What is a Risk Assessment Matrix?

Risks are always part of the equation when managing any organization. Compliance breaches, cybersecurity threats, fraud and even climate change can significantly impact a company’s reputation and bottom line. And whether it’s a change in the Santa Ana winds or a global pandemic, recent unforeseen circumstances have underscored the need for robust risk assessment visibility.

Enter the risk assessment matrix—a useful tool in the arsenal of governance, risk, and compliance (GRC) professionals to gauge risk posture. The primary purpose of a risk assessment matrix in risk management is to:

1. Provide a systematic approach to risk evaluation
2. Facilitate informed decision-making
3. Enable efficient resource allocation for risk mitigation
4. Enhance awareness of overall risk levels within the organization

How Does a Risk Assessment Matrix Work?

A risk assessment matrix functions by plotting risks on a grid according to numeric values assigned to risk criteria, typically with two axes: likelihood on one and impact on the other. The matrix uses color-coding to represent different risk levels, making it easy to visualize and prioritize risks.

Here’s a breakdown of how a risk matrix works:

Risk Identification

The tool first takes into account all of your identified risks. This list is usually the result of a collaborative approach to gather insights from various sources, such as key stakeholder sessions, expert interviews and reviewing past data.

Once potential risks are identified, they should be organized into categories or domains for clarity—think financial, operational, strategic, or compliance-related risks. This categorization helps teams focus their efforts where it matters most. We recommend cataloging your entire risk inventory into a risk register. A centralized risk register allows your to expedite the risk analysis process.

Likelihood Assessment

The matrix measures two main components:

1. Probability (Likelihood): How likely is it that a risk will occur?
2. Severity (Impact): What are the consequences if it does?

These factors are matched against identified risks and hazards, then ranked from “low” to “critical.”

Risk likelihood forecasts the chance of the risk occurring. Likely events might have up to a 90% chance occurring; highly unlikely events fall below 10%. And you can run across a spectrum of likelihood, such as:

• 1 = Improbable: Very unlikely to happen.
• 2 = Remote: Unlikely, but possible.
• 3 = Occasional: Could happen during the project.
• 4 = Probable: Expected to occur several times.
• 5 = Frequent: Likely to happen often.

Impact Assessment

This is where we gauge potential damage or disruption. The potential risk impact of each risk is evaluated, usually ranging from “insignificant” to “catastrophic.”

• 1 = Insignificant: No real impact; contractual risk is remote.
• 2 = Minor: Slight issues; minor problems may arise.
• 3 = Moderate: Some operational hiccups; temporary reputational concerns.
• 4 = Major: Significant disruption; higher reputational and contractual risks need immediate attention.
• 5 = Extreme: Severe operational impacts; major reputational damage expected.

Risk Scoring

The likelihood and risk impact ratings are combined to determine the overall risk level. Multiply the likelihood score by the impact score to get an overall risk score for each risk. This number helps quantify the level of concern associated with each risk.

Assign Numerical Values
Each level of likelihood and impact is assigned a numerical value. For example, in a 5×5 matrix:

Likelihood: Very Low (1), Low (2), Medium (3), High (4), Very High (5)
Impact: Insignificant (1), Minor (2), Moderate (3), Major (4), Severe (5)

Calculate the Risk Score
The basic formula is: Risk Score = Likelihood Score × Impact Score

For instance, a risk with a “High” likelihood (4) and “Major” impact (4) would have a risk score of 16.

Determine Risk Level
The calculated score is then used to categorize the overall risk level. A common categorization might be:

Low Risk: 1-4
Medium Risk: 5-12
High Risk: 13-19
Extreme Risk: 20-25

Visualization

Risk scores are plotted on the matrix, with high-risk items typically appearing in the top-right quadrant and low-risk items in the bottom-left. Color codes represent these levels—green for low, red for high—so you can quickly grasp the situation.

For example, a risk with high likelihood but low impact might be managed differently than one with low likelihood but high impact. The goal is to empower decision-makers to focus their efforts and resources on addressing the most significant threats first—those that could disrupt operations or pose serious challenges if left unchecked.

Ultimately, this simplified approach ensures that your organization remains proactive rather than reactive when it comes to managing risks.

Why Is a Risk Assessment Matrix Important for GRC?

There are several reasons why a real-time risk matrices are important.

1. Prioritization: Risk matrices help prioritize risks, allowing teams to focus on the most critical issues first.
2. Informed Decision-making: By providing a clear visual representation of risks, matrices enable more informed decision-making at all levels of the organization.
3. Resource Allocation: They guide the efficient allocation of resources for risk mitigation efforts.
4. Improved Communication: Risk matrices facilitate better communication about risks among stakeholders, ensuring everyone has a shared understanding of the risk landscape.
5. Compliance Support: They aid in meeting regulatory requirements and industry standards for risk management.

