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Risk management in the company

Risk management in the company

In today's dynamic and uncertain business environment, effective risk management is crucial to protect companies from potential damage while taking advantage of opportunities to maximise success. Enterprise risk management is a strategic process that helps to recognise and assess potential threats at an early stage and take appropriate action.

Key information on risk management

  • Risk management as Process to systematically identify, assess, control and monitor risks that could jeopardise the achievement of the company's goals.
  • Risk management in Germany is not only a recommended best practice, but in many cases also a legal obligation.
  • In order to manage risks, there are numerous Instruments and methods. The use depends on the industry and the size of the company; if necessary, a mix of several makes sense.
  • Risk management software supports companies and organisations in carrying out risk management efficiently and digitally.

Content on the topic of risk management in the company:

What is risk management?

The Risk management definition includes all organisational measures and processes with the aim of identifying, analysing, evaluating, controlling and monitoring future, uncertain events. One component is the planning and implementation of measures designed to minimise the probability of occurrence and impact of risks and increase potential opportunities. Risk management aims to create risk awareness and minimise risks. Active risk management is an important prerequisite for the future viability of organisations.

Basics and goals of risk management in the company

Risk management objectives

Risk management aims to make negative events, as well as their probability of occurrence and effects, visible or to minimise them. This increases the stability and growth of a company and minimises financial damage such as loss of sales or high costs.

  • Risk mitigation: Effective risk management aims to minimise potential hazards and reduce losses.
  • Opportunity exploitation: The aim is to identify and exploit positive opportunities to move the company forward.

Advantages of risk management

Active risk management has many advantages for companies, including compliance with legal obligations, strategic cost reduction and competitive advantages.

Through systematic analysis, potential risks can be identified in good time and proactively dealt with before they develop into major problems.

Risk management provides important information that enables companies to make informed decisions and thus take more strategic paths.

In the event of breaches of the entrepreneurial duty of care, managing directors are liable for damages, i.e. they are liable for damages incurred. Properly established risk management serves to monitor potential risks and at the same time as proof that the duty of care has been fulfilled.

A large number of corporate legal forms in Germany are obliged to prepare management reports on the company's risk situation. The scope and structure of the risk management system can be adapted to the circumstances of the company.

Strategically established risk management ensures that the probability of potential risks occurring is reduced. This results in lower costs for the company in the long term

A well-functioning risk management system means that potential risks can be identified at an early stage and countermeasures can be initiated in time. This time advantage can mean a competitive edge over other companies on the market.

The aim is to protect the image and reputation of the company by minimising the possible negative effects of risks.

Risk management aims to ensure the safety and well-being of employees.

Risk management should be viewed as a continuous process that adapts to changing conditions and is constantly improved.

Roles and tasks for risk management staff

Ideally, every department in the company must be aware of potential risks and initiate appropriate measures. However, the management or the board remains responsible in any case.

In large companies, special departments or working bodies are usually responsible for risk management; these are headed by a Chief Risk Officer. Another possibility is to appoint a person responsible who is not involved in the operational business.

Typical roles in risk management are:

  • Risk manager: Responsible for leading the overall risk management process and coordinating all risk-related activities in the company.
  • Risk AnalystResponsible for the identification, analysis and evaluation of risks in order to provide a sound basis for decision-making.
  • Risk owners: Bear responsibility for certain risks and are responsible for taking appropriate measures to control or mitigate these risks.
  • Crisis manager: Prepare plans and coordinate actions in the event of crisis situations to minimise damage and ensure business continuity.
  • Compliance Officer: Ensures compliance with legal requirements and regulatory requirements in the risk management process.
  • Financial expert: Assists in the assessment of financial risks and supports the implementation of financial protection measures.
  • Safety Officer: Focuses on the identification and assessment of security risks and develops strategies to safeguard corporate assets.
  • Project Manager: Integrates risk management into project activities and ensures comprehensive risk assessment during the course of the project.
  • Managing Director: Take responsibility for risk management and make strategic decisions based on the risk analyses.
  • Internal audit: Independent unit that reviews the effectiveness and efficiency of the risk management system and makes recommendations for improvement.

