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When evaluating a project's feasability or assessing the risks in the acquisition of a firm in M&A, conducting a risk assessment is highly recommended to limit the potential negative impacts of pre-identified risks.
The "Risk Matrix" (or "Risk diagram"), according to Garvey & Lansdowne (1998), was created in the Electronic System Centre of the US Air Force. It's overall simplicity, compact approach and pertinence, has made it one of the most popular semi-quantitative risk assesment frameworks in many industries, leading to multiple spin-offs and more complex versions.
The gist of the framework is to correctly assess each identified risk (identifying risks could be a whole seperate exercise), on two dimensions:
- 💥 Severity (of consequences): the degree to which the occurence of the risk would negatively impact the project : from Very Low to Very High
- ％ Probability (of occurence): the likelihood of the event (risk) actually happening and possibly negatively impacting (to various degrees), your project : from Almost Certain to Rare.
The combination of Severity x Probability = Level of Risk 📊 😱
Here are the different levels of Risks available (and associated combinations Severity-Probability) :
- CRITICAL (6)
- MAJOR (8)
- MODERATE (5)
- MINOR (5)
- INSIGNIFICANT (1)
Given the pertinence and popularity of this risk assessment matrix framework, I decided to use it in a large Project Audit at a SaaS software company I worked for. The corresponding slide was well appreciated given its ability to quickly outline the critical and major risks associated to the project.