Types of Risk Assessment Matrices

Risk assessment matrices come in various forms, each suited to different organizational needs and risk management maturity levels. For example, a GRC professional in the financial sector might use a 5×5 risk matrix to evaluate and prioritize cybersecurity risks. They would plot potential threats like data breaches, ransomware attacks, and insider threats on the matrix based on their likelihood and potential impact. High-risk items appearing in the top-right quadrant, such as a sophisticated ransomware attack, would receive immediate attention and resource allocation for mitigation strategies.

The most common types of matrices include:

3×3 Matrix

• Description: A simple grid with 9 cells, ideal for basic risk assessments.
• Use Case: Best for small projects or organizations new to risk management.
• Advantage: Easy to understand and implement.

5×5 Matrix

• Description: A more detailed grid with 25 cells, offering greater precision in risk evaluation.
• Use Case: Suitable for medium to large projects or organizations with more complex risk profiles.
• Advantage: Provides a good balance between simplicity and detail.

7×7 Matrix

• Description: An advanced grid with 49 cells, allowing for highly nuanced risk assessment.
• Use Case: Ideal for large organizations or projects with complex, sensitive risks.
• Advantage: Offers the most detailed risk categorization.

Qualitative vs. Quantitative Matrices

• Qualitative Matrices: Use descriptive terms (e.g., low, medium, high) to assess risks. They are more common and easier to implement.
• Quantitative Matrices: Employ numerical values and data analysis for more precise risk assessment. These are typically used in industries with strict regulatory requirements or for large-scale projects.

Creating Your Own Risk Assessment Matrix

The choice of how to build the actual risk assessment matrix and what tool to use typically occurs after identifying risks but before assigning likelihood and impact scores. This decision is based on several factors:

Complexity of risks

For simple risk assessments, a basic 3×3 matrix might suffice, while more complex scenarios may require a 5×5 or larger matrix.

Organizational risk

The matrix size and tool should align with the organization’s risk management maturity and specific requirements.

A manufacturing company’s GRC team might use a risk matrix to assess and manage supply chain risks. They would plot risks such as supplier bankruptcies, geopolitical disruptions, and quality control issues on the matrix. By visualizing these risks, the team can develop targeted mitigation strategies for high-priority risks, such as diversifying suppliers for critical components or implementing more rigorous quality control measures for high-impact areas.

Available resources

The choice of tool often depends on the resources and expertise available within the organization.

Tools for Building a Risk Assessment Matrix

Common tools for building risk assessment matrices include:

Spreadsheet software

Microsoft Excel or Google Sheets are popular choices for creating simple to moderately complex matrices.

Specialized risk management software

For more advanced needs, dedicated GRC (Governance, Risk, and Compliance) software can provide robust features for creating and managing risk matrices.

In healthcare, a GRC professional could employ a risk matrix to evaluate compliance risks associated with various regulations like HIPAA. They would assess the likelihood of non-compliance incidents and their potential impact on patient privacy, financial penalties, and reputation. This visual representation would help prioritize compliance efforts and allocate resources to address the most critical regulatory risks first.

Visual tools

Some organizations may use visual mapping tools or project management software with risk assessment capabilities.

The key is to choose a tool that allows for easy creation, updating, and sharing of the risk matrix while meeting the organization’s specific needs for risk visualization and analysis.

Once you’ve determined those resources, you can follow these steps to visualize potential risks.

1. Choose Your Matrix Type: Decide on the appropriate size (e.g., 3×3, 5×5) based on your organization’s needs and risk management maturity.
2. Identify Risks: Brainstorm and list potential risks relevant to your organization or project.
3. Define Likelihood and Impact Scales: Establish clear criteria for each level of likelihood and impact.For example:
   Likelihood: Very Low (1), Low (2), Medium (3), High (4), Very High (5)
   Impact: Insignificant (1), Minor (2), Moderate (3), Major (4), Severe (5)
4. Assess Risks: For each identified risk, determine its likelihood and potential impact based on your defined scales.
5. Calculate Risk Ratings: Use the formula: Risk Rating = Likelihood x Impact5.
6. Plot Risks on the Matrix: Place each risk in the appropriate cell based on its calculated rating.
7. Color-Code the Matrix: Typically, use green for low risks, yellow for moderate risks, and red for high risks.
8. Review and Refine: Regularly review and update your risk matrix as new information becomes available or circumstances change.

By following these steps, organizations can create a customized risk assessment matrix that aligns with their specific needs and risk management objectives.

Ultimately, a risk assessment matrix is a tried-and-true tool for modern risk management. Risk assessment matrices provide a structured approach to identifying, evaluating and prioritizing risks, enabling organizations to make informed decisions and allocate resources effectively.

To learn how our GRC software can help you implement risk assessment matrices and so much more, schedule a call with us. We’re happy to show you how to leverage this visualization in your risk management program.