As an industrial engineer who became a lean management expert, I’ve come across many risk management tools. However, the risk matrix is one of the most effective risk management tools because it’s a simple visual aid that ranks risks.
In this tool breakdown, you’ll discover how the risk matrix can help you make smarter decisions, reduce surprises, and accelerate your progress as a continuous improvement professional. So how does a risk matrix work, and why is it important for any professional focused on improvement?
Understanding Risk Matrices
A risk matrix is one of the most useful tools I’ve encountered in my career. It’s a visual aid to evaluate and prioritize risks. The matrix has two axes: likelihood and impact. These are the two building blocks of risk analysis.
Risk matrices come in different shapes and sizes. Most companies use a three-step (low, medium, high) or five-step (1-5) severity of impact scale. I’ve found the decision often comes down to the complexity of the project or organization.
There are many benefits of using a risk matrix. It’s a visual representation of risks, making it easy to make quick decisions. You’ll also rely on it a lot to communicate risk to stakeholders. It’s also an excellent way to standardize risk assessment across an organization and ensure everyone is managing risk the same way.
I implemented a risk matrix at a manufacturing plant that was struggling with safety issues. It completely changed their approach to safety and mitigating risk. And one of the reasons it was so effective was the visual nature. It was something that was easy for all employees to understand and participate in risk management.
Creating a Risk Matrix
Creating a risk matrix is simple, though it requires thoughtful analysis. Here are the steps I use to create a risk matrix:
- Define scope and context
- Identify potential risks
- Define likelihood and impact scales
- Assign risk levels
- Review and refine the matrix
A 5×5 risk assessment matrix is the most common, along with predefined impact and probability scales. You’ll have to define what each scale means in that particular context.
Adapting risk matrices to specific industries or projects is essential. For example, the maturity of the risk matrix I use in consulting varies from automotive plants to software teams. The key is to ensure that the matrix captures the key risks and priorities of the industry or project.
Just remember that the matrix is a tool, not the decision maker. Use the matrix to help inform your risk management strategy, though also use your own common sense and expertise.
Interpreting Risk Matrices
Understanding risk levels and their implications is key to effective risk management. Where you place a risk on the matrix defines its priority. Risks in the top right corner (high likelihood high impact) are top priorities. Risks in the bottom left corner (low likelihood low impact) are often being monitored but not actively managed.
We use color coding to make the visual interpretation easier:
- Red: High risk – take immediate action
- Yellow: Medium risk – develop mitigation strategies
- Green: Low risk – monitor and reassess periodically
Despite the value a risk matrix provides, it does have limitations. It can oversimplify more complex risks and influence bias in how you think about risk. I’ve also seen teams only focus on the highest risks and overlook just slightly less high medium level risks.
Use the risk matrix as one tool in your risk management arsenal. It’s a great starting point for discussion and analysis, but it shouldn’t be the only thing you rely on for risk assessment.
Risk Matrix Applications
Risk matrices are useful in many different industries. In project management, they’re essential for identifying and addressing potential roadblocks. I’ve also used them in financial risk analysis to help companies make data-driven investment decisions.
The use of a risk matrix has significantly benefited operational risk management. It helps you prioritize which processes to improve and where to allocate resources. I also frequently apply risk matrices in environmental risk analysis to identify potential environmental impacts and the best strategy to mitigate those risks.
The Project Management Institute (PMI) highlights the importance of analyzing and managing risks to ensure projects are completed successfully. And risk matrices are the best way to take a structured approach to risk analysis.
Risk Likelihood and Impact Scales
Defining the likelihood categories is a key step to building an effective risk matrix. Below is a common 5-category scale I use:
- Highly Likely (91%+)
- Likely (61-90%)
- Possible (41-60%)
- Unlikely (11-40%)
- Highly Unlikely (<10%)
The impact severity scale will vary based on the context. For example, it might be financial loss, operational disruption, or reputational damage. Quantitative scales are based on specific metrics (e.g. dollars) while qualitative scales use non-numeric descriptors (e.g. minor, moderate, major).
In my opinion, each industry requires unique scales. For example, what might be a “high impact” event for a small retail business might be somewhat trivial in the aerospace industry. The key is to make sure your scales are relevant to the context of what you’re discussing.
Risk Impact Calculation
The risk impact calculation is simple: Likelihood x Severity = Risk Impact. Yet, applying the risk impact calculation can be tricky. The risk impact, the combination of Likelihood and Severity, is complex as it depends on risk type, potential second-order effects, and the organization’s risk tolerance.
Here are a few examples of a risk impact calculation:
- High likelihood (0.9) x High severity (5) = 4.5 (High risk)
- Medium likelihood (0.5) x Low severity (1) = 0.5 (Low risk)
- Low likelihood (0.1) x High severity (5) = 0.5 (Medium risk)
Those risk impact calculations are useful when making a decision. It lets you compare very different risks on a single dimension so you can prioritize and invest resources accordingly.
Best Practices for Using Risk Matrices
Regular risk matrix review and updates are necessary as the risk landscape is constantly evolving, and you want your assessment tools to do the same. At a minimum, I’d suggest quarterly reviews with more frequent updates if your environment is changing rapidly.
Involving stakeholders in the risk matrix has several benefits. It introduces more diverse perspectives and ensures everyone from the board room to the front line feels ownership over the risk process. Combining the risk matrix with other risk management frameworks, such as SWOT analysis, or scenario planning will give you a better view of the complete set of risks.
Common pitfalls of the risk matrix:
- Relying too heavily on the risk matrix instead of expert judgment
- Ignoring low probability, high impact risks
- Forgetting to consider how risks interrelate with one another
- Creating a risk matrix that’s too complicated to explain clearly
Risk Matrix in Cybersecurity
Risk matrices are becoming more relevant in information security. 61% of cybersecurity professionals leverage a risk matrix in some capacity, so these tools are critical to managing digital risk.
Most traditional digital risks, like data breaches, malware, and insider threats, can be accurately represented on a matrix. From there, you can use the visual framework to identify the highest priority security controls and ensure you’re efficiently allocating resources.
The continuous evolution of digital risk is an ongoing challenge for risk matrices. New risks are constantly emerging, and the rapid pace of technological change is only creating more. Connecting with a cybersecurity framework like NIST or ISO 27001 also improves the efficacy of using a risk matrix for digital risk.
Historical Development of Risk Matrices
The historical origins of risk matrices can be traced back to at least 1978 when the US Department of Defense played a significant role in their standardization as a risk assessment tool. This laid the groundwork for the broader adoption of risk matrices as we know them today.
Risk matrices have since been widely adopted across industries. Whether you work in finance, healthcare, or any other industry, you’ve likely used a risk matrix at some point. The evolution of digital tools has only increased their value, as you can now update risk matrices in real time and integrate more complex data.
Today, digital risk matrices are one of the most common adaptations of the traditional risk matrix. These are often AI and machine learning risk matrices that provide more accurate risk assessments and even predictions.
In my own career, I’ve watched the evolution of risk matrices from basic pen and paper grids to more advanced digital tools. Despite these advancements, the basic idea behind a risk matrix remains the same: it’s a simple visual tool to help you make a decision.
Final Thoughts
Risk matrices are excellent uncertainty management tools. They allow you to rank risks and make better decisions in many industries. Whether you work in project management or cybersecurity, risk matrices offer a structured way to evaluate risk.
Just be sure to personalize your matrices, include stakeholders, and update them regularly. You’ll eventually master risk matrices and wonder how you ever worked without them. I’ve certainly found them helpful in my manufacturing and consulting jobs.
