Let’s see this qualitative model for legal risk in action.
Risk plot example
We will draw a risk plot. We want to “common size” two different legal risks and show them on a single visualization. This visualization will show the qualitative risk model we designed as part of our risk framework. This is a simple exercise that you can draw by hand.
Axes for risk plot
Start by drawing an X and Y axis.
Likelihood on the X axis
Label the X axis: likelihood. This will accommodate our likelihood scale we saw earlier.
Consequences on the Y axis
Label the Y axis: consequences. This will accommodate our consequences scale.
Yes, you can reverse the axes if you want.
Tick marks for scale
Now let’s add tick marks for our scale. Our five point scale goes from 0 to 4. We will leave 0 at the starting point. Uncertainty is a topic covered in the Process section.
Number the tick marks for easy reference.
Do the same for the consequences scale.
Now that we have a chart
We’ve drawn a chart representing an important part of the risk framework.
Let’s plot a couple of legal risks
Let’s plot a couple of legal risks to see it in action.
Breach of contract
Imagine that there is a potential breach of contract risk. After some risk analysis (covered in the Process section), we conclude that it is less likely than not and rate the likelihood a 2. Based on the size of the contract and the liquidated damages clause, we rate the consequences 1 as insignificant.
There is also potential employee litigation. Based on our jurisdiction and the nature of the claim, we rate the consequences as significant or a 3. Fortunately, we have good reason to believe that there is not much chance the employee would prevail on the question of liability, so we think the risk is unlikely and rate it a 1.
2 legal risks and 1 chart
Now we can see both risks on one chart. Even though the legal risks are quite different, we can compare them effectively.
Later this chart will show our risk tolerance policy and our uncertainty so we can focus our risk management resources where they will deliver the most benefit.
This simple exercise begins to reveal the power of a qualitative risk model for understanding our portfolio of legal risks.