Standard : Value at Risk (VaR)
Description
Value at Risk (VaR) measures the potential business value threatened by unresolved risks, ageing technical debt, or failing features. It quantifies the impact of inaction on future revenue or customer outcomes.
How to Use
What to Measure
- Identify assets or features with known risks or debt.
- Estimate the value potentially lost if the risk materialises.
Value at Risk = Σ (Impact × Probability) across all known risks
Example: £1M potential revenue impact × 0.3 likelihood → £300K VaR.
Instrumentation Tips
- Maintain a debt and risk register with impact estimates.
- Use consistent scoring methodology across teams.
- Review VaR quarterly to re-prioritise remediation.
Why It Matters
- Business visibility: Makes the cost of inaction tangible.
- Prioritisation: Helps justify investment in debt reduction.
- Risk communication: Aligns technical and business stakeholders.
Best Practices
- Tie VaR to measurable business outcomes (e.g. lost sales, SLAs).
- Visualise trends over time (VaR increasing or decreasing).
- Include both short-term and long-term impacts.
Common Pitfalls
- Overstating impacts without evidence.
- Failing to update VaR after mitigations or product changes.
- Treating VaR as a one-off exercise rather than ongoing.
Signals of Success
- Decreasing VaR over successive quarters.
- Increased investment in high-impact mitigation initiatives.
- Fewer critical incidents caused by unresolved debt.
- [[Risk Burndown Rate]]
- [[Investment Allocation Ratio]]
- [[Gross Margin Contribution]]