Ranking Risks: Rare to Certain, Negligible to Catastrophic

By ExecutiveBrief Staff

Risks your project or business is exposed to may be worth reviewing now more than ever to see which ones need more attention than others.

Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. In everyday usage, risk is often used synonymously with the probability of a known loss. Risk is measured in terms of impact and likelihood. Since risk is directly correlated to loss, it is important to be able to assess risks in one’s business and to address them. Needless to say, inattention to risks can definitely affect a company’s bottom line.

Some businesses actually go by without a formal risk assessment policy, nor is there a unit that directly assesses the impact of risks in the organization. We have been so accustomed to risk in our everyday lives that the tendency is to ignore minor ones and react when major ones occur. Moreover, effective risk management carries with it some costs, which, when presented to stakeholders, naturally would lead to questions on how the costs could be justified.

Risk management is a modern buzz word but in no means a new science. More and more businesses and organizations recognize the need to identify risks within them so that they can be controlled and mitigated. It is important to exercise risk mitigation when it affects people, the environment, and one’s business, to name a few. Risk avoidance cannot make the potential of even greater loss from happening go away.

The question is, as a manager, how would I know which particular sets of risks need a special level of attention? Given limited resources, how would I know which particular types of risks need to be prioritized and addressed?

A risk matrix is a risk assessment tool which exposes aspects of risks that could be subjected to some form of ranking. The matrix has ranges of consequence and likelihood as axes. A risk matrix shows the manager and the decision maker a clearer view of what the risk is, what is involved (in terms of procedural changes, costs, behavioral adjustments, and the like), and what amount of time can be afforded given the severity and probability of the risk event. It can help a manager visualize, in an organized manner, the risks he or she faces in quantitative and qualitative terms and plan and make a more informed decision when the situation arises.