When taking on any business project or new opportunity, there is risk involved. The ability to visualise risk and use the depiction to mitigate risk is a helpful tool to have. This is what a risk impact matrix offers. We’ll cover how to create a probability and impact matrix, the benefits of using one, as well as share some best practices.
Coming Up
1. What is the Risk Assessment / Probability Matrix And What Are The Benefits?
2. Steps to Create A Risk Assessment Matrix With Tips
3. Risk Efficiency Measurement
4. Best Practices and Lessons Learned
What is the Risk Assessment / Probability Matrix And What Are The Benefits?
A risk assessment matrix combines the probability and impact scores of each risk and then ranks them in terms of priority to manage.
When designed properly, a risk assessment matrix can provide these benefits:
- Identify event outcomes that need to be further investigated
- Help identify where risk reduction can happen
- Provide a graphical representation of risks based on project or task
- Simplify the process of risk management
- Provide a more detailed analysis if needed for high-risk situations
A risk matrix is typically created by using either a 3x3 or 5x5 matrix. If it’s a 3x3, your scale for probability and impact will include: Low, Medium and High. If it’s a 5x5, the more granular descriptors will include: Very Low, Low, Medium, High and Very High for both probability and impact. These will be the descriptions within each cell. Along the axis, you can define probability as: rare, unlikely, moderate, likely or very likely. For impact, you may present options like: trivial, minor, moderate, major and extreme.
When it comes to financial teams and business decisions, risks are inevitable. The necessity of adequate risk management plays a large role in a company’s success. Finance teams can leverage automation tools to assist in risk management. It will first require the team to define and identify risks and then set up their parameters for control based on their risk mitigation strategy.
Automation tools can help to alert the team if any thresholds are met and if a process needs to be kicked off in response, it can be done automatically. Automation tools help to centralise and standardise the risk assessment and mitigation process. Furthermore, since the entire organisation will be working with the same tool, it makes it easy to pull reports and oversee how the business is managing its risk profile.
Steps to Create A Risk Assessment Matrix With Tips
Before you create your risk assessment matrix, it’s best to understand that the matrix relies on understanding and defining of these two aspects:
- Probability: This explains how likely it is for a risk (uncertain event) to occur. It ranges from 0% to 100%. It won’t be 100% though because that’s entirely certain and it wouldn’t be 0% because then there’s no risk involved.
- Impact: Risks create negative outcomes. But, their effects vary in terms of costs and impact. The tool helps to determine both a risk’s probability and impact in order to help prioritise dealing with the risk.
Whether you’ve created a risk assessment matrix before or this will mark your first time, there are some steps to follow:
1. Risk Identification: To identify risk impact, you’ll want to leverage the assistance of as many people within your organisation as possible that are involved in any given project or endeavour. This is because each person deals with a different aspect of the business and can offer a different perspective. Brainstorm with your team on the types of events or uncertain business situations that may occur. This could include things like: fire, theft, flood, refunds, vendor issues, etc. In this step, you’ll want to consider: the project scope, human resource management plan, stakeholder register, activity cost estimates, necessary project documents and a plan to manage the budget. You can also categorise risks in categories: technology, financial, market, operational, and strategic. A useful tip is to create a checklist for projects that can be applied to new projects to help identify risk.
2. Risk Analysis: At the heart of any risk management strategy sits risk analysis. Once you have defined risks, you’ll need to evaluate them. You will want to perform quantitative risk analysis by assigning a rating to the probability of each event. Quantitative risk analysis involves: quantifying the possible outcomes and probability of achieving the project objectives, creating a scope target and realistic cost schedule and providing an approach to make decisions where uncertainty lies. Here, you’ll also decide how you’ll deal with each risk and ensure that stakeholders are on board with any plan.
3. Assessing Risk Impact: It’s then time to check the probabilities that a risk will occur. At the same time, it’s important to analyse how the damage of risk may impact the business or project. One way to do this is to consider each risk and then rate its potential impact on a scale of 1 to 10 (with 1 being of little impact and 10 being catastrophic). These assessments play a role in determining how you will prioritise risk management strategies. You can classify risks on high versus low impact, as well as categorise them in terms of business impact or technical impact.
4. Risk Prioritisation: With a risk assessment matrix, you’ll quickly be able to gauge levels of risk. You also have the option to include internal policies regarding risk. Since businesses and risks change over time, a risk assessment matrix should be considered a breathing document that can be updated with the time. Impact can fall under: minor, moderate, major or critical, for example. The risks that appear in the bottom left of the chart can likely be disregarded. It’s the risks appearing in the top right that will require the most attention and resources to approach.
Risk Efficiency Measurement
Risk mitigation and management evolves as the business changes. That’s why it’s useful to track how well your business is managing the impact of risk. This can be done through two main methods, namely:
Risk Audit: A risk audit is an independent measurement of risk. An audit will tell you: how well risks are being identified, the correlation between project risks and organisational risks, and the effectiveness of mitigation plans that have been put into place to manage the risk. Technical experts judge risk management principles and will likely provide businesses with the following:
- The important areas to focus on for risk analysis based on a given project
- Potential risks that were missed but exist
- A customised checklist to evaluate risks
- Risk-prone areas
Risk Metrics: Analysis should be performed as a project rolls out and is closed to evaluate how well the risk mitigation plan is working in action. This data will then serve as historical insights for the next project. These metrics can track and quantify things like:
- How many risks occurred during the project?
- How many risks were identified?
- Did the risk impact match the expectation?
- Were anticipated risks different than the actual problems that happened?
Best Practices and Lessons Learned
A company’s appetite for risk will depend on many variables. In the same vein, the approach to risk management and mitigation is bound to change over time. Some best practices and lessons to keep in mind when building your own risk matrix are:
- Tailor the assessment: Be sure to use tools that are suitable for the analysis in your risk assessment process. For example, if you’re dealing with an organisational change, then it may be worthwhile to consider the impact of risk on technology, cost and timing. You’ll want to be sure that the way by which you assess risk falls in line with the overall business goals or task at hand.
- Document everything: For each impact and probability rating, you’ll want to document the reasoning behind it. This is because you’ll revisit the risk matrix depending on both internal and external factors, so if any variable has changed, you’ll understand the thought process behind decisions.
- Prioritise the approach: Each risk will come with its own level of prioritisation. If a risk is critical and can negatively impact the entire organisation, then it should take precedence over less critical risks. Your risk mitigation strategy depends on the level of risk, as well as the goals you want to achieve.
By implementing an automation tool, you can alleviate some of the burden that comes along with risk management. With this tool and a risk impact matrix you’ll be able transform data for valuable insights, collaborate across an organisation effectively, standardise approaches and monitor risk using real-time data analytics.
