What is a Risk Assessment Matrix?
A risk assessment matrix is defined as an inverse matrix on an X-Y graph, where X-axis is the risk events in the order of increasing business impact, while Y-axis is the probability of these events occurring from high to low. The matrix basically aims to measure the probability of occurrence of business risk events.
Therefore, in the risk assessment matrix, there are two intersecting factors on the inverseX and Y axis:
- The risk events listed on the X-axis in the order of increasing business impact. For example, for a SaaS company, employee attrition may be classified as a lower risk event in comparison to IT system failure which directly affects products and customers, thereby causing issues with retention and sales.
- The probability of occurrence of these events in the order of high to low. For example, the probability of IT system failure may be low, in comparison to employee attrition, where company policies will exert less control.
The risk assessment matrix is typically a 5X5 matrix, with 5 stages of probability of occurrence and 5 levels of business impact on an inverse graph. This matrix therefore offers 25 cells for 25 events to be plotted across the graph.
It is important to note that a high business impact event usually has lower probability of occurrence since it requires large scale events to have significant business impact. Whereas, a low impact business event may occur more frequently and has a high probability of occurrence.
The risk assessment matrix, thereby helps prioritize risk events for effective enterprise risk management planning.
Here is the diagrammatic representation of the risk assessment matrix:
As you can see in this illustration, in a risk assessment matrix, as we move along the X-axis, the severity of the events keep increasing with decreasing probability of occurrence as it intersects with the Y-axis.
Benefits of enterprise risk assessment
Risk management is a key aspect of any enterprise planning, invariant of industry or scale. Here are the key enterprise benefits of using the risk assessment matrix:
- Risk prioratization
The key to effective risk management is to not just be aware of the potential risk events, but also their priority. This is because company resources are limited but potential risks may be many. But when these risk events are prioratized, now the leadership team can deploy resources based on high business impact and high probability of occurrence.
The risk assessment matrix is a potent tool for any leadership team to not just be aware of the potential risks, but also stack them against the probability of their occurrence.
- Risk management preparedness
The uniqueness of risk assessment matrix is that it makes company leaders aware of potential risks and to begin preparing in the event of occurrence – based on not just high probability but also business impact. Often the fear of high business impact may force leaders to mismanage funds and deploy resources on preparing for an event that has very low probability of occurrence, or worse, ignore those that have a low-to-medium impact but may occur more frequently.
- Efficient resource management
Resource management begins with prioritization, which is the key focus of the risk assessment matrix. With the knowledge of the potential risks facing the business and their probability of occurrence, business leaders can plan, prepare and manage the event when it occurs far more efficiently and effectively. This prevents expenditure for very low probability events with high impact ok occurrence and helps businesses prioratize events with higher frequency of occurrence and with low to moderate impact on business health if they occured.
Steps to create a risk assessment matrix
- Layout an inverse matrix. On the X-axis, label as ‘increasing severity’ or ‘increasing business impact’, with an arrow pointing East.
- On the Y-axis, label as ‘decreasing probably of occurrence’, with an arrow pointing South.
- On the first X-axis cell row, list the business impact levels – typically this can be a scale from 1 to 5.
- On the first Y-axis cell column, list the probability of occurrence – typically this too is a scale but in decreasing probability scale, say highest, high, medium, low and lowest.
- List down your identified risks based on where they fit into the matrix cells based on probably and impact of the event.
Top 5 Best Practices for Creating a Risk Assessment Matrix in 2023
- Clearly understand the threat landscape
The step that begins even before the risk assessment and the matrix, is understanding the threat landscape accurately. This may include consulting with department heads and subject matter experts to gauge what they see as the key risks facing their respective departments. However, beyond departments lies the external PESTEL threats which too must be analyzed for a holistic landscape view of risks facing the company as a whole.
- Determine a clear criteria for risk assessment
A risk assessment matrix may be broad or localized. For instance it may for a company-wide risk assessment including external and internal risks, or limited to just external or internal threats. Furthermore, within internal or external threats, there may be areas that require specialized attention based on priority, requiring their own risk assessment matrix. Large enterprises or companies ridden with issues may use several layers of matrices for clarity.
- Characterize each risk
When creating the risk assessment matrix, it is important to characterize the risks based on set parameters – such as internal, external, quantitative risk analysis, qualitative risk analysis etc. This is to ensure that one matrix focuses on only one set of risks with common characteristics.
- Assess exposure to each risk
While risks may be many, a company may not be equally exposed to them all. For instance, if a company is not listed in the stock market, crashes and jitters in the stock market may not have any impact on the company. Alternatively, if there is a supply-chain disruption in an industry where the company may be invested, this risk may have a bigger impact.
- Invest in prevention as well as cure
While the risk assessment matrix will reveal the potential of a risk event, the events classified as high and medium probability risks require both prevention plans, as well as recovery plan in the event of occurrence.
A classic example here would be that of cyber security, where security measures may deter most cyber attacks, but for the ones that get through the firewall need immediate detection and elimination. Whereas, some risk events, especially naturally occurring disasters, can only be managed largely on the recovery side in the aftermath.