Saturday, 21 November 2009

Probability/impact matrix to compare importance and urgency of one risk relative to another.

Probability/impact matrix

Having gauged the probability and impact of a number of risks, you can use the probability/impact matrix to compare them by assessing their importance or urgency relative to one another.  This diagram shows some risks that many of us face in our working lives, by way of illustration.

As with the other tools in this section, the matrix functions as a starting point for decision making.  It's a good way to display or share information on a number of risks facing the business, perhaps to form the basis for a meeting.  It might be possible to compare the different risks to each other, perhaps in order to highlight situations where disproportionate effort is being put into managing a particualr risk that is unlikely to occur, while another risk that is far more likely is being neglected.  Where risks are only expressed in verbal terms, there is a tendency to concentrate on those that sound worst rather than those that really do present the most likely or severe downside to the business.  The matrix can be used to help prioritise actions or focus efforts where they will have the most beneficial effect. 

As with the other tools, it is important to remember that the probability/impact matrix is only useful in proportion to the accuracy of your own assessments of probability and impact.  You only get out of it what you put in.

Tools for risk assessement:
Subjective probabilities
Impact: hard and soft
Decision trees
Expected value
Fatal downsides
Life decisions
A business decision
Break-even analysis
Risk profiles
Probability/Impact matrix

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