Definition of terms in the field of risk management

Definition risk

A risk is a potential future event that has a negative impact on a company. In most norms, standards and laws, risk is defined as follows:

Risk = damage x probability of occurrence

Definition of risk categories

Risks can have both internal (e.g. operational risks, financial risks) and external (e.g. economic, political or environmental risks) causes:

  • Internal risks: Internal risks caused by operational processes or wrong decisions.
  • External risks: External influences on the company, such as legislation, political decisions or the competitive and market situation.

These two risks can be divided into further categories. Risk categories are different groups or types of risks that can occur in companies or organisations. They help to organise and classify risks, which enables better identification, analysis and evaluation. Risk categories can vary by industry, company and context, but include some common categories:

  • Economic or financial risks: These are risks associated with the financial situation of a company, such as exchange rate fluctuations, liquidity risks, credit risks or capital procurement risks.
  • Operational risks: This category includes risks resulting from a company's internal operations and processes, such as production disruptions, technology failures, supply chain problems or staff shortages.
  • Reputational risks: Risks that can affect the reputation and public perception of a company, such as scandals, negative press reports or lack of customer loyalty.
  • Legal and regulatory risks: These are risks arising from legal and regulatory requirements, such as breaches of laws, breaches of contracts or compliance issues.
  • Strategic risks: Risks arising from strategic decisions and business models, such as market changes, disruptive technologies or inadequate go-to-market strategies.
  • Environmental and sustainability risks: Risks arising from environmental impacts and sustainable practices, such as climate change, resource scarcity or social responsibility.
  • Market risks: This category includes risks arising from changes in market conditions, such as interest rate changes, share price volatility or fluctuations in demand.
  • Technological risks: Risks associated with the use of technology, such as data breaches, cyber attacks or IT failures.

Definition of damage classes

In risk management, damage classes refer to the classification of risks based on their potential extent of damage. This classification helps prioritise risks according to their importance and potential consequences. The damage classes can vary depending on the company or organisation, but typically they are divided into numerical or alphanumerical categories, for example:

  1. Low (e.g. class 1 or A): Risks with a low level of damage that have little impact on the company and are easily manageable.
  2. Medium (e.g. class 2 or B): Risks with a moderate level of damage that may have some impact on the company and require appropriate attention.
  3. High (e.g. class 3 or C): Risks with a significant extent of damage that can seriously affect the company and require an immediate response.
  4. Very high (e.g. class 4 or D): Risks with a potentially catastrophic level of damage that require immediate action to avoid serious consequences.

Classification into damage classes helps to allocate resources and measures efficiently by prioritising serious risks and taking appropriate steps to reduce their likelihood of occurrence or mitigate their impact. By classifying risks into damage classes, companies can optimise their risk assessment and management processes to be better prepared for potential threats.

Definition of the probability of occurrence

Probability of occurrence in risk management refers to the likelihood or possibility that a particular risk or hazard will actually occur or materialise. It is a quantitative measure of how likely it is that a particular event or situation will occur that could potentially have a negative impact on a company or organisation.

The probability of occurrence is usually expressed on a scale from low to high or in percentages, with low values indicating a low probability and high values indicating a high probability.

example:

  • A risk with a probability of occurrence of 10% has a low probability of actually occurring.
  • A risk with a probability of occurrence of 50% has a moderate probability of occurring.
  • A risk with a probability of occurrence of 90% has a high probability of actually occurring.

The probability of occurrence is an important factor in risk assessment, as it allows risks to be prioritised according to their urgency and relevance. Risks with a high probability of occurrence and a potentially significant level of damage are considered particularly critical and therefore require special attention and appropriate mitigation or control measures. On the other hand, risks with a very low probability of occurrence may require fewer resources and slide down the priority list.

