Human beings have great difficulty in making accurate judgments under uncertainty. Often, we must make difficult decisions when reliable statistical data is usually lacking, and even when we have quantitative data, it may be limited in its relevance. For example, insurance companies can model how many houses will likely burn each year in your city.
But they cannot accurately predict whether your house will be one of them. Moreover, there are always likely to be trade-offs or other considerations influencing human perceptions of risk. For example, before building a new plant or taking on a new project, prudent managers conduct a cost-benefit analysis to evaluate all the potential costs and revenues that might be generated. The analysis outcome will determine whether the project is financially feasible or if the company should pursue another project.
For these reasons, one of the key paradigm shifts outlined in ISO 31000:2009 was the change in how risk was conceptualized and defined. Under ISO 31000:2009 and subsequent iterations, (currently ISO31000:2018) the definition of "risk" changed from being "the chance or probability of loss", to "the effect of uncertainty on objectives,” ... thus causing the word "risk" to now have positive consequences (i.e. benefits), as well as negative consequences (costs) and neutral (nil) impacts.
Unfortunately, whilst this paradigm shift in definitions has been around for nearly 15 years, its application has been ad-hoc such that many practitioners and tools still focus solely on assessing negative outcomes.
The Consequence Calibration Matrix (CCM) provides a visual, structured framework for thinking about risks (both the costs and the benefits). It is an analytical tool for assessing, categorizing, and visualizing risks based on their likelihood and consequences, both negative and positive. This structure encourages a more balanced view of risks arising from uncertainty.
CORE RISK MITIGATION: When risks are very likely, and the consequences are very negative, urgent attention and potentially significant resources are required to prevent or mitigate the potential negative outcome.
ROUTINE PROCEDURES: Here, negative consequences are expected but not severe. Since they are likely to happen, standard operating procedures are established to handle these situations.
ALL-HAZARDS APPROACH: Here, the consequences are very negative, but their occurrence is unlikely. This category requires an all-encompassing approach to manage vulnerabilities and prepare for these unpredictable events. The focus is on consequence management.
BUSINESS AS USUAL (Negative): The potential negative consequences are minor, but since they are likely, monitoring and support systems are put in place to ensure they remain minor.
BUSINESS AS USUAL (Positive): These areas don't represent significant opportunities and are unlikely to happen. As such, normal business operations can continue without special attention to these factors.
MONITOR AND SUPPORT (Positive): These represent potential benefits that are likely but not major. Monitoring these is essential to ensure they are realized and possibly even enhanced, but minimal resources are warranted.
MONITOR AND OPTIMIZE: These represent significant benefits that are unlikely. They should be monitored, and efforts should be made to optimize them if they materialize.
CORE RISK OPTIMIZATION: These opportunities could bring significant benefits and are likely to happen. Efforts should be made to optimize and maximize these benefits. Most resources should be focused on this area.
The CCM offers a balanced perspective on risk by promoting a holistic view that acknowledges both negative and positive outcomes. This approach ensures that organizations do not become tunnel-visioned by merely focusing on avoiding adverse effects and emphasizing the importance of capitalizing on potential opportunities.
One of the significant advantages of this matrix is its visual clarity. The very nature of its visual representation ensures that risks are clearly communicated and understood by all stakeholders, fostering a unified understanding across the board.
Furthermore, this explicit depiction of risks, categorized by likelihood and consequences, is invaluable for efficient resource allocation. Organizations can discern where their investments and resources are most needed. High-consequence, high-likelihood risks naturally demand more attention and resources. At the same time, those with low consequences and unlikely occurrences can be managed with fewer resources.
This clarity also bolsters strategic decision-making. By pinpointing where a risk or opportunity lies on the matrix, decisions on whether to pursue, avoid, transfer, or accept become well-informed.
Instead of organizations reacting to risks when they arise, this matrix nudges decision-makers towards a forward-thinking approach where challenges and opportunities are anticipated in advance.
This foresight allows for timely and effective responses. Moreover, the matrix's versatility cannot be overstated. Its applicability extends across diverse sectors, from business and public policy to project management and personal decision-making, making it a universally helpful tool for risk assessment.
It is important to note that risks and opportunities will likely move between squares over time. A source of risk may even appear concurrently as both negative and positive. When used effectively, the CCM can elevate an organization's or individual's approach to risk. Providing a clear framework for categorizing, prioritizing, and acting on risks promotes thoughtful and strategic decision-making.
