What is a Risk Matrix? (With Example) | Wrike (2023)

Imagine you’re the assigned project manager on a high-stakes project. The project scope is defined, key stakeholders are in agreement, you’re confident you can stay within the budget, and the project team is ready to dive in.

They start working tirelessly to meet the agreed-upon objectives — and then an unexpected risk meets you midway through the project. You never saw this one coming, so you have no idea how you’re going to get the project back on track and see it through to success.

If only you had identified and assessed the risk during the project planning phase, you might have felt more prepared to overcome it. That’s what a risk assessment matrix is used for and why you need one for your projects.

What is a risk assessment matrix in project management?

Risks in project management are unexpected events that may or may not occur and impact your project outcome in some way. According to the Project Management Institute (PMI), analyzing and managing risks is a key practice in project management. It improves the chances of successful project completion while reducing the consequences of any risk that occurs.

Risks can appear related to any aspect of a project, including the budget, resources, processes, or technology, to name just a few. While it can be easy to assume that all risks bring negative consequences to the table, it’s essential to understand that positive risks can also occur during the project life cycle.

(Video) What is a risk matrix? | Effective Risk Assessments | iHASCO

A risk assessment matrix (sometimes called a risk control matrix) is a tool used during the risk assessment stage of project planning. It identifies and captures the likelihood of project risks and evaluates the potential damage or interruption caused by those risks.

The risk assessment matrix offers a visual representation of the risk analysis and categorizes risks based on their level of probability and severity or impact. This tool is a simple, effective way to get a holistic view of the project risks for all team members and key stakeholders.

Risk matrix example

Let’s take a look at a simple risk matrix example for a project. We’re using a 5x5, five-point scale for the impact and probability in this matrix example, but use a scale system that works best for your team. For example, you can use a 3x3 matrix for less granularity.

Impact or Severity

Probability or Likelihood

Insignificant

Minor

Moderate

Major

Catastrophic

Very Likely

Low-Medium

Medium

Medium-High

High

High

Likely

Low-Medium

Low-Medium

Medium

Medium-High

High

Possible

Low

Low-Medium

Medium

Medium-High

Medium-High

Unlikely

Low

Low-Medium

Low-Medium

Medium

Medium-High

Very Unlikely

Low

Low

Low-Medium

Medium

Medium

In this example, you see risk categories ranging from low to high and likelihood ranging from very likely to very unlikely. Using it is as simple as any other matrix: You look for where both of your criteria meet to get your risk rating.

Let’s say you’re the project manager for a new organization-wide software tool rollout and will be working with a consultant to implement it. For this project, consultant delays are possible due to a lack of resources on their end, and if a delay happens, the impact would be major because it would impact the entire rollout plan. We’d categorize this risk as medium-high based on the example matrix.

(Video) Risk and How to use a Risk Matrix

What are the benefits of a risk assessment matrix?

You might be wondering if it’s worth spending the time to assess risks and create a matrix for all of your projects. Well, the benefits of a risk assessment matrix speak for themselves:

  • You can prioritize all risks with an understanding of the level of severity. Having an overview of all potential risks allows you to prioritize them against one another if multiple risks occur. This prioritization will benefit your project team and help keep them on track if the project does go awry.
  • You can devise strategies and allocate resources for the unexpected. While it’s impossible to fully plan for uncertainty, acknowledging and understanding what risks could occur provides an opportunity to create action plans for those unexpected events. Appropriately planning for risks increases the likelihood of project completion and success.
  • You’ll reduce or neutralize the impact of risks that occur. The unexpected consequences of a risk that’s not thought about in advance might feel more severe and damaging than a risk identified and analyzed early on. Having an awareness of the potential impact can reduce or neutralize the effect of a project risk before it occurs. Hope for the best, but prepare for the worst.

What are the challenges of a risk matrix?

While risk matrices can be very useful for identifying and preparing for project risks, they are not an answer to all your project problems. Here are some of the challenges of risk matrices:

  • Inaccurate assessments:The risk matrix categories may not be specific enough to compare and differentiate between risk levels accurately. The severity and likelihood of certain risks are often subjective and therefore unreliable.
  • Poor decision-making: Incorrectly categorized risks can lead to poor decision-making since you do not have an accurate picture of potential issues.
  • Doesn't account for timeframes: Risk matrices don't differentiate between risks that could occur two weeks from now and risks that could occur in two years' time. There is no consideration of how risks could change over the years.
  • Can oversimplify risks: The complexity and volatility of risks can be oversimplified — some risks remain the same over time, while others can change overnight.

How do you calculate risk in a risk matrix?

A risk matrix is a valuable tool for your project planning, and creating one doesn’t have to be complicated. Follow these steps to calculate risk for a project of your own.