The probability of occurrence is often assessed in combination with the extent of damage to enable a comprehensive risk assessment and to develop appropriate risk management strategies.

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Laws, norms and standards in risk management

In risk management, there are various laws, norms and standards that support companies and organisations in identifying, assessing and appropriately managing risks.

The German legislator has tightened its requirements for corporate risk management in numerous laws (HGB, AktG, GmbHG, etc.). To this end, the Law on Control and Transparency in Business (KonTraG) was passed in 1998.

KonTraG stands for the "Law on Control and Transparency in Business" and was passed in Germany in 1998. The main objective of KonTraG is to strengthen corporate governance in German companies and to improve risk management.

The most important provisions of the KonTraG are:

  • Introduction of the obligation to establish a risk management system: Public limited companies and partnerships limited by shares are obliged to introduce a risk management system that is adequate to identify, assess and manage existing risks.
  • Introduction of the obligation to set up an internal control system: Companies must set up an internal control system to ensure the regularity of business transactions and to prevent financial losses.
  • Management liability: The management (executive board) and the supervisory bodies (supervisory board) are held more accountable and can be held liable for breaches of the obligations to establish a risk management system or an internal control system.
  • Duty of disclosure: Companies must disclose information on material risks and risk management in the management report.
  • Audit of the internal control system: The auditors are obliged to audit the internal control system and to issue a report on it.

With the changes in the law, company management has the duty to control risks and to conduct risk management. The companies concerned must set up a comprehensive controlling and reporting system and inform comprehensively and quickly about risks in the performance area.

Other laws, norms and standards serve as a guide and reference for companies to improve their risk management processes and implement best practices. Compliance can help proactively identify and control risks, leading to improved safety, stability and long-term success.

Other important laws, norms and standards in risk management are:

  1. ISO 31000: ISO 31000 is an international standard for risk management that provides guidelines and principles for effectively managing risk in organisations.
  2. Digital operational resilience for the financial sector and amending regulations (DORA): Single supervisory framework aimed at improving the digital operational resilience of EU financial firms, including ICT third party service providers.
  3. EU-DSGVO: The European General Data Protection Regulation regulates the protection of personal data and is relevant for the risk management of companies in relation to the handling of sensitive information.
  4. Sarbanes-Oxley Act (SOX): A US law that improves the transparency and accuracy of corporate finances and strengthens the accountability of top management.
  5. ISO 27001A standard for information security management that addresses risk assessment and control related to information security in organisations.
  6. ISO 9001: An international standard for quality management aimed at identifying and managing quality risks.
  7. ISO 22301: A standard for business continuity management that aims to identify risks of business disruption and take appropriate action to maintain business continuity.
  8. ITIL (Information Technology Infrastructure Library)A framework for IT service management that addresses IT risks and defines service continuity strategies.
  9. COSO (Committee of Sponsoring Organizations of the Treadway Commission): A framework that promotes risk management, internal control and corporate governance.
  10. ISO 19600: A compliance management standard that helps companies meet legal and regulatory requirements and minimise risks associated with compliance.
  11. BAITBAIT is a risk management framework developed by the German Federal Financial Supervisory Authority (BaFin). BAIT stands for "Bankaufsichtliche Anforderungen an die IT" (Banking Supervisory Requirements for IT), furthermore BAIT contains additional requirements for IT governance and risk management of credit institutions.
  12. VAITThis is a risk management framework that was also developed by the Federal Financial Supervisory Authority (BaFin). VAIT stands for "Versicherungsaufsichtliche Anforderungen an die IT" (Insurance Supervisory Requirements for IT) and is aimed specifically at insurance companies.
  13. DORA: The Digital Operational Resilience Act (DORA) is a new piece of EU legislation designed to improve the digital resilience of financial institutions. DORA sets out a series of risk management requirements for businesses.

Risk management as a component of ISO standards

ISO 31000 a general standard for risk management that applies to all types of risks and organisations, while ISO 31001 is specifically focused on risk management in projects and serves as a complementary guideline to ISO 31000 for the project management context. Both standards help to improve risk management processes and optimise the handling of risks in companies and projects.

