Probability and Impact Jovana Riddle Salvatore Adamo was the head of Vintel Corp's Risk Management Department. His responsibility was to manage risks for many of the company's products. However, one particular product had major risk implications and mattered to Salvatore the most. It was Vintel's agship product and had a very important risk event at stake. The risk at stake had a very low probability of occurring but had a huge potential impact on the company and its future. This was the rst time in the company's history that a product with such a low probability risk event could lead to such enormous potential impact. This case presents how Salvatore adjusted Vintel's risk analysis procedure to address this type of risk. RISK ANALYSIS STEPS In order to effectively manage risk for Vintel's product, Salvatore typically followed the standard procedure. He started off with the identication of all potential risks. He then identied the probability and impact of each risk, using a 1to5point scale. For each risk, the risk score was then calculated based on a set formula (Probability + 2 X Impact). He then used a Risk Rating table with predetermined thresholds to categorize risks into high (red), medium (yellow), and low (green) severity risks. Typically, the threshold for high risk is 12 and above. Medium risks have a score ranging from 8 to 11. Risks that score below 7 are considered low risks. Usually high risks will get more management attention and Vintel will perform further investiga tion and come up with appropriate response plans. Medium and low risks will get less management oversight. The use of this procedure would ensure that risks are analyzed in a systematic marmer based on their probability and impact. ADJUSTING THE TH RESHOLDS Salvatore knew from past experience that in general a very low probability risk event does not have as high a potential impact or a severe outcome. In such a typical situation, using the Risk Rating table in Figure 11.1 should work ne. But for this agship prod uct, a lot of very low probability risks have a very high level of impact, and using his normal Risk Rating table may not be appropriate. \"Am I right?" Salvatore thought. 245 246 CASE STUDIES Figure 11. 1 Example of Rating 3 Risk Impact on Schedule an a Five-Level Scale Scale 1 2 3 4 5 Very Low Low Medium High Very High Risk Impact on Slight schedule Overall project Overall project Overall project Overall project Schedule delay delay {TEE delay 544% delay 1533% delay 3 33% Probability Risk Score = P -- 2 is I Key: NC = 5 7 9 11 High Severity HI = 4 6 8 10 Medium Severity L = 3 5 '3' a Low Severity LL 2 3 4 6 VU = l 3 5 7 9 ll VL=1 L=2 M: H=4 VH=5 [Dy-[PACT Probability Kev Impact Kev \\-"U = Very Unlikely VL = Very Low Impact LL 2 Low Likelihood L = Low Impact L = Likely M 2 Medium Impact HL 2 Highly Likely H = High Impact NC = Near Certain \\-"H = Very High Impact \"I think I am," Salvatore talked to himself. He knew that he had to adjust his risk thresholds, such that those risks are in the category of high risk. Salvatore had a ashback to his experience with Ford Australia. Several years ago when Salvatore visited Ford Australia for technical exchange, he participated in risk analysis training. One of the risk events they discussed was the SUVr tire explosion. Typically, tire explosion is a very low probability risk event. But when it happens, it can cause the vehicles to rollover, which can lead to the severe injury or death of the passengers in the SUV. Besides the safety of the passengers at stake, tire explosion should impact the sales of the SUV by as much as $5 billion. This was definitely a high risk. This ashback assured Salvatore that the risk thresholds needed to be adjusted. If not for this agship product, a risk event like \"tire explosion\" would always end up being a mediumlevel risk and would never get as much manage ment attention as it should. No management attention means no further analysis and no support. Then, if the risk happens, he could not imagine how huge the impact would be. \"Probably not $5 billion but it would definitely be ugly and no more future for me at Vintel," thought Salvatore. Discussion items 1. Would adjusting the threshold be the right move for Salvatore? If it is, what should the new threshold be to account for the very low probability and vely high impact risks? . Would adjusting the thresholds be the only solution? What else should Salvatore introduce to Vintel such that risks get proper management attention? [