More questions raised by Probability Impact graphs common practice

More questions raised by Probability Impact graphs common practice

Apr 9th, 2015

More questions raised by Probability Impact graphs common practice is all about the lack of logical robustness of the 4×4 or 5×5 risk matrix approaches. We oftentimes see PIGs risk matrix (probability impact graphs) based “ERM binning exercises” being presented where the scale of the graph (generally the consequence axis) is adapted when going from operational to corporate level. This practice certainly does not help a rational approach to strategic, tactical, operational levels and raises several questions.

FMEA/PIG matrix 4×4 (or 5×5): are the “not likely”/”most unlikely” event with extreme consequences IDENTICAL to an “expected”/”will occur” event with negligible consequences risk?

More questions raised by Probability Impact graphs common practice

Probability impact graphs generate questions such as:

  • Can we define Manageable and Unmanageable risks in a clear and transparent way?
  • Is it possible to have a clear and simultaneous representation of Strategic, Tactical and Operational scenarios in a ERM report?
  • Are common practices (Probability Impact Graphs: PIGs risk matrix) sufficient for ERM?
  • Is there a better way to represent risks of all types and support decision making?

The replies to these questions are actually rather simple. That is provided one has at hand a properly defined risk tolerance threshold.  Each corporation, project, endeavor being the object of the ERM has its own tolerance threshold.

  • Intolerable risks lie above risk tolerance.
  • Sustainable mitigation of the system can bring intolerable but manageable risks below risk tolerance.
  • Unmanageable risks are intolerable risks. Only changes to the system, strategic in nature, can bring them under tolerance.
  • All risks (Strategic, Tactical and Operational) can be presented on a single, rational p-C graph. A comparison to the tolerance level, is thus possible, leading to a rational risk prioritization with the ORE methodology.
  • Common practices are not sufficient for ERM, they are misleading and can easily lead to skewed decisions, and ultimately hold you liable.

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Category: Consequences, Probabilities, Probability Impact Graphs, Risk analysis, Risk management, Tolerance/Acceptability

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