  • ISO 31000: ISO 31000 is an international standard for risk management that provides guidelines and principles for effectively managing risk in organisations. This standard establishes general principles, frameworks and processes for risk management and can be applied to all types of risks and organisations. It provides a broad and comprehensive approach to risk management and is not specific to any particular industry or field of application.
  • ISO 31001: In contrast to ISO 31000, ISO 31001 is specifically focused on risk management in projects. This standard provides guidelines and recommendations for risk management within project management. It supports project managers and project teams in identifying, assessing and managing risks in the project environment to ensure the successful implementation of the project. ISO 31001 can be considered as a specific complement or application of ISO 31000 in project management.

Legal significance

In Germany, risk management has considerable legal significance, especially for companies and organisations in various sectors. The relevance of risk management is determined by various laws, ordinances and regulations that require companies to adequately identify, assess and control risks. Here are some important aspects of the legal relevance of risk management in Germany:

  • Stock Corporation Act (AktG) and Limited Liability Company Act (GmbHG): According to these laws, boards of directors and managing directors of joint stock companies and limited liability companies are required to establish and maintain an adequate risk management system to identify, monitor and control the risks of the company.
  • KonTraG (Corporate Control and Transparency Act): This law stipulates that companies that are capital market oriented or meet certain size criteria must implement an early risk detection system in order to identify potential risks in good time and take countermeasures.
  • HGB (German Commercial Code): According to the provisions of commercial law, companies must present their risks and opportunities in the management report in order to enable a comprehensive assessment of the economic situation.
  • Compliance requirements: Companies must ensure compliance with legal requirements, regulatory requirements and ethical standards. Effective risk management helps minimise violations and avoid legal consequences.
  • Sector-specific specifications: In some sectors there are specific legal requirements for risk management, for example in the financial sector (e.g. Basel III) or in the health sector (e.g. Medical Devices Act).
  • Insurance law: Insurance companies are subject to strict regulations regarding risk management in order to ensure the security of policyholders and safeguard the financial stability of the company.

Risk management in Germany is therefore not only a recommended good practice, but in many cases also a legal obligation to ensure that companies take adequate precautions to identify and manage risks in order to ensure economic stability, compliance and long-term success.

Points of contact with other departments

In the company, several departments are involved in the process of risk management, as risks can affect different aspects of business operations. The main departments involved in risk management are:

  • Company management (board of directors/management): The management bears the overall responsibility for risk management in the company. It is responsible for setting the risk strategy, defining the risk appetite and monitoring the implementation of risk management processes.
  • Finance Department: The finance department is involved in risk management, as many risks can have financial implications. It assists in the assessment of financial risks, prepares financial analyses and forecasts and contributes to the identification of risk mitigation measures.
  • ControllingControlling plays an important role in monitoring and reporting risks. It supports the identification of Key Risk Indicators (KRIs) and the development of risk reporting systems for management.
  • Human Resources: The HR department is involved in risk management as there are risks related to human resource management, such as staff turnover, absenteeism or skills shortages. It can also contribute to the development of HR risk management measures.
  • Legal Department: The legal department plays an important role in identifying and managing legal risks, such as regulatory compliance, contractual risks and liability issues.
  • IT department: The IT department is responsible for identifying and mitigating IT risks, such as cyber security, data protection and data backup.
  • Compliance Department: The compliance department plays an essential role in a company's risk management. Its tasks and responsibilities are closely linked to the identification, assessment and control of risks arising from legal and regulatory requirements.
  • Quality Management: The quality management department has an important role in the risk management of a company. Although quality management and risk management have different focuses, their tasks and objectives overlap in some areas.
  • Risk management department: In larger companies, there is often a dedicated risk management department or function devoted exclusively to risk management. This department coordinates and supports risk management activities throughout the company and develops risk management strategies.
  • Internal audit: Internal audit reviews and evaluates the effectiveness of risk management processes and controls and makes recommendations to improve risk management practices.

