Probability Impact grid analysis



Today Risk management is a significant function in organizations. Companies undertake increasingly complex and ambitious projects, and those projects must be executed successfully, in an uncertain and often risky environment. As a responsible manager one must be aware of these risks. The most critical environments which can be too expensive both in time and resources. Instead, first need to prioritize risks and if it is effectively done then one can focus the majority of time and effort on the most important risks The Risk Impact/Probability Chart provides a useful framework that helps you decide which risks need your attention.

How to Use the Tool

The Risk Impact/Probability Chart is based on the principle that a risk has two primary dimensions:

·        Probability - A risk is an event that "may" occur. The probability of it occurring can range anywhere from just above 0% to just below 100%. It can't be exactly 100%, because then it would be a certainty, not a risk and it can't be exactly 0%, or it wouldn't be a risk.

·        Impact - A risk, by its very nature, always has a negative impact. Though, the size of the impact varies in terms of cost and impact on health, human life, or some other critical factor.

The chart allow to rate potential risks on these two dimensions. The probability that a risk will occur is represented on one axis of the chart - and the impact of the risk, if it occurs, on the other. These two measures are used to plot the risk on the chart. This give a quick, clear view of the priority that need to give to each and then decide what resources you will allocate to managing that particular risk.

The basic form of the Risk Impact/Probability Chart is shown below.

Probability Impact grid analysis

The corners of the chart have these characteristics:

·        Low impact/Low probability - Risks in the bottom left corner are low level, and can ignore them.

·        Low impact/High probability - Risks in the top left corner are of moderate importance - if these things happen, you can cope with them and move on but try to reduce the likelihood that they'll occur.

·        High impact/Low probability - Risks in the bottom right corner are of high importance if they do occur, but they're very unlikely to happen. For these, however, you should do what you can to reduce the impact they'll have if they do occur, and should have contingency plans in place just in case they do.

·        High impact/High probability - Risks towards the top right corner are of critical importance. These are top priorities and are risks that must pay close attention to.

It's natural to want to turn this into a two-by-two matrix. The problem here is where the lines dividing the quadrants of the matrix lie. For example - should you ignore a 49% probability risk, which will cause a 49% of maximum loss? And why, in this example, should you pay maximum attention to a risk that has a 51% probability of occurring, with a loss of 51% of maximum loss?

To use the Risk Impact/Probability Chart follow these steps:

·        List all of the likely risks that project faces. Make the list as comprehensive as possible. Assess the probability of each risk occurring, and assign it a rating. Estimate the impact on the project if the risk occurs. Again, do this for each and every risk on your list. Using your 1-10 scale, assign it a 1 for little impact and a 10 for a huge, catastrophic impact.

·        Map out the ratings on the Risk Impact/Probability Chart. Develop a response to each risk, according to its position in the chart. Remember, risks in the bottom left corner can often be ignored, while those in the top right corner need a great deal of time and attention. Read Risk Analysis and Risk Management for detailed strategies on developing a risk response plan.

Key Points: To successfully implement a project identify and focuses attention on middle and high-priority risks otherwise risk spreads to efforts too thinly, and resources will be wasted on unnecessary risk management.

With the Risk Impact/Probability Chart, you map out each risk and its position determines its priority. High-probability/high-impact risks are the most critical, and you should put a great deal of effort into managing these. The low-probability/high-impact risks and high-probability/low-impact risks are next in priority, though you may want to adopt different strategies for each. Low-probability/low-impact risks can often be ignored.



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