Thursday, July 14, 2016

Risk Heat Map

Just another visual to help you think through uncertainty/risk in your innovation projects. I would replace the term risk with uncertainty in your reading. Go to the original source for a full explanation of how to deploy this tool.

A risk heat map is a tool used to present the results of a risk assessment process visually and in a meaningful and concise way. 
Whether conducted as part of a broad-based enterprise risk management process or more narrowly focused internal control process, risk assessment is a critical step in risk management. It involves evaluating the likelihood and potential impact of identified risks.Heat maps are a way of representing the resulting qualitative and quantitative evaluations of the probability of risk occurrence and the impact on the organization in the event that a particular risk is experienced. 
The development of an effective heat map has several critical elements – a common understanding of the risk appetite of the company, the level of impact that would be material to the company, and a common language for assigning probabilities and potential impacts. 
The 5x5 heat map diagram below provides an illustration of how organizations can map probability ranges to common qualitative characterizations of risk event likelihood, and a ranking scheme for potential impacts. They can also rank impacts on the basis of what is material in financial terms, or in relation to the achievement of strategic objectives. In this example, risks are prioritized using a simple multiplication formula. 
Organizations generally map risks on a heat map using a ‘residual risk’ basis that considers the extent to which risks are mitigated or reduced by internal controls or other risk response strategies

What benefits do Risk Heat Maps provide ? A visual, big picture, holistic view to share while making strategic decisions Improved management of risks and governance of the risk management process Increased focus on the risk appetite and risk tolerance of the company More precision in the risk assessment process Identification of gaps in the risk management and control process Greater integration of risk management across the enterprise and embedding of risk management in operations.

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