Effective collaboration and communication between these departments is critical to proactively identify risks and take appropriate action to address them. Risk management should be viewed as a company-wide process in which different departments work closely together to ensure the safety, stability and success of the company.

Risk management instruments and methods

There are numerous instruments and methods for presenting and managing risks. Their use depends on the industry and the size of the company. Each company must choose the appropriate instruments according to its needs - if necessary also a mix of several.

Risk management audits are formal reviews and audits of an organisation's risk management process by internal or external auditors. The objective of such audits is to assess the effectiveness and adequacy of the risk management system to ensure that risks are appropriately identified, assessed and managed.

There are different types of risk management audits:

  • Internal audit: Internal auditors within the organisation conduct an independent assessment of the risk management process. They verify that risk management policies and procedures are properly implemented and adhered to and that the measures taken are appropriate.
  • External audit: External auditors from independent audit firms or government agencies conduct an assessment of the risk management process to ensure compliance with laws, regulations or standards. External audits can also be used to verify the quality and transparency of risk reporting.
  • Management Review: Senior management or top management conduct regular assessments of the risk management process to ensure that risk management meets business needs and objectives and is operating effectively.

Risk management audits play an important role in ensuring that risk management is appropriately designed and implemented and that risks are effectively managed. They contribute to the continuous improvement of risk management and support the organisation in proactively managing risks and successfully achieving its business objectives.

The Balanced Scorecard (BSC) is a strategic management tool originally developed by Robert S. Kaplan and David P. Norton. It is used to measure and monitor a company's strategic goals and key performance indicators in a balanced way. The BSC makes it possible to translate corporate strategy into concrete goals and key figures and to track progress in the various dimensions of corporate performance.

In the context of risk management, the Balanced Scorecard can be extended to also measure and manage performance in dealing with risks. The integration of risk management into the balanced scorecard enables a holistic view of the company's performance, taking into account risks and opportunities.

The extension of the Balanced Scorecard to include risk management is typically done in the following steps:

  1. Definition of the risk strategy: The company's risk strategy is integrated into the balanced scorecard. This includes setting risk appetite, tolerance and targets to ensure that risks are in line with the company's strategic objectives.
  2. Key risk figures: In addition to traditional performance measures, specific risk measures are also developed and included in the scorecard. These may include, for example, the number and type of risks identified, risk management successes, response times to risks or other relevant risk measures.
  3. Risk categories: The balanced scorecard may contain risk categories or dimensions that reflect the different types of risks the company faces, e.g. financial risks, operational risks, strategic risks, compliance risks, etc.
  4. Risk assessment and management: The recording and assessment of risks, as well as the planned or implemented measures to address risks, are integrated into the scorecard to monitor the progress and effectiveness of risk management.
  5. Risk reporting: The Balanced Scorecard can also serve as a communication tool to inform relevant stakeholders about the risk management status and risk performance of the company.

Integrating risk management into the balanced scorecard provides a holistic view of business performance that considers both financial performance and risk management effectiveness and efficiency. This supports management in identifying critical risks, prioritising actions and achieving balanced performance in relation to corporate strategy and risk management.

The Delphi method is a technique in risk management used to gather opinions and expert knowledge from a group of professionals and make consensual decisions. It was originally developed in the 1950s for forecasting and planning in futurology and is nowadays also used in various other fields, including risk management.

The process of the Delphi method in risk management is usually as follows:

  1. Selection of experts: A group of experts or professionals with relevant knowledge and experience in the respective field is selected. The experts can be internal or external and should represent different perspectives and backgrounds.
  2. First survey: The initiator of the Delphi method asks the experts a series of questions or statements related to risk management. The experts answer independently and anonymously.
  3. Summary and feedback: The experts' answers are anonymised and aggregated. The results are then returned to the participants, giving them the opportunity to review and evaluate the aggregated answers and opinions of the group.
  4. Second survey: Based on the summary and feedback from the first round, the experts now have the opportunity to revise their answers or revise their positions. The second survey may also include additional questions to capture further expert knowledge.
  5. Iterative implementation: Steps 3 and 4 are repeated until a certain degree of consensus or convergence is reached. The anonymity of the experts and the possibility to reconsider their positions allow a gradual approach to a common consensus.

