value-risk-matrix

Value/Risk Matrix In A Nutshell

The value/risk matrix is a tool used to assess the complexity of a category of goods or services based on value and risk. The value/risk matrix is a relatively simple 2×2 matrix, with risk on the x-axis and value on the y-axis. Each of the four quadrants should be partitioned according to the designated scoring system. If each factor is ranked out of 100 for value and risk, then a low-risk initiative will score between 0 and 50 and a high-risk initiative between 50 and 100. Businesses that need more flexibility or precision may choose to use a 3×3 matrix with low, medium, and high designations.

Understanding the value/risk matrix

The value/risk matrix is useful in any scenario where a business wants to assess value in terms of risk and associated complexity.

Typically, the value/risk matrix has three main applications:

  • A contract or group of contracts (contract management). This includes contract renewal and extension or the designation of a new risk profile as a result of a significant event.
  • A category of goods or services (for developing category management plans), and
  • The sourcing of goods and services (for developing a sourcing strategy).

But it can also be used in the prioritization of project, process, and product roadmaps to assess the business value and risk of new features.

Regardless of the application, the risk and value associated with an initiative is displayed in a matrix. This allows team members to filter and rank each initiative and prioritize investment decisions that are aligned with organizational strategy.

Completing the value/risk matrix

There are several methods to completing the value/risk matrix. Here is one that is both simple and effective:

  1. Start by listing the factors to be evaluated. This could be contracts, initiatives, projects, processes, or product features.
  2. Assign each factor a value score based on its potential usefulness to the business, supplier, or customer. Many businesses choose to use a list of predefined, context-specific questions (criteria) to assess value. Higher scores should equate with higher perceived value.
  3. Repeat the previous step. But this time, assign each factor a risk score based on uncertainty around cost, time, or the ability of the team to execute. Again, higher scores should equate with higher perceived risk. For example, a business whose core operations would be significantly affected by a supplier defaulting would assign this risk a high score.
  4. Add the scores for each predefined question or criteria according to risk and value. This gives a final score for each factor that can then be plotted on the matrix to guide future action. 

Continue reading to learn how each factor should be plotted.

The four classifications of the value/risk matrix

The value/risk matrix is a relatively simple 2×2 matrix, with risk on the x-axis and value on the y-axis. Each of the four quadrants should be partitioned according to the designated scoring system.

If each factor is ranked out of 100 for value and risk, then a low-risk initiative will score between 0 and 50 and a high-risk initiative between 50 and 100. Businesses that need more flexibility or precision may choose to use a 3×3 matrix with low, medium, and high designations.

Here are the four categories that plot each factor on the matrix:

  1. Routine (low risk/low value) – these are transactional initiatives. Here, a “light touch” approach is recommended. In other words, the business does the bare minimum to facilitate transactions so that it can focus its efforts elsewhere.
  2. Leveraged (low risk/high value) – since these initiatives are high in value but low in risk, a priority should be made on extracting as much value as possible. This may include volume discounts, rebate applications, or monitoring spend and leakage.
  3. Focused (high risk/low value) – encompassing high-risk initiatives without much value. The focus here should be on activities that reduce risk. For example, the close monitoring of performance against KPIs or the regular contact with key stakeholders to proactively discuss issues as they arise.
  4. Strategic (high value/high risk) – these initiatives demand the constant attention of highly experienced managers. If possible, they should be broken down into smaller actionable tasks.

Key takeaways:

  • The value/risk matrix measures the complexity of a process, product feature, contract, or other initiative based on value and risk.
  • The value/risk matrix is useful in contract management, category management, sourcing strategy, and project or product development
  • The value/risk matrix assigns weighted risk and value scores to one of four categories: routine, leveraged, focused, and strategic. Risk and value are rated according to context-specific criteria.

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