Methodically approaching risks using a risk assessment matrix can help organizations mitigate potential losses. Here's how to approach them.
If you’re doing business, then your business is at risk. Without smart planning ahead, organization leaders don’t always know their greatest risks or how severely those risks could derail projects and profits.
A risk assessment matrix methodically identifies internal and external threats and then charts the threat levels in a visual way. This helps plan how to mitigate the business risks for your corporation, nonprofit, or organization.
What is a Risk Assessment Matrix?
Even the best run business and nonprofit boards can’t outrun risk entirely. From cybersecurity failures to climate disruptions, your project management team should complete a thorough risk analysis to identify the source of potential threats, the likelihood a disruption will occur, and the possible impact to your work.
Not every risk carries the same weight. Board members and business leaders can use risk matrices to prioritize and prepare for foreseen challenges, so they can avoid or lessen potential damage.
A risk assessment matrix template is a chart or spreadsheet that visually graphs potential risks vs. predicted impact. This form of risk analysis essentially multiplies the likelihood that an event will occur by its potential impact.
Color coding the chart helps leaders quickly identify each risk’s severity: Red indicates high-probability and high-impact risks, and a sliding scale of orange, yellow, and green indicate progressively lower probability and impact risks.
This proactive risk analysis flags each risk as high, moderate, or low, so your board can prioritize its risk management strategy.
How to Build a Risk Assessment Matrix
1. Identify Risk Management Goals and Objectives
Begin your risk analysis by brainstorming potential risks with all stakeholders, not just leaders or board members. By gaining perspective from different sources within your organization, this early collaboration ensures your risk assessment matrix accounts for all possibilities. Individuals likely know their job best and can flag strategic or operational risks that aren’t obvious on the surface.
In addition to identifying potential risks internally, review historical trends and future forecasts in your industry beyond your organization to ensure your risk assessment is comprehensive.
As you build your risk assessment matrix, many risks fall into these categories:
- Strategic risks: Business strategy decisions that may affect your organization’s ability to achieve its goals, such as a failed new product launch.
- Operational risks: Internal processes or procedures that disrupt day-to-day operations, such as employee errors, system failures, or software outages.
- Financial risks: Potential monetary losses, such as added expenses or lower profits caused by delays in delivery or inflation.
- Compliance risks: Failure to comply with legal or governmental regulations can lead to lawsuits or fines, such as workplace health or safety violations.
- External risks: Outside forces beyond your control, such as supply chain shortages, political changes, or bad publicity.
2. Outline Risk Criteria
Once you identify potential risks, you will add them into the risk assessment matrix. In order to accurately and effectively rank risks, you must set criteria for risk severity and frequency.
Define what constitutes major or catastrophic vs. negligible incidents by assigning numerical values, typically on a scale from one through five, with one meaning least severe or unlikely and five meaning most extreme damage or disruption. These scores will help you build your matrix later.
Ranking risks on a scale of one to five provides deeper insights into the level of severity associated with each threat, so your leadership can allocate resources efficiently to the risks most likely to happen or to cause the most harm. Analyzing risk impact gives visibility into possible roadblocks, enabling leaders to take proactive steps to keep projects on track.
3. Assess Potential Risks
To ensure an effective risk analysis, you must understand risk tolerance vs. risk appetite. Leaders should tailor their risk matrices to suit the unique risk tolerance and risk appetite of their specific organization, board, business, industry, or market. For example, some leaders would color-code a risk red to indicate something that, while not highly probable, would be so detrimental to the organization that it’s elevated in priority for risk management planning.
Risk appetite refers to what level of risk your organization is willing to tolerate on a wide scale. Risk tolerance allows your organization more room to adjust its willingness to take a specific risk based on individual initiatives. This involves planning for contingencies if these risks come to pass and securing the necessary resources beforehand to cope if the worst happens.
Adjust your risk criteria scores to reflect your unique risk tolerance and appetite. An operational risk may rank higher to a retail business where being unable to quickly serve customers directly costs it money, while a compliance risk is less of a concern in an unregulated industry.
4. Outline Response Plan
Armed with a risk assessment matrix, the next step is for your project management team to prioritize each risk by importance and develop an effective strategy to mitigate bad outcomes. Proactively managing project risks prevents additional damage later.
You may choose to build your risk matrix in Excel or another spreadsheet. A software solution, such as OnBoard, can streamline risk management planning from creating to implementing this response plan.
How to Determine Risk Probability
Craft a risk assessment matrix template with the probability something bad occurs listed in columns across the top and the severity ranked in rows below. To build the matrix, place the risks identified earlier by project managers, board members, and other stakeholders into the chart.
To categorize potential risks from extremely high to low risk, place each in rows with the most severe or catastrophic risks at the top and those with the most negligible impact at bottom.
Then, move those risks into the correct columns based on how frequently they may occur. For example, a catastrophic risk that is very likely to happen would be in the top row and first column, while a negligible risk that is unlikely to happen would be in the bottom row and last column in the chart.
You can split probability into 5 categories:
- Frequent (91%+ probability): Highly likely risks are virtually guaranteed to happen, so they should be one of the first addressed in planning.
- Likely (61-90%): These risks are more likely to become a problem than not, so they should be prioritized, especially if they rank catastrophic or critical in severity.
- Occasional (41-60%): Risks that may occur about half the time are generally ranked high or medium risk depending on the severity if they do happen.
- Seldom (11-40%): Although risks in the unlikely category have a low probability of occurring, monitor them, as they could potentially cause significant disruptions to your business.
- Highly Unlikely (<10%): The highly unlikely includes risks that are rare, with a negligible probability of happening.
These probability thresholds are used as guidelines when monitoring for events that may disrupt day-to-day activities or hinder long-term progress — from virtually certain occurrences down to those on the cusp of impossibility.
Achieve Complete Board Alignment With Board Management Software
Risk is an inevitable part of running a business. With a risk assessment matrix, your organization can manage risks by identifying and planning for those that are most likely to disrupt operations.
OnBoard software’s board management platform offers a secure solution that helps boards communicate and collaborate as they work through developing risk-mitigation strategies before problems arise. OnBoard also enables easy file distribution, so relevant background information can be easily and confidentially shared across teams as they build out their risk analysis
Download our Board Meeting Agenda Template to streamline your meetings with a professional format that engages attendees and boosts productivity.
About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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