The Delphi method is particularly useful when dealing with complex problems where there are no clear answers or unambiguous solutions. By using the collective knowledge and experience of experts, realistic assessments of risks and opportunities can be obtained. The method helps minimise biased views or dominance of individual opinions and enables informed decision-making.

Decision tree analysis, also known as the decision tree method or decision tree analysis, is an important technique in risk management and decision-making. It is used to analyse complex decision-making situations, to evaluate possible courses of action and to make the best decisions, taking uncertainty and risks into account.

The decision tree is a graphical representation consisting of a tree diagram showing different decision paths. Each node in the tree represents a decision and each branch represents a possible course of action or event with probabilities. The end nodes of the tree show the possible outcomes or effects of the decisions.

The process of decision tree analysis in risk management is usually as follows:

1. identification of the decisions: First, the decisions to be made and the possible courses of action are clearly defined. In doing so, the uncertainties and events to be taken into account that could influence the decisions are also recorded.

2. determination of probabilities: Probabilities are assigned for each event or uncertainty that affects the course of decisions. These probabilities can be based on historical data, expert assessments or other sources of information.

3. creation of the decision tree: the decision tree is represented graphically by displaying the decisions, options for action and the associated probabilities in the form of branches.

4. evaluation of the results: At the final nodes of the tree, the possible outcomes or effects of the decisions are brought together. The probabilities of the different scenarios are also taken into account.

5. make an optimal decision: The decision tree analysis makes it possible to calculate the expected values of the different decision paths. On this basis, the optimal decision can be identified by choosing the path with the best expected value.

Decision tree analysis is particularly useful in situations where multiple courses of action are available and uncertain events can influence outcomes. It helps decision makers consider the impact of uncertainty and risk and make better decisions by providing an informed assessment of possible scenarios.

FMEA (Failure Modes and Effects Analysis) is a proven method in risk management used to identify potential failures (Failure Modes) in processes, products or systems that could lead to undesirable effects. FMEA is widely used in various industries, including automotive, aerospace, healthcare and other technical fields.

The purpose of FMEA is to identify potential risks and weaknesses at an early stage in order to take appropriate preventive or corrective action before a failure occurs and results in serious consequences.

The FMEA process usually includes the following steps:

1. identification of the elements to be analysed: First, the processes, products or systems to be analysed are selected. These can be, for example, production processes, components of a product or functions of a system.

2. formation of an FMEA team: an interdisciplinary team of subject matter experts is assembled to carry out the FMEA. The team may include engineers, technicians, quality assurance staff, project managers and other relevant experts.

3. identification of the failure modes: The team identifies all possible failure modes that could occur during the operation of the analysed element. A failure mode describes how the element could fail.

4. severity assessment: Each identified failure mode is evaluated according to its potential impact on the process, product or system. This determines how severe the consequences of a failure could be.

5. evaluation of the occurrence (frequency of occurrence): For each failure mode, an assessment is made of how likely it is that this failure mode will actually occur.

6. detection assessment (probability of detection): The probability that a failure mode will be detected during inspection, monitoring or testing before any impact occurs is assessed.

7. calculation of the Risk Priority Number (RPN): The RPN is calculated by assessing and multiplying Severity, Occurrence and Detection. This prioritises the most critical failure modes.

8. derivation of measures: Based on the assessments and RPN, appropriate preventive or corrective actions are developed to reduce or eliminate the risk of failure.

FMEA is a proactive and systematic risk analysis tool that helps to improve the quality, safety and reliability of processes, products or systems and to identify and correct potential problems at an early stage.

