Join us for a Party! R.S.V.P.

Your organisation is holding it’s annual summer party. This is a big event and management wants the risks assessing.

Here’s how one of the event planners sees the uncertainty around poor weather:

There is a good chance it’ll stay dry but if it rains then we will get really wet, however if it pours then we’re in for a right drenching. I think there is a 50:50 chance it’ll rain, and a 10% chance it will pour. And if it rains one-in-twenty attendees won’t show, but if it pours half those expected will cancel.

Yet here’s how some risk professionals translate that assessment using a risk matrix:

Okay, well I have ‘wet’ down here on the matrix as a 2 and ‘drenching’ down as a 4, so let’s say the impact is a 3 and the probability is what…10% you say…. that’s on the grid as a 2? Are you happy to say the risk is a 6? That’s low overall so nothing to worry about.

Yet the user has given enough information to quantify the risk into two scenarios, optimistic and pessimistic.

In the optimistic scenario: Impact = attendance -5%, Probability = 50%

In the pessimistic scenario: Impact = attendance -50%, Probability = 10%

Now we can calculate both scenarios:

Optimistic: (-0.05 * 0.5) = -0.25 plus Pessimistic: (-0.5 * 0.1)  = -0.05

And find the midpoint (-0.25 + -0.05) / 2 = -0.15

Now we can say:

Should the risk event (bad weather) happen, the expected impact will be a fall in attendance of 15%, in the range 5% to 50%.

If the company doesn’t have the appetite for up to 50% not attending there is an opportunity to take the decision, for example, to hire a venue with both indoor and outdoor space.

Party on dudes! 

Risk Insights Explorer is the only risk tool specifically designed for undertaking first-pass evaluations of uncertainty, whether for a specific project objective, strategy decision or a more insightful view of potential events over a longer time horizon. Critically it provides robust, transparent estimates and encourages a move away from matrix-based risk ratings.

Risk Rating: Probability x Impact = Simplistic & Dangerous

Risk Managers are assumed to be at the leading edge of their profession if they provide quantitative measures of both probability and impact, and combine them to give an overall measure of risk. The most common such measure is to multiply your measure of probability of the risk with your measure of the impact of the risk  as shown below:

Probability impact matrix with risk score

The example shows a risk that has been assessed as ‘medium probability’, ‘medium cost impact’, generating a ‘risk score’ of 15.  A risk rating such ‘15’ will have no absolute meaning, (it would be inappropriate to conclude that such a rating is fifteen times more important than rating of 1).

While risk matrices are viewed by some as useful for ranking risk in order of significance (the bigger the number, the greater the risk),  it can be irrational when applied blindly.  Some advise caution, concluding risk matrices do not necessarily support good (e.g., better-than-random) risk management decisions, while others have described the PIM approach as hiding more than it reveals and that it can be a dangerous waste of time.

Unfortunately much risk analysis involves going through the motions to assign numbers without actually doing much thinking about what lies under the hood.

The correct treatment of risk requires both the impact and probability dimensions to be considered, and that focusing attention on those risks ranked as ‘riskiest’ by a multiplied figure of these two dimensions is dangerous. Indeed, the effect of low probability, high-impact risks will be quite different from that of high probability, low-impact risks, even though individually the risks can the same product term (impact x probability). It is important to consider such consequences when setting contingencies since, as would be expected, low probability, high impact risks require greater contingency than likely, low impact risks.


Understand Trends

A risk trend is a long-term pattern that is currently taking place and that could contribute to amplifying risks and/or altering the relationship between them.  Unlike risks, trends are occurring with certainty and can have both positive and negative consequences. Trends can alter how risks evolve and interrelate, and they inform efforts at risk mitigation.

The structural trends that drive uncertainty stem from multiple sources. Regulation will continue to broaden and deepen as public sentiment becomes less tolerant of any appearance of preventable errors and inappropriate business practices. Simultaneously, customers’ demands and expectations change as technology and new business models emerge and evolve.  Unless your organisation acts now to prepare for these longer-term changes, you may be overwhelmed by new requirements and developments.

Risk Insights

New Thinking, New Insight.

Risk Insights is an opportunity for organizations to enhance their users’ ability to identify, manage, and share risk information; and control risk content for improved compliance and security.

More power to your decision-making

Risk Insights helps you process risk information more efficiently and better manage and share critical business knowledge, making the most of the knowledge of every person, resource, and opportunity. Risk Insights helps you improve productivity by having all the necessary tools in one place while the community builder component helps your employees work together to make the most effective risk decisions.