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Friday, January 4, 2013

Risk Probability and Impact Matrix


In the previous chapter we took a detailed look at “Risk Probability & Impact Assessment” and assigned a risk rating to each of our identified risks based on the risk’s probability and impact. In this chapter, we are going to assign a risk score to our risk and categorize it as “High-Medium-Low” priority. This technique is called “Risk Probability and Impact Matrix”

Let us say, we are working a project to construct a new formula one race track in our country. It’s a high-profile and high budget project. During risk identification step, we found that, the supply of top quality “tar” that is used to lay the race track is of high demand and supply of the item could be a potential risk. Let us say that after analyzing our probability and impact definitions and stakeholder risk tolerance, our risk experts have assigned the following numbers to our risk:

Probability – 0.8
Impact – 0.64
As you can see, the numbers above are in cardinal scale (0 to 1) with numbers being closer to ‘1’ are of higher probability/impact when compared to numbers that are closer to ‘0’

This was done in our previous step so, what should we do next?

We are going to use the Risk Probability & Impact Matrix that is specific to our project. Look at the example below:


This matrix is combining the probability and impact into one overall rating. This is different from the rating assigned in the previous step as well as the one that was assigned using the Probability & Impact Matrix tool (From the RM Plan).

So, in order to minimize confusion, we will be referring to this rating as the “Risk Score” that signifies the combined probability and impact score of the risk under consideration with respect to our project objectives.

If you see the image closely, the probability is on the left going top to bottom, gradually reducing from 1 (a 100% sure shot possibility) towards 0. Similarly, the Impact is on the top going left to right, gradually going up from 0 (no impact) towards 1. The values in the table cells below are just the multiplied value of the risk probability and impact which we are going to consider our Risk Score. The values in each row refer to the impact score corresponding to the probability value.

Go back to the beginning of this chapter and see what numbers were assigned to our “Supply of TAR” risk? Now, look at the previous image (the matrix) and try to find out the cell where our probability and impact numbers match. If you found it very good. If you couldn’t, don’t worry, the cell is highlighted below just for you:


In our matrix, the “RED” color signifies High risk; “YELLOW” signifies Moderate risk and “GREEN” signifies Low risk. Unfortunately our risk “Supply of TAR” falls in the high risk category which means it has to be monitored closely to ensure that there is minimal impact on our project objectives.

An important point to note before we wrap up is the fact that, the above matrix is just an example for illustration purposes. Each organization could have a template for this and so, you must take a look at your organizational process assets to understand your org’s preferred way of assessing risks.

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