Building a qualitative risk analysis matrix is one of the more complicated tasks in project management. Review the process here.
The predictive skills required to carry out project management are nowhere more apparent than in the development of a probability and impact matrix. The inputs developed for use in creating this seemingly simple rating system require a great deal of expertise in qualitative risk analysis. Generally, a large number of team members (and some outside sources) must be tapped to generate a comprehensive and realistic list of risks. This is just the start since each risk event must also be evaluated to determine how likely it is to occur and how much damage it is likely to do.
Project Objectives and Risk Ratings
Each organization must determine its own standards and risk thresholds to develop a useful rating system. The probability of risk and the impact it may have on project objectives such as time, cost, and quality should be objectively determined and assigned a numeric or descriptive risk level. Some companies use a scale of one to ten; others use a ‘very low’ to ‘very high’ rating system. The simplest approach is often to assign a separate risk rating for each factor such as time, cost, and so forth as a first step. Determining the risk level of one factor (probability or impact) at a time on separate charts may also make things easier. The type of project management graph created at this stage is very straightforward to interpret since it can feature a simple x (column) vs. y (row) layout.
Probability & Impact Combined
Once a workable system has been developed for calculating risk ratings, these points can be plotted on a matrix. At this stage, it is possible to combine the ratings for probability and impact on the same graph to create an overall or “total” risk classification. This type of matrix may require the use of color coding or shading to offer a readily grasped visual for team members and other stakeholders. For example, probability may be plotted on one axis and impact on the other. Each point on the graph where these factors intersect may have an overall risk level represented by color. High probability/high risk areas on the matrix might be red, mid level risk areas yellow, etc.
A combined matrix is most useful in determining the amount of resources that should be directed at preventing a particular negative event from occurring. Events with a low probability may not require a large investment of time and funds to avoid even if they would have a fairly high impact. They may simply need to be monitored to see if the probability rating rises. On the other hand, events with a high probability and a low impact may be worth addressing immediately (if this can be done cost effectively) simply to keep things running smoothly.
The thought process used to arrive at an accurate rating assessment for each risk should be fully documented. So should a description of the anticipated outcome of each potentially negative event. This information is particularly important for the ongoing risk review process that should occur throughout the duration of the project. Having access to the data that was used to reach the initial set of conclusions helps reduce the time and effort required for re-evaluation later. With something as complex as risk analysis, it is very unlikely that the project management team will remember all the details without this documentation.