To begin with, let’s consider a scenario. Your organization has received a new project. As the project manager, you have defined the project charter, scope, and other necessary attributes and got your stakeholders’ approval. The project has begun and is running its due course, but suddenly, your critical resource takes unplanned leave indefinitely due to unavoidable personal reasons. Since you didn’t have a backup plan in place, your project’s deadline is delayed.
Moreover, you will have to resort to last-minute hiring, which may lead to cost escalations and compromise the quality. In short, the risk of unplanned absenteeism translated into an issue that could derail your project. If only you had a backup strategy in place, you would be better equipped to secure its success. This is what exactly a risk matrix helps you do.
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.
This blog walks you through the concept of a risk matrix, its advantages, and how to create it. Before that, let’s get a grip of the basics,
Types of risks involved in a project
No project is absolutely risk-free. However, risks are actionable as long as they don’t turn into issues.
So, before going to the different types of risks involved in a project, it is vital to understand the difference between risks and issues in detail.
Risks vs. issues
Risks are unexpected events or conditions that haven’t occurred yet but can adversely affect a project. Each risk has a certain probability of occurrence, and the project manager has to assess its impact and form a contingency plan beforehand.
Issues, on the other hand, are the events that have already occurred. If risks are not mitigated proactively, they turn into issues and lead to significant roadblocks in the project’s execution. These issues are actionable and need urgent attention and control measures to prevent them from causing further discrepancies.
Given the differences between the risks and issues, let’s read about the various risks involved in the project.
Types of risks
Though the exact nature of risks can vary project-wise and industry-wise, you can segregate them broadly into four common categories as below.
Technical risks
These risks are associated with the technology implemented during the project’s course. They can be glitches related to the software, hardware, storage, data security, etc., in your project. Failure to manage these risks may result in security breaches, system failures, increased maintenance time, and more.
External risks
External risks, as the name indicates, are the risks that are outside your organization’s direct control but have the potential to disrupt your project. These can be related to fluctuating demands, market volatility, environment, compliance issues with the government, etc.
Organizational risks
Risks related to the company’s resources and work culture that could influence your project’s execution come under this category. They can be the absence of the requisite skilled staff, policies, compliance issues, etc.
Project management risks
Project management risks are those related directly to your project team and the internal factors that could impact employee performance. Some examples are scope creep, poor stakeholder involvement, budget/time overruns, subpar deliverable quality, etc.
These risks can further be organized based on their probability of occurrence and impact using a risk matrix.
Here is the detailed description,
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What is a risk matrix?
A risk matrix is a virtual representation of risks and their impact on the projects. It is essentially a grid where the left side (X-axis) represents a risk’s probability, while the top (Y-axis) represents its impact. We have included a visual representation in the later section of the article for better understanding.
While the probability is generally visualized in terms of its likelihood, you can also show it in terms of percentage ranges. The impact of a risk on a project, if it occurs, shows its severity level. The priority of a risk increases in proportion to its likelihood and severity in the risk matrix.
Some organizations introduce even a third axis to denote the “probability of consequence”, which depicts the likelihood of a consequence once a risk occurs. This way, the risk matrix becomes a risk cube (3-d representation of risks).
With the basic idea of the risk matrix, let’s delve deeper into its advantages,
Benefits of a risk matrix in project management
PMI’s research suggests that early recognition of undesirable events is a precondition for efficient risk management.
Therefore, it is imperative for a project manager to foresee risks, be ready with a contingency plan to mitigate them, and keep the project on track.
A risk assessment matrix is a powerful visual tool that enterprises use to identify, analyze, and segregate all possible risks in a project.
It can help managers take a methodical and structured approach towards risk mitigation.
The following section explains how it benefits the project management landscape:
Helps prioritize risks involved based on the severity
A complete overview of all the project-related risks allows managers to diligently assess each one of them and not miss out on any important ones. A comprehensive analysis of its likelihood and impact also facilitates the prioritization of risks against one another in a multiple-risk scenario. It further helps in segregating them into high, medium, and low-priority and gauging the level of preparation needed to tackle each of them.