Step 1: Identify the risks related to your project

To complete your risk assessment matrix, you need to start by having an in-depth understanding of your project — the scope, budget, resources, timeline, and goal. You’ll need this information to help you spot the potential risks.

Identify as many risks as you can with your project team. Consider aspects like scope creep, budgetary constraints, schedule impacts, and resource allocation as the starting points for your risk identification process. Create a risk register complete with all of the identified risks, as it will make it easier to create your matrix.

(Video) Risk Matrix

Step 2: Define and determine risk criteria for your project

No two risks and no two risk matrices are alike, which means you’ll need to work with your project team and key stakeholders to define and determine the risk criteria you’ll use to evaluate each risk you’ve identified.

Remember that two intersecting criteria need to be specified, each with its levels: the probability or likelihood that the risk will occur and the severity or impact the risk will have.

Step 3: Analyze the risks you’ve identified

After you’ve identified and described all of the potential risks, the next step is to analyze them. In your analysis, use your risk criteria to categorize each risk within its appropriate severity level and probability.

Many matrices assign a number value to criteria. So, sticking with our example, you might rate the impact ranging from one (insignificant) to five (catastrophic) and do the same with likelihood, where one represents very unlikely, and five represents very likely.

Using the matrix, it’s then easy to multiply severity times likelihood to get a number value. A risk that’s catastrophic and very likely would rank as a 25, whereas one that’s insignificant and very unlikely would rank as a one. It’s a simple and intuitive way to compare and understand risks.

(Video) Types of Risk assessments | how to calculate Risk Matrix | how to fill Risk Assessment Formats |

Step 4: Prioritize the risks and make an action plan

Your final step is to prioritize the risks and create risk management plans to mitigate or neutralize them, with your risks categorized accordingly. You’ll want to outline the steps you’ll take if the risk does occur and the strategies you’ll deploy to help get the project back on track.

How do you create a risk matrix in Excel?

Wondering how to make a risk matrix in Excel? Start by building a table that reflects the probability and severity scales you’ve defined for your risk assessment. Here are a few tips to help you get started:

  • After you’ve created your table, add your labels to the rows and columns. Use the columns for severity and rows for the likelihood of occurrence.
  • Once you’ve labeled all of your column and row headers, add the definitions for each probability and severity level you’ve outlined with your team beneath the header title. This helps ensure the team is on the same page when ranking risks within the matrix.
  • Use formatting options to color coordinate the matrix for the best visual representation. You can use the stoplight system (red, yellow, green) for high, medium, and low risks, respectively. Using different colors allows any viewer to easily distinguish the risks based on the likelihood that they will occur and the amount of damage or interruption they’ll cause.

How do you create a risk matrix in Wrike?

If an Excel sheet isn’t your jam when it comes to tracking and monitoring risks, you can use Wrike to create a risk matrix. Some of the key features Wrike has that you can use to assess project risk include:

  • Custom fields that allow you to build out the severity and probability any way you want to. You could turn these into drop-down rankings on a one-to-five scale or use the text option to label your categories.
  • Table view to provide greater visibility into the risks and a similar table to the one you can create in Excel.
  • Reports and calculated fields to automate the data associated with your assessed risks.
  • Interactive Gantt charts that allow you to create task dependencies and streamlined automation of changing project dates and deadlines. Project progress can be monitored in real-time, which allows your team to keep risks top of mind, so the important stuff doesn’t get overlooked.

The best part about using a platform like Wrike is that it can automatically update and adjust as your project progresses, saving you from the manual work required in Excel.

What do you do with risk matrix results?

So, what does a risk matrix accomplish for you? The short answer is that your matrix results help you create a risk response plan.

(Video) Risk Matrix Assessment - How to Use | Severity and Likelihood | Step 3 | Risk Assessment

To start with, it’s crucial to address the risks that are ranked high or extreme. Depending on the project and your team’s resources, you may only need to monitor the medium and low-risk categories rather than taking immediate action.

Finally, reference your risk matrix throughout the project until it’s marked complete and successful. Don’t make the mistake of not committing to risk management as an ongoing process. Using this tool is a powerful way to support your project team and mitigate any bottlenecks that stand in the way between them and a winning project.

Are you ready to get ahead of the game and stop losing sleep over project risks? Sign up for a free trial of Wrike to start building risk matrices with your team today.

FAQs

What is risk matrix explain with example? ›

A risk matrix is a matrix that is used during risk assessment to define the level of risk by considering the category of probability or likelihood against the category of consequence severity. This is a simple mechanism to increase visibility of risks and assist management decision making.

What is your understanding of risk matrix explain in your own words? ›

As previously stated, a risk matrix will visually tell you the levels of risk that your organisation is facing. They are often used during the risk assessment process to help you decide which risk management strategy will be best to deal with them as well as which risks need prioritising.

