A risk matrix is used within risk management to visually define the level of risk by considering the likelihood against impact severity within the risk category.
This simple visual tool increases the visibility of risk levels and supports decision-making.
Introduction
Risks are inevitable. From a start-up to a large multi-national enterprise, all are faced with risks to be controlled and mitigated.
Whether you’re beginning a new business or project or running an established organisation, the critical questions are “What could go wrong?” and “How can we be successful?”.
It’s not a simple task assessing potential risk, let alone managing a suite of risks. Successful organisations find the time and resources to identify risks and devise management strategies to control, mitigate, and even plan contingencies to lessen any high Impact from a threat risk. Your people and organisation are at stake if you don’t identify, evaluate, and manage risk.
There are essential steps for a successful risk management process. The process begins with risk assessment. It then progresses until a definition of risk control measures and mitigating actions are required to manage the risks.
Here is how each step adds to a successful risk management system.
Risk Assessment Process
The risk assessment process is a series of stages for effective risk management.
Risk Identification
Risk identification associated with an organisation’s operation is one of the first steps in risk management.
Some organisations develop checklists from previous experiences of past projects or changes to manage risks. However, you could be a part of a new start-up, or your organisation is unfamiliar with the concept of risk management, so other methods to use include:
- Brainstorming
- Questionnaires
- Industry benchmarking
- Scenario analysis
- Risk workshops
- Incident investigation
- Auditing and inspection
After identifying the risks, the processes of risk analysis and evaluation begin.
Risk Analysis
SWOT (Strengths-Weaknesses-Opportunities-Threats) is a technique used to define the organisation’s internal Strengths (opportunities) and Weaknesses (threats), including culture, structure, finance, and resources. External Opportunities and Threats consist of variables outside the organisation, such as political, economic, social, technological, environmental, and legal risks. Given the scope of this analysis, a PESTEL model can be used to support this stage.
Other methods include:
- Threat analysis
- Fault tree analysis
- FMEA (Failure Mode and Effect Analysis)
- Event tree analysis
Risk Evaluation
When the risk analysis is complete, it’s necessary to compare the estimated risks against the risk criteria of the organisation.
Risk criteria may include, for example, cost, health, safety, environmental standards, legal requirements, socioeconomic factors, and the concerns of stakeholders.
Risk evaluation supports decisions regarding the significance of a risk to the organisation and whether a specific risk should be accepted, controlled, or mitigated.
Risk Likelihood
The risk Likelihood is the probability of a risk occurrence. Within GetRiskManager, the Likelihood of risk has five qualitative ranges [Ref. The Institute of Risk Management]:
- Remote
- Unlikely
- Possible
- Probable
- Highly Probable
Risk Impact
The risk Impact considers the consequence if the risk occurred and within GetRiskManager has five levels [Ref. The Institute of Risk Management]:
- Insignificant
- Minor
- Moderate
- Major
- Extreme
The grid assigns a number to the risk, obtained by multiplying Likelihood with Impact.
GetRiskManager provides three calculations:
- Likelihood x Impact (the default calculation)
- (Likelihood x Impact) + Impact
- (Likelihood x Impact) + (2 x Impact)
Calculations 2 and 3 tend to be utilised by charities, allowing a sharper focus on the risk Impact. [Ref. The Institute of Risk Management]
So, what about the Risk Matrix?
A Risk Matrix (also known as a Risk Assessment Matrix) is a risk diagram that assists in risk evaluation by visualising the Likelihood and Impact of potential risks. It visually represents all the current risks associated with an organisation, activity, or project risk.
What do you do with the Risk Matrix results?
Risk management is an integral part of any successful organisation.
By developing and following a risk matrix, you can help your team prioritise which risks to take action on and track their progress. To make the most of the risk matrix, it’s essential to understand what it does and why it’s crucial.
The risk matrix ranks different risks (threats and opportunities) according to how likely they impact the organisation’s success. By understanding which Risk Events are high or extreme, you can focus your risk mitigation and control resources on those with the most significant positive or negative consequences.
Once you have a list of risks, communicate the risk matrix throughout the organisation to ensure all stakeholders know what’s at stake. Risk management is an ongoing process, and using a risk matrix will ensure that your organisation stays on track.
The GetRiskManager Risk Matrix
Below is the risk matrix from GetRiskManager indicating all current risks.
The risk matrix consists of a coloured grid, with Likelihood on the X-axis and potential Impact on the Y-axis.
The circles indicate the number of different risks in a zone.
The lower risks are blue at the bottom left of the risk matrix. The top right contains the highest risk level and is coloured red.
These four zones provide a clear vision of the risk situation and the future steps to be taken:
- Red Risks: These risks are very significant. Subsequently, they are a high priority and need to be addressed immediately through control and mitigating actions that will move the high risk into, as a minimum, the Yellow area.
- Yellow Risks: These risks are highly significant but lower than red risks. These should be addressed as a medium risk priority and actioned according to an agreed plan and schedule.
- Green Risks: These risks are moderate-level risks. They are not highly significant; however, they could Impact if not controlled and mitigated. These should be addressed after the Yellow risks and actioned according to an agreed plan and schedule.
- Blue Risks: Lastly, these are low-risk. That does not mean they are unimportant; they should be the last to be addressed or could be monitored over a period and then reassessed.
Advantages of Risk Matrices
- Visually aligns risk against the Likelihood and Impact
- Visually indicates the level of current risks
- Provides an overview of an organisation’s risks
- Organisations can calibrate them as appropriate for their specific situations
- They highlight which risks should be prioritised, i.e., From Red Risks that should immediately be focused upon down, to Blue Risks that can be addressed later or just monitored
- They are straightforward to use and understand, making risk management a more transparent and effective method of presenting risk data
Disadvantages of Risk Matrices
- The risk categories may not be specific enough to differentiate between levels of risk
- Categorising a risk’s severity and likelihood can often be subjective, so it’s not always reliable
- Although a risk matrix is a powerful tool for evaluating, prioritising, controlling and mitigating risks, it can lead to poor decision-making if risks are not categorised correctly
- They can often oversimplify a complex problem
- They generally don’t consider the time needed for risks to play out and how they change over time
Final Thoughts
A risk matrix is only a visual tool; it’s not the complete solution for risk management.
As an organisation, you still need to manage risk by assessing, controlling, and mitigating it through various actions. To help with risk management, you can use a tool such as GetRiskManager to protect your people and your organisation.
