A risk matrix is a tool that is used to assess the risk and its visibility by taking into consideration the probability against the consequence severity. The risk matrix is a simple matrix that is used in order to increase the knowledge and visibility of the risks which will help in making better decisions.
Meaning and Explanation
When there is a lack of guarantee pertaining to the outcome of a particular choice then that condition is called a risk. The potential outcomes from a particular decision are weighted and plotted on the risk matrix according to their severity.
There are risks associated in business at every point which and while it is important that risk should be taken in order to conduct business, it is also equally important to understand the outcome of the risk (or risk matrix) and the severity of it and if the organization can sustain such a blow.
This is the reason why the risk matrix is plotted in order to understand the downside of the risk and the severity of that harm.
Basics of Risk Matrix
Organizations want to be prepared for a particular event which may affect the business negatively and these particular events are known as risks. With the help of risk matrix a company not only is able to identify the magnanimity of the risk but also is able to explain whether the risk can be controlled or should be avoided altogether.
When considering the basics of the risk matrix, there are two factors that are to be considered which are severity and the likelihood of the risk.
The risk matrix is presented in the form of a box where the left side of the box is the severity of the risk, while the bottom of the box denotes the probability of risk. With the help of both of these, the severity of the risk matrix can be determined.
Primary and the probability can be classified into five categories in which the risk can fall. Following are those 5 types of probabilities in risk matrix:
When the risk is not at all likely to happen, then it is classified as rare and it would be placed in this category of unlikely. As the name suggests the possibility of this risk happening is very rare and the percentage of risk in this particular category is considered to be less than 10%.
As a business, it is crucial that they take these unlikely risks into consideration because, in the event that they occur, it would cause a huge loss for the business.
An example of an unlikely probability would be a certain reaction associated with a new treatment drug.
Similar to unlikely category the risks that fall into this category are very rare but as it is more common than those in the unlikely. These are the risks that have to be considered as it is more serious than the ones in the unlikely category and they cannot be ruled out.
As the name suggests these are the seldom risks that may occur from time to time but the frequency of their occurring compared to another category of risks would be very low.
When the risk has a chance of occurring of about 50% and 50% of not occurring then it is categorized under occasional risk. Occasional risks have a higher possibility of happening than seldom risks, but a lower probability than likely risks.
As the name suggests likely risk is the one which has a possibility of more than 60% of happening. Businesses have to prepare themselves to face likely risks more often than not.
Definite risks are the risks that have an 80% possibility of happening or even higher than that are to be termed as higher risks or definite risks. This means that companies have to prepare themselves to face definite risks since they have the highest probability of happening and cause interference in the work.
While they are large on a qualitative scale, they may differ quantitatively, that is the amount of damage they may cause.
The amount of harm or damage that can be created by a particular risk is known as severity. Severe damage is identified and classified according to the harm percentage.
Severity often affects pear which is an abbreviation of people, environment, assets, and reputation. For example, a big piece of machine wreck damage in a warehouse then people, assets along with repetition could be negatively impacted.
This is because the person who was handling the machine could be hurt, the machine itself could have malfunctioned or have been destroyed and the safety reputation of the organization is put in jeopardy. Accordingly, the severity of the risk matrix is classified into the following types:
When the risks cause a minimal impact or negative impact then they are classified as insignificant. As the name suggests, if these risks occur, none of the reputations may suffer badly.
When the damage occurs and where is it on the progress of a project then it is classified as a marginal risk. These risks are smaller compared to moderate risks but are larger as compared to the insignificant ones.
When the risk causes damage, which is noticeable but the frequency of occurring is not very likely that is classified as moderate risk. Moderate risks are slightly higher than marginal risks and the amount of impact is also higher than marginal risks.
These are the risks that cause huge damage and losses and the consequences associated with it are equally larger. Such risks are known as critical risks. The occurrence of critical risks is more noticeable than moderate but less than catastrophic ones.
These are classified as the worst form of all the threats since they cause extreme damage which may not be reparable to a project or business. These may render the project completely unfruitful or unproductive and should be a top priority in order to manage risks.
Implementing the risk matrix
Once the proper risks have been placed in the relevant cells of the matrix, then the corresponding consequence and likelihood of it become clear and visible and that is that should be handed at priority are understood by your organization.
All of the risks are classified under four different risk matrix categories for which different colors are used. These colors determine the amount of risk and severity at a glance.
Following are four categories that are used in the risk matrix:
1) Extreme Risk Matrix
The risks which are classified under the category of extreme are marked with red color and are considered to be the most important and critical of all the risks that must be addressed on fire fighting priority. Immediate action from the project team is required which will help to eliminate the risk.
2) High Risk
These are the ones that have the risks classified under them with a pink background and also require immediate action and risk management strategies from the organization. Apart from eliminating the risks, the substitution strategy will also work well with these.
If the high-risk issues cannot be solved immediately, then a strict timeline should be followed and established in order to ensure that these are solved before they create a major hurdle in the project.
3) Medium Risk Matrix
These are the ones that are color-coded with orange and require the development of a risk management strategy by taking some reasonable steps in time. Although the risks have to be sorted out early there is no hurry on an immediate basis to solve them and these risks do not require the use of resources extensively.
They can be managed on the basis of the experience of senior management and with the help of logical planning and smart thinking.
4) Low-Risk Matrix
These are the ones that fall in the category of cells that are colored with green color and are usually ignored by your organization since they do not possess a serious problem. However, these have to be sorted out and some steps have to be taken in order and improve the performance of the project.
Hurdles of the risk matrix
While many organizations have found the usefulness of the risk matrix in their activities, there are many problems with it as well.
Following are few of the problems associated with risk matrix:
1) Poor resolution
Only a small fraction of hazards can be compared by a risk matrix which is correct. Different risks get identical ratings quantitatively.
It can so happen that higher qualitative ratings to quantitative this more the risks can be assigned by mistakenly in the risk matrix. Sometimes worse than random decisions are taken because of the fact that some risks are negatively correlated with varieties and frequencies which are worse than useless.