Probability and Impact

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 flagship 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 first 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 identification of all potential risks. He then identified the probability and impact of each risk, using a 1 - to - 5 - point 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 investigation 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 manner based on their probability and impact.

ADJUSTING THE THRESHOLDS

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 (1) should work fi ne. But for this flagship product, 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.

Fig. (1) Example of Rating a Risk Impact on Schedule on a Five-Level Scale

Scale 2 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 25% Probability Risk Score = P + 2 * I Kev: NC = 5 7 9 11 13 15 High Severity HL = 4 6 8 10 12 14 Medium Severity L = 3 5 7 9 11 13 Low Severity LL = 2 4 6 8 10 12 VU = 1 3 5 7 9 11 VL = 1 L = 2 M = 3 H = 4 VH = 5 IMPACT Probability Key Impact Key VU = Very Unlikely VL = Very Low Impact LL = Low Likelihood L = Low Impact L = Likely M = Medium Impact HL = Highly Likely H = High Impact NC = Near Certain VH = Very High Impact