What are examples of risk? ›

Examples of uncertainty-based risks include:
  • damage by fire, flood or other natural disasters.
  • unexpected financial loss due to an economic downturn, or bankruptcy of other businesses that owe you money.
  • loss of important suppliers or customers.
  • decrease in market share because new competitors or products enter the market.
1 Feb 2021

How do you explain risk assessment matrix? ›

A risk assessment matrix is the table (matrix) used for allocating risk ratings for risks that you identify, based on two intersecting factors: the likelihood (or probability) of a security risk-based event occurring, and the consequence (or impact) to an asset if it did.

What are examples of risk metrics? ›

Examples
  • Deaths per passenger mile (transportation)
  • Probability of failure (systems reliability)
  • Volatility (finance)
  • Delta (finance)
  • Value at risk (finance/actuarial)
  • Probability of default (finance/actuarial)

What is risk simple answer? ›

According to the International Organisation for Standardization (ISO), the risk would be defined as a "combination of the probability of an event and its consequences".

What is a risk matrix called? ›

A risk matrix (also called a risk diagram) visualizes risks in a diagram. In the diagram, the risks are divided depending on their likelihood and their effects or the extent of damage, so that the worst case scenario can be determined at a glance.

Why is a risk matrix important? ›

The risk assessment matrix will help your organization identify and prioritize different risks, by estimating the probability of the risk occurring and how severe the impact would be if it were to happen.

What are the main terms used in the risk matrix? ›

A risk matrix is a graph of the severity or likelihood of an unwanted event. There are two major categories used to assess a risk, which are severity and probability. The severity of the risk falls within 5 categories which include: insignificant, marginal, moderate, critical, and catastrophic.

What are 3 examples of risk factors? ›

Risk factor examples

Negative attitudes, values or beliefs. Low self-esteem. Drug, alcohol or solvent abuse. Poverty.

What are four examples of common risk? ›

4 Risk Response Strategies for Project Management Success
  • Avoid. Avoiding a risk means to completely eliminate it. ...
  • Transfer. Transferring risk involves shifting the risk to some other entity, such as an insurance company. ...
  • Mitigate. ...
  • Accept.
21 Oct 2019

How many types of risk matrix are there? ›

You can use this three-part scale to assess the severity of the risk. They are high risk, medium-risk, and low-risk.

What is risk matrix chart? ›

A risk matrix is a risk analysis tool to assess risk likelihood and severity during the project planning process. Once you assess the likelihood and severity of each risk, you can chart them along the matrix to calculate risk impact ratings.

What is an example of a metrics? ›

Examples of Metrics

Key financial statement metrics include sales, earnings before interest and tax (EBIT), net income, earnings per share, margins, efficiency ratios, liquidity ratios, leverage ratios, and rates of return. Each of these metrics provides a different insight into the operational efficiency of a company.

How do you write a risk matrix? ›

How do you calculate risk in a risk matrix?
  1. Step 1: Identify the risks related to your project. ...
  2. Step 2: Define and determine risk criteria for your project. ...
  3. Step 3: Analyze the risks you've identified. ...
  4. Step 4: Prioritize the risks and make an action plan.
13 May 2022

What is an example of key metrics? ›

Here are a few examples of key marketing metrics: Lead Conversion Rate - the percentage of website visitors who are captured as leads. Average Time on Page - average amount of time a user spends on a single website page.

How do you answer a risk question? ›

To answer this interview question, take the following steps:
  • Consider the company. Before preparing your response to what your biggest risk is, research the company and its values. ...
  • Select an example. ...
  • Mention the risk involved. ...
  • Explain your thought process. ...
  • Share the results that occurred.
30 Nov 2021

What is risk explain its types in short? ›

Definition: Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment. Description: Risks are of different types and originate from different situations.

What is a good risk definition? ›

Good risk: Weighing all the possible results and being able to come up with (and implement) a solution – difficult though it may be – should the worst case scenario happen. Bad risk: Weighing all the costs and not being able to come up with a plausible solution should the worst case scenario happen.

What is risk matrix in business? ›

A risk matrix or business risk assessment matrix is a graph that you use to plot the probability of certain risks occurring against the impact this would have on your business. In other words, how likely is it that this identified risk will actually happen, and how severely will it affect your business if it does?

What is the importance of risk? ›

It helps in calculating the uncertainties and also predict their impact, consequently giving organizations a basis upon which they can make decisions.

What's right with risk matrices? ›

A risk matrix which considers only one category of consequence and/or only one estimation of likelihood is likely to be of limited value. It is also likely to yield inconsistent results because it will attempt to measure all risks against one category.

What is an example of risk in your everyday life? ›

A driver is approaching a yellow light and must choose to brake in order to stop in time for the light to turn red or to accelerate to make it through the light before it turns red. If the driver accelerates, he is risking going through the light which could result in an accident or a ticket.