Enables managers to devise risk management strategies in advance
As stated earlier, with complete visibility into risks, the project manager can easily analyze their severity levels. They can bring the team together, brainstorm, and determine effective measures to manage them proactively. It, thus, enables a project manager to have an effective contingency plan ready to handle the risks that may surface during the project’s course. Furthermore, it helps prevent risks from turning into significant roadblocks and prevent the project from derailing further.
Ensures timely delivery of projects by eliminating bottlenecks
A visual representation of risks gives a project manager a clear idea of the risks and the hindrances they can cause. The grid format allows easy categorization of the risks, and thus, managers can stay ready to tackle them in advance and ensure timely project completion. For instance, let’s say a project manager overseeing a construction project may have apprehensions about the timely supply of raw materials that could become a significant roadblock. In that case, they can proactively look for alternative suppliers to prevent hurdles and delays in the future.
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Standardizes risk evaluation protocol across the enterprise
Risks can vary from one project to another. Therefore, the risk matrix cannot be precisely the same for two projects. However, defining standard criteria for the evaluation of risks involved in a project, i.e., implementing a risk matrix in this case, can help improve efficiency. Moreover, this systematic protocol keeps everyone on the same page and makes it easy for stakeholders to evaluate and approve action plans.
Ascertains regulation of resource health index
As resources are the drivers of a successful project, any risks related to them are critical. Thus, factoring in and addressing them in time can help secure your project’s budget and timeline while keeping the resource health index in check. These risks involve reduced employee productivity, poor engagement, unplanned leave, etc. Continuing the first example, project managers can keep a spot for a backup resource to combat unplanned absences of critical employees.
Moreover, in case the employees are overloaded or overutilized, they can implement resource smoothing where they can distribute the work uniformly among the remaining team members.
Thus, it helps prevent the burnout of the individual resources and upkeep their engagement and productivity, thereby regulating their health index.
Prevents potential scope creep and controls the project’s lifecycle
Sometimes, if a project manager fails to notice any potential risks, it can affect the entire project lifecycle if they materialize. A risk matrix enables a project manager to determine the possible risks that could result in scope change. It also helps find the extent to which a scope change is manageable. The project manager can then take appropriate proactive measures to mitigate risks, minimize scope change, and prevent it from turning into scope creep.
Read More: What is Scope Creep, and How to Avoid it in Project Management?
After discussing the benefits of a risk assessment matrix, let’s understand how to create a risk matrix for a project.
How to create a risk matrix?
There are some fundamental steps you need to follow to create an effective risk matrix for your project. Below are the four main steps involved.
Define and customize the matrix according to your project
The type and size of the risk matrix are unique to an organization or project based on its nature and requirements. Based on these factors, you can determine the number of levels of the likelihood and their severity. It will help you customize the size and add other dimensions like the probability of consequence of risk or range the severity from very low to very high instead of just low to high. For instance, the risk matrix in an IT project is generally 5 x 5. It is because the risks are multi-faceted and have 5 levels ranging from “Very Low” to “Very High” in terms of likelihood and severity.
Identify the potential risks that could surface in the project
Once you customize the risk matrix, the next step is the identification of risks. Risks are generally specific to a project and depend on its nature. Therefore, it is imperative for managers to diligently assess the project’s attributes and tasks involved, including the industry it belongs to and more. Based on that analysis, they document the risks that can surface.
Additionally, the project manager can refer to projects of the same nature from the past, find the risks that surfaced previously, and add them. Moreover, the lessons learned reports can help determine the mitigation strategies they used to tackle risks and improve their current risk management plan
Analyze likelihood of risks and their impact on the project’s progress
After identifying and defining risks, the next step is assessing the probability of risks and the extent to which they can hamper a project. In this, you can use the predefined risk evaluation criteria to gauge each risk and determine its likelihood and impact. You can also take help from the previous project closure reports, stakeholders’ experience, and examples from your industry for more accurate analysis.
Some organizations assign a numerical value to the likelihood and severity levels ranging between 1 and 5. You can give a numerical value to your risk as well by multiplying the severity and likelihood.
(Risk Number = Likelihood x Severity Level)
For instance, in a 5 x 5 matrix, the risk that’s very likely and has a very high impact on the project would rank as 25.
