Imagine you have to visit your parent’s house this weekend and you have two travel options—you can take a flight or a train. But there’s a catch. It’s a full flight and there’s the risk someone may be COVID-19 positive. On the other hand, the train will be less crowded but will take longer.
Once you have made a decision, take a moment to recollect your thought process. Try to make out how you assessed different risk factors before picking one option. Similarly, businesses need to gauge and calculate risks to find the most effective ways to avoid or manage risks. A risk matrix will help you explore this concept in detail. Read on to understand the significance and ways to use one.
What Is A Risk Assessment Matrix?
Before we look into a risk assessment matrix, we need to understand what risk assessment is. A risk is the possibility of a negative or unexpected outcome and risk assessment helps identify risk factors or hazards. Risks are inevitable in businesses and organizations must identify and address risk factors to successfully drive business goals.
An in-depth understanding of the magnitude and probability of risks can help you prevent or navigate them in a more efficient way. A risk matrix is the first step to identify and evaluate various risks impacting your business. To put it simply, a risk assessment matrix is a visual project management tool that enables you to define, catalog, assess, analyze, evaluate and mitigate risks. Also known as a risk rating matrix, it depends on two key factors
Severity: The extent to which a risk factor causes damage
Probability: The likelihood of a risk occurring
Do You Need a Risk Matrix?
Project managers often shoulder the responsibility of working on large and complex projects. To stay on track and meet their deadlines, managers need to recognize uncertainties as well. While avoiding every risk is impossible, they can at least stay prepared by calculating the risks. Here are some of the key benefits of using a risk control matrix:
Teaches You To Prioritize
A risk matrix helps you analyze your risk environment (i.e., your organization and industry) and make note of specific factors that may disrupt operations. The severity factor allows you to rank risks and tackle the most harmful ones.
Helps You Plan
Once you’ve made a list of potentially negative outcomes, you’re better prepared to develop a targeted strategy to address the risk factors. You’re encouraged to make decisions and utilize resources accordingly.
Helps You Account For It
Having a risk control matrix plan is to have a method to the madness. You’re aware that circumstances may change anytime and it’s easier for you to navigate emergent and recurrent risks. You successfully maintain a real-life assessment of risk factors.
How to use a Risk Matrix?
To successfully create and use a risk matrix, you need to assess the risks in your environment. Here’s a simple yet effective risk assessment plan that you can implement:
Identify The Risk
Businesses face various kinds of risks—internal, external, strategic, market-related, operational and so on. It’s difficult to tackle risks without labeling and understanding their nature. You can brainstorm risk identification strategies with your team to recognize the root cause.
Analyze The Risk
Every risk has a root cause or an underlying factor. If you want to assess any type of risk, you should start asking questions such as:
What is the likelihood of these risks occurring?
How will the risks impact the organization?
Rank The Risks
This is when you use a risk assessment matrix to prioritize your risks, depending on their severity and likelihood.
Here are some ways to determine the probability or likelihood of risks.
Very likely: There’s an 80% chance or more for your business to experience risk
Likely: These risks are recurrent and, typically, have a 60-80% chance of impacting your business
Possible: An occasional risk, which is a coin toss when it comes to probability; they have a 50% chance of occurring
Unlikely: These risks have a less than 50% chance of occurring and aren’t very harmful but can impact your business
Very unlikely: Typically, having less than a 10% chance of occurring, these risks are rare
To assess the consequences of risks, you should rank them based on how damaging they can be. Here are some useful categories.
Insignificant: The once that barely cause any damage are often known as negligible risks
Minor: Here the extent of damage is still insignificant but they impact your business nevertheless
Moderate: These risks won’t significantly affect your operations but there are noticeable damages
Critical: These have significant consequences and can potentially damage your business; these kinds of risks must be addressed
Disastrous: It can interrupt your business operations and must be avoided at all costs (by utilizing appropriate resources)
Treat The Risks
Risks need to be either eliminated or managed. Determine your response, according to the severity of the risk and the likelihood of risk factors.
If you want to create an effective risk matrix, you need to know how to systematically break down problems and address them. Want to solve a problem in the most efficient manner? Go for Harappa Education’s Structuring Problems course. The MECE (Mutually Exclusive and Collectively Exhaustive) Principle will teach you how to classify problems better. The Ease Impact Analysis will teach you how to analyze, identify and prioritize the underlying causes of problems. Get to the root of problems to improve your risk assessment plan and you’ll never be intimidated by a challenge again.
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