Understanding Risk Impact: A Comprehensive Guide
Updated: Nov 10
Risk impact assessment is a crucial step in effective risk management. It involves evaluating the potential consequences of a risk event occurring, which can vary depending on the type of impact. In this blog article, we will explore different types of impacts to consider when assessing risk impact, and provide an example to illustrate their importance.
One of the most obvious types of impact to consider is the financial impact of a risk event. This can include direct costs, such as repairing or replacing damaged equipment, lost revenue due to business interruption, client or customer compensation, or increased expenses to address the risk. For example, a manufacturing company may face a financial impact if a fire breaks out in their production facility, resulting in damages to the facility and equipment, and disruption of production, leading to lost revenue and increased expenses to repair and resume operations.
Operational impact refers to how a risk event can disrupt or affect business operations. This can include delays in production or delivery, disruptions to supply chains, or reduced productivity. For example, a logistics company may face operational impact if a major road closure due to a natural disaster prevents their trucks from delivering goods on time, leading to delays in customer orders and potential loss of business.
Reputational impact refers to the potential damage to an organisation's reputation or brand as a result of a risk materialising. This can include negative media coverage, loss of customer trust, or legal action. For example, a food processing company may face reputational impact if there is a recall of their products due to contamination, resulting in negative media coverage, loss of consumer confidence, and potential legal action.
Legal and Regulatory Impact
Legal and regulatory impact refers to the potential legal or regulatory consequences of a risk event. This can include fines, penalties, or lawsuits. For example, a financial institution may face legal and regulatory impact if they are found to have violated regulations related to data privacy, resulting in fines, penalties, and reputational damage.
Health and Safety Impact
Health and safety impact refers to the potential impact on employee health and safety as a result of a risk event. This can include injuries, illnesses, or fatalities. For example, a construction company may face health and safety impact if a worker falls from a height due to inadequate safety measures, resulting in injuries or fatalities, as well as potential legal and financial consequences.
Environmental impact refers to the potential impact on the environment as a result of a risk event. This can include pollution, contamination, or damage to natural resources. For example, an oil refinery may face environmental impact if there is a spill or leak that contaminates nearby water bodies, resulting in environmental damage, clean-up costs, and potential legal liabilities.
Customer and or client Impact
Customer and or client Impact relates to the potential effects that a risk event could have on your customers or clients. This can include negatively impacting the business of your clients, losing customers money, etc.
To assess the potential customer or client impact of a risk, you should consider factors such as the number of customers or clients affected, the severity of the impact, and the potential duration of the impact. You can also consult with customer or client representatives to understand their concerns and gather feedback on potential risk events.
Other type of impacts
Over the years, I came across and implemented multiple impact matrices. Each matrix was designed to align to the business at play and the type of impact the organisation would face. Depending on your activity, you could also include
Capital and liquidity (mostly for financial institutions)
Example: Applying risk impact to a retail company
To illustrate the importance of assessing risk impact, let's consider a hypothetical scenario of a retail company that operates a chain of stores. One of the identified risks is a potential cyber-attack on the company's online platform, which could result in customer data breach and financial loss.
Financial Impact: The company may face financial impact in the form of potential lawsuits, compensation to affected customers, and loss of revenue due to reputational damage, as well as costs associated with strengthening cybersecurity measures.
Operational Impact: The operational impact may include disruption of online sales, customer service interruptions, and additional costs to restore the online platform, which can result in lost revenue and reduced customer trust.
Reputational Impact: Reputational impact may include negative media coverage, loss of customer trust, and damage to the company's brand image, which can result in long-term reputational damage and loss of market share.
Legal and Regulatory Impact: Legal and regulatory impact may involve fines or penalties imposed by regulatory authorities for failure to protect customer data or comply with data privacy regulations.
How to choose the most relevant impact types for your business?
Choosing the most relevant types of impact for an organisation will depend on several factors, including the nature of the organisation's operations, its goals and objectives, and its stakeholders' expectations. Here are some steps you can take to help choose the most relevant types of impact:
Review the organisation's goals and objectives: The first step is to review the organisation's goals and objectives to identify the areas where impact is most critical. For example, if the organisation's primary goal is to generate profits, financial impact may be the most relevant.
Consider the organisation's industry and sector: Different industries and sectors may have specific impact categories that are particularly relevant. For example, environmental impact may be particularly important for organisations in the energy or manufacturing sectors, while health and safety impact may be more relevant for healthcare organisations.
Evaluate the organisation's stakeholders: It's important to consider the perspectives and expectations of the organisation's stakeholders, including customers, employees, shareholders, and partners. For example, if customers place a high value on ethical and sustainable practices, reputational impact may be particularly relevant.
Assess the organisation's risk profile: The organisation's risk profile will also influence the most relevant types of impact. For example, if the organisation operates in a high-risk environment, health and safety impact may be particularly critical.
Consult with experts and advisors: Finally, it can be helpful to consult with experts and advisors in the relevant impact categories to gain additional insight and perspective on the potential impact of risks.
By considering these factors, you can choose the most relevant types of impact for your organisation's risk impact assessment, ensuring that your assessment is focused on the areas of greatest concern and aligns with the organisation's goals and objectives.
Assessing the potential impact of risks is a critical component of effective risk management. By identifying and evaluating the potential impact of risks, organisations can develop risk response strategies that minimise the negative consequences of risks and capitalise on opportunities. While financial impact is often a primary consideration, it's important to also consider other types of impact, such as operational, reputational, legal and regulatory, customers and clients, health and safety, and environmental impacts, as well as other impact categories that may be relevant to the organisation's goals and objectives.
To choose the most relevant types of impact for your risk impact assessment, consider factors such as your organisation's goals and objectives, industry and sector, stakeholders, risk profile, and expert advice. By taking a comprehensive approach to risk impact assessment, you can gain a more complete understanding of the potential impact of risks and develop risk response strategies that prioritise the most critical impact categories. Ultimately, by effectively managing risks and their potential impact, organisations can enhance their resilience, reputation, and long-term success.