Glossary term
Likelihood and Impact
Subject: Risk Management, Risk Assessment and Quantification
Also known as: Probability and Consequence, Frequency and Severity
Likelihood and impact are the two basic measures used to rate a risk: how probable it is that the event happens, and how serious the effect would be if it does.
Explanation
Almost every risk method asks the same pair of questions. Likelihood may be a probability, a frequency such as once in ten years, or a descriptive scale from rare to almost certain. Impact may be a financial loss, but also harm to people, regulatory action, disruption or reputation. Scoring both and combining them, often by multiplying, gives a rating that helps rank risks. A frequent small event and a rare catastrophic one may score alike yet need different responses, so many teams treat high-impact, low-likelihood risks separately. Scores are usually subjective, so definitions for each level are written down to keep ratings consistent. The two scores are plotted on a risk matrix and recorded in the risk register. Scoring both gives teams a shared yardstick for deciding what to tackle first.
Example
A manufacturer rates a supplier failure as likely (4 out of 5) with moderate impact (3 out of 5), giving a score of 12. A factory fire is rare (1) but catastrophic (5), scoring 5. The risk committee notes that the lower score hides the larger worst case and asks for a separate plan.
Not to be confused with
- Risk velocity
- Velocity describes how quickly a risk hits once it occurs. Likelihood and impact describe how probable and how serious it is.