
Chapter 12 n IQ Applied to Financial and Risk Management 587
Failure mode and effects Analysis, also called FMEA is a tool or method that
considers the severity of a Risk, the likelihood of occurrence for each Risk and the
ability to detect the Risk. Each of these Factors (severity, occurrence, and detection)
is rated on a scale of one to five and then they are multiplied together. The result
is a Risk Priority Number from 1 to 125 for each Risk. The higher the number, the
higher the need to remediate it. Typically, Risks over 30 require an action plan.
Severity Key: Loss Severity
5 = Certain Loss
4 = High Probability of Loss
3 = Noticeable Effect
2 = Minor Effect
1 = No Effect
Occurrence Key: Likelihood of Occurring
5 = Very High: Failure Almost Inevitable
4 = High: Repeated Failures
3 = Moderate: Occasional Failures
2 = Low: Relatively Few Failures
1 = Remote: Failure Unlikely
Detection Key: Ability to Detect
5 = Little to No Chance to Detect
4 = Very Low Chance to Detect
3 = Moderate Chance to Detect
2 = High Chance to Detect
1 = Almost Certain Detection
In a work Team of Subject Matter Experts, develop independent estimates of
Risk and then normalize them. You may achieve a consensus or you may end
up with a range of Risk values.
Act to Standardize the Risk Management Process Improvements
(TIQM Step P4.5).
Ensure that the Process is In Control and roll it out to all Risk Managers.
Best Pract