The Influence Diagram Tool for Analyzing the Cause-Effect Relationships Between Risks and Objectives

October 2011 Bonus Resource

The Influence Diagram is a tool to understand and evaluate the cause-effect relationships between risks and objectives. This figure shows the components of an Influence Diagram.

what_is_an_influence_diagram2 

Click to view a full page, printable version of The Influence Diagram.

Because it’s a structured approach, the Influence Diagram technique offers many advantages:

  • Due to its pictorial nature, it is intuitive to use.
  •  It systematically identifies the factors that drive risk (uncertainty) to achievement of the objective. 
  • It highlights what needs to go right (i.e., performance drivers) to achieve the objective, not just the factors that could go wrong (i.e., downside risks). This helps to pinpoint vulnerabilities in performance capabilities.
  •  It provides insight into the interrelationships between risk factors, that the kind of simple list of risks produced by the traditional brainstorming exercise does not. This is extremely important for addressing major risk scenarios, which research shows, typically involve the interaction of 2 or more risk factors.
  • It provides a higher degree of certainty that key risks will be identified than brainstorming alone. I frequently find that clients realize that certain risks that appeared to be small when they considered them in isolation were actually significant because they are amplified by due to their position in the chain of cause-effect relationships between risk/performance drivers that determines if the objective will be achieved. They can also spot weaknesses in the ability of their risk mitigation strategies to handle cascading risks that they couldn’t see when they considered risks individually.
  •  It can be used prospectively to explore where risks will be in three to five years. This kind of forward-looking analysis helps you to identify where you need to build resilience to ensure the sustainability of the organization. This may include making adjustments to your capabilities to manage the risks that are within your control (people, processes, and systems) and your strategies (e.g., awareness, influence, response) to deal with external factors that are not within your control.
  •  Thanks to the availability of commercial software the influence diagram can easily be converted to a probabilistic risk model (e.g., by applying the Monte Carlo method) to rigorously explore the full range of potential risk values. This type of approach enables the analyst to quantify the ‘thickness’ of the arrows, i.e., the magnitude of the influence that each factor has on the achievement of the objective being analyzed.  

Click to request step-by-step instructions and an illustrated example of the influence diagram methodology.

Follow the links to:

  • Read this month's Feature ArticleBasics of Risk Management – Step 2: Assess Risk and Its Implications for Performance
  • Download a printable version of the entire October 2011 issue of the Risk Management Made Simple Advisory.
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