The Internal Control System (ICS) is an essential component of risk management and refers to the measures and procedures that an organisation implements to identify, monitor and control risks. The main objective of the ICS is to ensure the effectiveness and efficiency of business processes, the reliability of financial reporting and compliance with laws, policies and internal guidelines.

The ICS can include various elements, such as internal control policies, procedures, internal control mechanisms, automated controls, segregated tasks, regular audits and monitoring, and training for employees. It is designed to identify potential risks, detect them at an early stage and take appropriate countermeasures to minimise potential damage or loss.

Monte Carlo simulation is a computer-based statistical method used to account for uncertainty in a model and produce probabilistic results. It is applied in various fields, such as finance, engineering, risk management, project planning, physics, and many other areas where complex models and random variables play a role.

The name "Monte-Carlo" comes from the city of Monte Carlo in Monaco, which is known for its casinos and combines gambling with random outcomes. Monte Carlo simulation uses the concept of randomness to calculate a variety of possible outcomes of a model.

The process of a Monte Carlo simulation is usually as follows:

  1. Model development: First, a mathematical or statistical model is created that describes the system or phenomenon to be studied. The model may contain complex equations, relationships or probability distributions.
  2. Definition of uncertainty: The variables in the model that are uncertain or random are identified. These uncertain variables can be, for example, market prices, weather conditions, production failures or other factors that are subject to fluctuations.
  3. Generate random numbers: Monte Carlo simulation uses random number generators to produce values for the uncertain variables. These random numbers are generated according to the assumed probability distributions.
  4. Simulation: The simulation runs the model several times, using random values for the uncertain variables for each run. This produces a large number of possible outcomes.
  5. Result analysis: The collected results are analysed to determine statistical ratios such as average, standard deviation, probability distributions, risk measures or other metrics of interest.

The strength of Monte Carlo simulation is that it takes into account the effects of uncertainty and complexity in a model and provides probabilistic results. This enables a more realistic assessment of risks and opportunities and helps to make better decisions by evaluating different scenarios and their probabilities.

A risk matrix, also called a risk matrix or risk assessment matrix, is a helpful tool in risk management for assessing and prioritising risks. It is used to quantify the probability and impact of a risk and to rank it in a visual representation.

Risk matrix

A typical risk matrix consists of two axes:

  1. Frequency of occurrence: This axis represents the probability of occurrence of a risk and is often divided into different levels (e.g. from "rare" to "very frequent"). The probability of occurrence indicates how likely it is that a certain risk will occur.
  2. Impact / level of damage: This axis shows the possible impact of a risk on the objectives, the project or the organisation. Here, too, different levels or ratings can be used (e.g. from "negligible" to "existence-threatening").

The intersections of the two axes then form the individual risk cells in which the risks are positioned according to their probability of occurrence and their impact.

Based on this positioning in the risk matrix, the risks can then be divided into categories, which are often represented by colours or numbers:

  • Turquoise (low risk): Risks are placed here that have a low probability of occurrence and low impact.
  • Green (medium risk): This zone contains risks that have either a moderate probability of occurrence with moderate impacts or a low probability of occurrence with high impacts.
  • Orange (high risk): Risks in this zone have a high probability of occurrence and medium impact or a moderate probability of occurrence and high impact.
  • Red (very high risk): Risks are placed here that have both a very high probability of occurrence and catastrophic effects.

The visual representation of risks in the risk matrix enables decision-makers to quickly identify which risks require special attention and measures and which are less critical. This facilitates the prioritisation of risks and the determination of appropriate countermeasures as part of risk management.

A SWOT analysis is a proven strategic tool for assessing the internal strengths and weaknesses as well as the external opportunities and threats of a company, project or organisation. The analysis makes it possible to gain a holistic overview of the current position and future prospects.

