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.
|High Value, Low Risk||Tasks with significant value and minimal associated risk.||These tasks offer high rewards with minimal potential drawbacks.||Prioritize and focus on these tasks to maximize benefits while minimizing potential issues.||Launching a proven product in an established market, optimizing existing processes.|
|High Value, High Risk||Tasks with significant value but associated with considerable risk.||These tasks offer high rewards but may come with substantial uncertainties or potential pitfalls.||Carefully plan, assess, and mitigate risks to maximize the chances of success.||Entering a new and competitive market, developing a breakthrough technology.|
|Low Value, Low Risk||Tasks with limited value and minimal associated risk.||These tasks may have low potential rewards but also pose minimal risks or downsides.||Consider completing these tasks if they align with other priorities but do not invest too many resources.||Minor administrative tasks, routine maintenance.|
|Low Value, High Risk||Tasks with limited value and associated with significant risk.||These tasks offer minimal rewards and may not be worth the potential issues or challenges they pose.||Carefully evaluate whether these tasks align with overall objectives and are worth the risk.||Pursuing complex and unproven initiatives with limited potential returns.|
Understanding the value/risk matrix
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:
Start by listing the factors to be evaluated
This could be contracts, initiatives, projects, processes, or product features.
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.
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.
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
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:
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.
Leveraged (low risk/high value)
This may include volume discounts, rebate applications, or monitoring spend and leakage.
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.
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.
- 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.
- Value/Risk Matrix Overview:
- The value/risk matrix is a tool that assesses the complexity of a category of goods or services based on value and risk.
- It’s a 2×2 matrix, with risk on the x-axis and value on the y-axis, and it can also be extended to a 3×3 matrix.
- This matrix helps in scenarios where businesses want to evaluate value in relation to risk and associated complexity.
- Applications of the Value/Risk Matrix:
- The matrix has various applications, including contract management, category management plans, sourcing strategies, and prioritizing project, process, or product roadmaps.
- It aids in assessing and prioritizing investment decisions aligned with organizational strategy.
- Steps to Complete the Matrix:
- Factors to be evaluated (such as contracts, initiatives, projects, processes, or product features) are listed.
- Each factor is assigned a value score based on its potential usefulness to the business, supplier, or customer.
- Predefined context-specific questions or criteria are often used to assess value.
- The same factors are assigned a risk score based on uncertainties around cost, time, or execution ability.
- Scores are totaled for each factor based on risk and value, which helps plot them on the matrix.
- Four Classifications in the Matrix:
- Routine (low risk/low value): Transactional initiatives that require minimal effort for facilitating transactions.
- Leveraged (low risk/high value): Initiatives with high value and low risk; focus is on extracting maximum value, often involving discounts or monitoring.
- Focused (high risk/low value): High-risk initiatives with lower value; emphasis on risk reduction through monitoring and stakeholder engagement.
- Strategic (high value/high risk): Initiatives demanding constant attention of experienced managers; should be broken down into actionable tasks.
- Matrix Design Flexibility:
- The matrix can use a 2×2 layout with a range of scores (0-50, 50-100) or a 3×3 matrix with low, medium, and high designations for more precision.
- Key Takeaways:
- The value/risk matrix helps evaluate initiatives based on value and risk, aiding decision-making and prioritization.
- The matrix assists in various business aspects, such as contract management, category management, sourcing strategy, and roadmap prioritization.
- It categorizes initiatives into four classifications: routine, leveraged, focused, and strategic, based on their risk and value scores. Context-specific criteria are used for scoring.
Related Business Matrices
Main Free Guides: