankings are often based on a subjective scale (e.g., from 1 to 5 or from “very low” to “very high”). The key here is consistency. The same scales and parameters should be used across all risk assessments to ensure comparability and maintain the integrity of the scoring system.
Understanding Impact and Probability:
- Impact: This refers to the potential effect a risk could have on the project or business. Some risks might cause a minor inconvenience, while others could threaten the very survival of the organization. Impact can be evaluated in terms of financial loss, operational disruptions, or reputational damage.
- Probability: This refers to the likelihood of the risk occurring. Some risks might be rare but disastrous if they do occur, while others might be relatively common but less harmful.
Both the impact and probability are scored using the chosen scale and then typically multiplied to provide a single risk score. This final score provides a rudimentary but effective way of comparing and prioritizing different risks.
Using a Risk Matrix
A common tool used to assign scores to qualitative risks is a risk matrix, a grid that allows users to plot risks based on their impact and probability. Each axis represents one of these factors, and each cell within the matrix corresponds to a specific risk score.
Once risks have been assigned to the appropriate cell, they can be color-coded to further highlight their significance. For instance, risks that have both a high impact and a high likelihood might be coded in red, indicating that they require immediate attention.
Fine-Tuning the Scoring Process
While the basic process of assigning scores to qualitative risks is fairly straightforward, there are ways to fine-tune it and make it more effective.
- Tailoring the Scale: Depending on the nature of the project or business, a standard 1 to 5 scale might not provide enough nuance. For instance, a high-tech startup might face a number of potential risks that could all be classified as “high impact”. In such cases, it may be beneficial to use a more granular scale.
- Considering Velocity: In addition to impact and probability, the speed at which a risk could materialize, also known as its velocity, can be important. A risk that is likely to occur and have a high impact but not for several years might be less of a priority than a similar risk that could occur in the next few months.
- Incorporating Expert Judgment: While quantitative data may be scarce when dealing with qualitative risks, expert opinion can be invaluable. Individuals with substantial experience or knowledge in a particular area can provide additional context and insight, helping to refine risk scores.
- Using a Weighted Scoring System: Not all aspects of risk are equally important in every situation. For instance, in a project where time is a critical factor, the velocity of risks might be weighted more heavily in the scoring process.
Qualitative risk scoring is not a one-time exercise but a dynamic process that should be reviewed and updated as conditions change. As new risks emerge or existing ones evolve, scores should be adjusted accordingly. The ultimate goal is to build a dynamic, responsive risk management system that allows businesses to adapt and thrive in the face of uncertainty.
Assigning scores to qualitative risks is as much an art as it is a science. It requires judgment, intuition, and a deep understanding of the specific project or business. While there’s no one-size-fits-all solution, a systematic approach based on impact, probability, and other relevant factors can provide a robust framework for managing these often elusive and difficult-to-quantify risks. Through careful scoring and prioritization, businesses can better prepare for the future, turning uncertainty into a strategic advantage. Learn more about risk scoring and risk assessment with IRM’s Level 1 Global Enterprise Risk Management examination.