Qualitative measures are highly influenced by someone's position and past experience, so something considered "high" to someone can be perceived as low or totally unimportant to the next person. Conversely, quantitative measures are explicit and not open to interpretation. I see risks logs that list the impact as “major,” “significant,” “substantial,” etc. There is no universally accepted definition of “significant” so one person’s “significant” may seem trivial to others. Without quantitative risk impact there is no way for an organization to understand their total risk exposure and whether they are within the risk tolerance levels established by the organizational risk policy. To effectively mitigate risk, its impact to the project must be quantitatively documented so treatment activities can be measured and tracked. It makes no sense to spend $50,000 treating a risk event that represents $10,000 in budget impact. Quantitative risk impact is a frequent topic of debate with pundits who argue that the uncertainty of risk makes it impossible to quantitatively measure.
To illustrate the importance documenting risk impact quantitatively, I randomly polled a number of people last year before one of my risk management conferences. I asked two questions, "what is a high budget amount?" and "what is a long duration?". The responses that I received from the budget question ranged from $3.5 million to $1 trillion. The responses that I received to the duration question ranged from 5 years to 50 years. You can see that qualitative measures result in broad ranges making it very difficult to nail down the true risk exposure and impact. Contrary to pundits of quantitative risk impact measures, the University of Edinburgh in Edinburgh England does a very good job of quantitatively establishing thresholds in their risk policy which then flows down to the risk practitioners. According to their risk policy The University will:
- achieve a surplus of a minimum of 2% of gross income over any 3 year period
- operate with a Staff Cost/Total Expenses ratio of less than 60%
- achieve a rate of return of at least 2% above inflation on its endowment investments over a 3 year period
This sort of quantitative policy and subsequent risk management leaves no doubt as to your exposure, impact of risk events, how much should be spent to manage budget risks, etc. For more details on the University of Edinburgh's risk policy and governance click here.