March 24, 2019

Risk Assessment Matrix: Your Complete Guide

Compliance Risk
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Every business faces risks, and it’s these risks that can keep executives, managers and stakeholders up at night. To identify, outline and prioritise risk, a risk assessment matrix is a valuable tool for businesses to utilise.

There are various types of risk, and by being able to see the likelihood and extent of a threat visually, a business can better define the methods, controls and resources available to manage risk.

Why Risk Management?

For organisations, risk management helps to discover, analyse, and address the risk to meet goals. It offers insight into how to keep projects on track, stick to budgets and timelines. Risk management involves five stages: planning, identification, analysis, response, and monitoring/control.

What is a Risk Assessment Matrix?

A risk assessment matrix is a visual project management tool that consists of a single page with all potential risks listed, along with their likelihood and severity of consequence. Once outlined, a risk assessment matrix is used for companies to decide whether or not they have the resources to minimise or control the risk, and in turn, it helps prioritise what risks to address.

When to Use a Risk Assessment Matrix

A risk assessment matrix is not the first step in risk management. It’s useful first to fill out a risk assessment form where you can define and assess business risks. Then, once that information is available, it can be moved into the risk assessment matrix for a visual overview.

How to Create Your Risk Assessment Matrix

Although it seems like an overwhelming task, once broken down, the steps are quite simple. Here’s a look at what to do to create your business’ risk assessment matrix.

1. Identify Risks

Businesses face different types of risks that can be broken down into categories. While the list is longer than what is outlined here, this gives a glimpse of different types of risk that businesses face:

a. Strategic Risk: When implementing a business plan, strategy risk defines the potential failure of such a plan. With this type of risk, it’s more common to assess based on a risk-reward ratio rather than the elimination of risk because the risk is inherent.

b. Operational Risk: The potential for an adverse outcome stemming from day-to-day activities and or a process failure.

c. Financial Risk: As the name implies, this is a risk that every business faces such that it is the threat of not being able to generate enough revenue to cover operating costs.

d. Market Risk: Also known as systematic risk, market risk reflects the potential loss for an investor according to market fluctuations and changes in the financial and competitive landscape. While market risk can be hedged against through diversification, it cannot be entirely avoided.

e. Technical Risk: Technical risk can occur when a mechanical process isn’t executed correctly, which can be at the hands of human or technological resources.

For example, as a senior manager or leader in business, your duty to oversee multiple departments and ensure compliance and regulatory data is accurately stored and distributed can become challenging. By outlining the technical and regulatory risk and assessing its likelihood, a risk assessment matrix can help to prioritise and allocate resources to help mitigate such burdensome pressures.

2. Determine Criteria

After outlining the types of risk inherent in your business, you’ll want to determine their criteria and likelihood of happening. This happens by ranking their probability, as well as how detrimental the potential outcome can be from the risk occurring.

To define likelihood, you can rank risk with the following scale:

Definite: Any risk that is more than 80% likely to happen.

Likely: A risk that has a 60-80% chance of occurring.

Occasional: These are 50/50 shots.

Seldom: Risks that can’t be ruled out, but have a low probability of happening.

Unlikely: Less than 10% chance of happening, making it rare.

And, then determine what it will mean to your business if the risk did occur, as in how negative the consequences will be on a scale of:

Catastrophic: These are the risks that become the top priority in project management because if they occur, they mean that the project is unproductive.

Critical: Risks that can cause significant amount of loss.

Moderate: Risk that creates sizeable damage, but is less threatening.

Marginal: These risks may not affect the overall outcome of a project, but they can cause some damage.

Insignificant: Risks that can cause negligible damage such that it can occur without affecting the overall success of a project.

3. Assess Risk

Determining if the risk is low or high on a scale comes from assessing the risk’s likelihood along with its significant effect.

For example, you can assign numerical values of the likelihood and consequences from 1-5, such that: definite (5), likely (4), occasional (3), seldom (2), and unlikely (1). In the same way, assign the values to the potential outcomes, like catastrophic (5), critical (4), moderate (3), marginal (2), and insignificant (1).

Thus, by multiplying the Likelihood x Consequence = Overall Risk.

Since the range of outcomes is 1-25, you can group ranges into levels of risk as such:

Low = 1-8

Medium = 9-12

High = 15-25

With this information, you can prioritise risk and thereby allocate resources accordingly to mitigate, avoid, accept, or transfer risk, all according to how you decide to manage each risk.

To refer back to the previous example of regulatory risk, take a bank or financial institution for example. If data is not accurately stored, consolidated and reported to the necessary agencies promptly, it could quite literally cost a business everything. Therefore, the overall risk for compliance may be considered high, in which case it would make sense to find resources to solve compliance hurdles by utilising data and report automation software tools.

4. Create a Risk Assessment Matrix

To create a risk assessment matrix, you can either make your own (Excel is a useful tool for this) or download a template online.

To create your own, be sure to include the following:

Likelihood (or probability)

Consequence (or severity)

Overall Risk (these are the cells within the matrix according to their associated numbers calculated above)

Once the risks are placed into the matrix, you can define zones for what is generally acceptable versus what needs to be considered unacceptable, and thereby, avoided altogether. Use a real-life example to test if your zones are reasonable. Once it feels like the assessment is right for your organisation to function and face risk, you can implement risk response plans.

What’s Next?

Risk response plans involve the tactics you can use to address risk, which includes:

Avoid: Don’t take part in the activity or process that poses a risk in the first place

Reduce: Allocate resources to lower the likelihood or consequences of a risk

Transfer: Share the consequences of a risk. I.e. buy insurance.

Accept: If it’s a risk that cannot be avoided to run the business and its adverse effects are not going to be immensely detrimental, you may choose to accept the risk without allocating resources towards it

Project Use Cases

Since risks are inevitable, having a risk assessment matrix handy can help improve project management, for internal and external stakeholders.

Internally: Share a risk assessment matrix with your internal teams so that they can anticipate downfalls before they happen and share the responsibility of managing risk in whatever strategy has been chosen, defined and communicated.

Externally: When managing projects for clients or business partners, you can use a risk assessment matrix to outline potential downfalls and plan to avoid them, offering your clients or partners peace of mind in trusting your team to execute the said project.

The Benefits of a Risk Assessment Matrix

The benefits of a risk assessment matrix are clear and multiple. When you have an overview of risks, and they are ranked in order of importance, you can create action plans and allocate resources accordingly to best benefit your business.

When your organisation is on board, and everyone has access to see what could happen, and they are instructed with how to act, the flow of operations becomes more effective, efficient and less threatening by default.

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