What is a Risk Assessment Matrix? (And How to Build One)

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.