What is a Risk Matrix?

A risk matrix is a commonly used tool in Risk Management. It is applied after identifying the risks and hazards in a project. The matrix helps rank these risks based on their likelihood and potential consequences allowing you to visualize and prioritize them effectively. This process enables you to focus on the most critical risks and implement the necessary mitigation measures. The example of a risk matrix shown below is just one version; it can be tailored with customized factors to fit the specific needs of your company.

Risk Matrix, RoC Consult ApS

Likelihood Assessment

There are various probabilities for the occurrence of a risk. The likelihood of a risk occurring is independent of its consequences, meaning the two are not related. Therefore, it is crucial to first assess the likelihood of the risk itself. But how can you predict the likelihood accurately? The short answer is, you cannot make a precise prediction, but several factors can help form a reliable estimate.

Data is a key factor in determining likelihood. To predict the frequency of a risk it helps to review past incidents and their recurrence. Additionally, industry trends, potential problems, and internal control evaluations provide useful insights. Consulting external experts can also help in making more accurate assessments.

Consequence Assessment

When ranking the consequences of an identified risk, it is important to evaluate the impact alone without factoring in the likelihood. This ensures that the consequence is not undervalued simply because the probability of its occurrence is low.

There are several ways to measure consequences. One of the most common is assessing the economic impact such as the costs associated with the risk. Another is measuring human loss or injury. Other categories may include environmental effects or the impact on a company’s reputation.

There is no universal standard for comparing these different categories, which can make it challenging to assign value to different consequences. For example, valuing a human life versus economic damage can vary from company to company as each has its own risk perception. What one company may consider a low economic consequence, might be considered high by another.

How the Risk Matrix Can Be Combined with Mitigation

Once the risks and their potential consequences are plotted on the risk matrix, you gain a comprehensive overview which allows you to prioritize your mitigation strategy. For example, if a risk has both high probability and high impact, it poses a significant threat and should be addressed as a priority in your mitigation plan.

Sources:

Beredskabsstyrelsen. (2004). Risikoanalyse. I: S.H. Holst & D.B. Hansen (Red.), Håndbog i risikobaseret dimensionering. Beredskabsstyrelsen.

Rausand, M. (2011). Risk Assessment: Theory, Methods, and Applications. John Wiley & Sons, Inc.

This article was written by the combined effort of: 
Mads Rosenwanger & Valdemar Kragh Dan