What are two examples of an everyday risk? ›

Everyday Risks People Face to Their Long-Term Health
  • Lack of Sleep. Most individuals know that 7–9 hours of sleep is recommended for everyone. ...
  • Excessive Alcohol Consumption. ...
  • Poor Posture. ...
  • Sun Exposure. ...
  • Dehydration. ...
  • Excessive Sitting. ...
  • Too Much Screen Time. ...
  • Poor Eating Habits.
9 Jun 2021

What are the two most types of risk? ›

The two major types of risk are systematic risk and unsystematic risk. Systematic risk impacts everything. It is the general, broad risk assumed when investing. Unsystematic risk is more specific to a company, industry, or sector.

What is the 5 types of risk? ›

Types of Risks
  • Market Risk. ...
  • Interest Rate Risk. ...
  • Inflation Risk. ...
  • Currency Risk. ...
  • Liquidity Risk.

What are the top 10 risks? ›

Top 10 Op Risks 2022
  • Talent risk.
  • Geopolitical risk.
  • Information security.
  • Resilience risk.
  • Third-party risk.
  • Conduct risk.
  • Climate risk.
  • Regulatory risk.
31 Mar 2022

Who made the risk matrix? ›

1 Risk matrix. The idea of a risk matrix was first developed in the Electronic System Centre, US Air force (Garvey & Lansdowne, 1998).

What is a risk map example? ›

In the enterprise, a risk map is often presented as a two-dimensional matrix. For example, the likelihood a risk will occur is plotted on the x-axis, while the impact of the same risk is plotted on the y-axis. A risk matrix that includes natural disasters and human risk factors.

What is Process Risk example? ›

Process Risk — a way of expressing the variation in potential outcomes based on the size of the sample. The risk decreases as the sample size increases. For example, loss forecasts rely on historical loss data. Increased amounts of credible loss information reduce the amount of process risk inherent in the calculation.

What is risk profile example? ›

An individual investor might use a risk profile to illustrate the risk of losses associated with a number of positions. In the diagram above, each number corresponds an active position that falls into the risk category. For example, the investor has 6 positions that have a 0-5% risk of a loss greater than $100,000.

What is market risk with example? ›

Market risk is the risk of losses on financial investments caused by adverse price movements. Examples of market risk are: changes in equity prices or commodity prices, interest rate moves or foreign exchange fluctuations.

What is risk and explain? ›

Definition: Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment. Description: Risks are of different types and originate from different situations.

What is risk and types? ›

Risk Types: The different types of risks are categorized in several different ways. Risks are classified into some categories, including market risk, credit risk, operational risk, strategic risk, liquidity risk, and event risk. Financial risk is one of the high-priority risk types for every business.

Why are risk matrices important? ›

A risk matrix enables you to identify and assess all the risks involved and the severity of their impact on the project. You can then form the best mitigation plan and control your project's fate.

What is key risk? ›

A key risk indicator (KRI) is a metric for measuring the likelihood that the combined probability of an event and its consequences will exceed the organization's risk appetite and have a profoundly negative impact on an organization's ability to be successful.

What are the 4 types of risk? ›

The main four types of risk are:
  • strategic risk - eg a competitor coming on to the market.
  • compliance and regulatory risk - eg introduction of new rules or legislation.
  • financial risk - eg interest rate rise on your business loan or a non-paying customer.
  • operational risk - eg the breakdown or theft of key equipment.

What means risk assessment? ›

A risk assessment is the process of identifying what hazards currently exist or may appear in the workplace. A risk assessment defines which workplace hazards are likely to cause harm to employees and visitors.

What are 5 examples of markets? ›

The following are common examples.
  • Financial Markets. Large scale platforms of financial exchange such as stock, bond, derivatives, commodity and money markets.
  • Over-the-Counter. A market that is conducted by a dealer network. ...
  • Reinsurance. ...
  • Crowdfunding. ...
  • Farmer's Markets. ...
  • Wholesale Markets. ...
  • Trade Fairs. ...
  • Events.
12 Mar 2017

What is an example of financial risk? ›

Financial risks are risks faced by the business in terms of handling its finances, such as defaulting on loans, debt load, or delay in delivery of goods. Other risks include external events and activities, such as natural disasters or disease breakouts leading to employee health issues.

How do you measure risk? ›

Risk—or the probability of a loss—can be measured using statistical methods that are historical predictors of investment risk and volatility. Commonly used risk management techniques include standard deviation, Sharpe ratio, and beta.

Videos

1. Risk assessment and Risk matrix, How to use them together? + template
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2. How to Make a Risk Assessment Matrix in Excel
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3. How to Make a Risk Assessment Matrix
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