Prioritize the risks and prepare a mitigation plan
In this step, you need to segregate the risks based on priority. Besides, depending on the numerical values assigned to each risk, you can prioritize them in 3-4 categories: critical, major, moderate, minor, etc. After prioritizing the risks, you need to prepare a proper mitigation plan to tackle all those risk scenarios – especially high-priority ones.
Given below is an example of a risk matrix explained in detail for better understanding.
Risk Matrix Example
To understand the concept of the risk matrix better, let’s consider an example here.
A construction firm takes up a new project – building a shopping mall. The firm analyzes all the aspects, understands the requirements, and comes up with the list of risks as below.
Against each risk, it mentions its probability of occurrence and the level of impact as shown.
In the next step, the project manager creates a 2 x 3 risk matrix. On the X-axis, they plot the two probability levels – unlikely and possible. On the Y-axis, they plot the level of impact a given risk can have on a project.
Note – To keep the example simple and comprehensible, the levels of probability and severity of risks have been kept to a minimum. However, a real-life construction project may have a more granular risk matrix of even up to 5 x 5 or more in size.
Here is the final risk matrix the construction project manager creates.
If you assign numbers to the probability and impact levels in an increasing order like this:
Likelihood: Unlikely – 1 and Possible – 2
Impact level: Low – 1, Moderate – 2, and High – 3,
You can give a numerical value to each risk using that. The higher the number, the more critical the risk is. For example, the risk of “budget overruns” is towards the high end on both probability and impact level scales. It is also possible to calculate its numerical value by multiplying its likelihood and impact level scale, which is
Risk number = 2 (probability level) x 3 (risk impact level) = 6
You can calculate the risk numbers for other risks in the same way. For example, the risk number for approval issues, hazards, and resource crunch will be 3 (1 x3). So, these risks can be considered “medium-priority” risks.
As the risk of “underutilized risks” lies on the lowest end of both the scales, it is a low priority risk. Its risk number is also 1 (1×1) if we calculate it similarly to others.
With this risk matrix, the construction project manager can segregate the risks into high-priority, medium priority, and more. T
his visibility of risks and their segregation into different priority levels helps formulate a robust contingency plan to tackle each risk efficiently and proactively.
For example, in this risk matrix, the risks of resource crunch, approval issues, hazards, etc., have the highest risk number 6. So, the project manager should first formulate the contingency plan for them, followed by others.
Read More: 10 Common IT Project Risks: Ways to Mitigate Them
How can a resource management tool help in risk mitigation?
A resource management tool helps you prevent and mitigate resource-related risks in multiple ways. It provides 360-degree visibility of all the resources allocated to various projects across the enterprise. Using the advanced filter, the project manager can pick the best-fit resources based on skills and competencies. It, thus, helps prevent the allocation of over/under skilled resources and prevents project delays or cost escalations.
It also generates data-driven, real-time business intelligence reports that provide actionable insights into metrics that help make informed decisions. These decisions prevent the risks from turning into major issues and a project from veering off the track.
For example, the forecast-vs-actual time report indicates how much time a resource is actually spending on a task and tracks the variance from the initial forecast. If the project manager finds a given job taking more than the estimated time, they can devise a suitable strategy to prevent it from creating a cascading effect and delaying the overall project.
Besides, the tool also entails the What-If analysis (also known as sensitivity analysis) feature. This analysis helps you create a simulation environment where you set various parameters to determine the performance of a project. It also helps the managers gauge different ways they can allocate resources to various tasks, compare the possible outcomes, and decide on the best-fit resource plan based on that. With the right resource plan in place, the resource-related risks can be minimized, thereby streamlining project execution.
Conclusion
It is evident that no project is risk-free, and an ideal risk mitigation plan doesn’t exist. Despite all the measures, risks can always occur and influence the normal course of a project. However, the difference lies in how well you foresee those risks and manage them. A project manager must have an eagle-eye view of all the risks involved right from the beginning. They should be well-equipped with a backup plan to handle the risks if they occur, eliminate hindrances, and ensure successful project completion.
A risk matrix is a powerful risk assessment technique that helps a project manager do that. It helps plot all the risks graphically, prioritize them, and form a risk management plan. So, a risk matrix combined with the use of the right skills and acumen to tackle risks can empower a project manager to make every project a success.
So, are you ready with a risk matrix for your next project?
The Glossary
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