The individual components of the SWOT analysis are as follows:

  1. Strengths: This is where the internal positive aspects of a company or project are captured that can set it apart from competitors and provide a competitive advantage. These can be, for example, special competences, unique resources, strong brand identity or established customer satisfaction.
  2. Weaknesses: This component refers to the internal negative factors that may limit the company or project or cause difficulties. Weaknesses can be, for example, inefficient processes, limited resources, lack of expertise or technological deficits.
  3. Opportunities: External factors that could have a positive effect on the company or project are recorded under this aspect. These can be, for example, new market opportunities, changing customer needs, technology trends or positive regulatory developments.
  4. Risks (Threats): This category lists external factors that may pose potential threats and risks to the company or project. These include, for example, growing competition, political uncertainties, economic downturns or changing market conditions.

SWOT analysis is often used in strategy development, business planning, project evaluation and other decision-making processes. It helps to get a clear view of a company's internal strengths and weaknesses while taking into account external opportunities and threats. The insights gained from the SWOT analysis can serve as a basis for setting strategic goals and formulating recommendations for action to improve the competitiveness and success of the company or project.

The risk register is a central document in risk management that lists all recorded risks of an organisation or project in a systematic and structured way. It serves as a kind of database or directory in which all relevant information on the identified risks is brought together and managed. The risk register is an important tool for keeping track of risks and taking targeted measures to address risks.

The risk register typically contains the following information on each identified risk:

  1. Risk identification: A unique name or number of the risk to clearly identify and distinguish it.
  2. Description of the risk: A clear and detailed description of the risk, including causes, effects and possible scenarios.
  3. Category: The assignment of the risk to a specific risk category, e.g. financial risks, operational risks, strategic risks, compliance risks, etc.
  4. Probability of occurrence: The probability that the risk will actually occur, typically on a scale from low to high or in percentages.
  5. Impact: The potential impact or consequence of the risk, typically on a scale from minor to catastrophic or in monetary terms.
  6. Risk Priority Number (RPN): A metric that calculates the priority of the risk based on probability of occurrence and impact to determine the urgency of treatment.
  7. Responsibilities: The persons or teams responsible for monitoring and managing the risk, as well as the measures and deadlines set.
  8. Status: The current status of the risk, whether it is active, has been managed or is still being monitored.
  9. Risk management measures: The measures planned or already implemented to reduce or address the risk.
  10. Progress and course: Information on the progress of the measures taken and possible changes in the risk profile.

The risk register is continuously updated when new risks are identified, when probabilities of occurrence or impacts change, or when risk management measures are implemented. It is an important tool for transparency, communication and documentation in the risk management process and supports the organisation in gaining a comprehensive overview of its risk landscape and dealing effectively with risks.

A risk management manual is a written document or guide that sets out the principles, objectives, structures and procedures of risk management in an organisation or business. It serves as a central reference document and provides a clear framework for risk management within the organisation. The risk management manual may also be referred to as a risk management guideline or policy.

A risk management manual will typically contain the following elements and information:

  1. Objective: A clear definition of the objectives and purposes of risk management in the organisation. This may include how risk management is to contribute to the achievement of the organisation's objectives and what strategic aspects are to be considered.
  2. Responsibilities: The competences and responsibilities of the different actors in risk management are defined. This includes the roles of the management, the risk manager, the risk management team and other relevant stakeholders.
  3. Risk management framework: A description of the structural framework of risk management, including the definition of risk management processes, methods and tools.
  4. Risk assessment: The criteria and methods for identifying, assessing and prioritising risks are described. This may include the use of risk matrices or the calculation of risk priority numbers (RPNs).
  5. Risk management: The strategies and measures to address the identified risks are defined. This includes the definition of risk mitigation measures, risk transfer options and risk acceptance criteria.
  6. Risk communication: The communication channels and procedures for reporting on risks and risk management activities are described. This also includes interaction with relevant stakeholders.
  7. Monitoring and reporting: The processes for monitoring the risk situation and reporting on the progress of risk management measures are defined.
  8. Continuous improvement: The methods for continuous review and improvement of the risk management process are described to ensure that risk management remains appropriate, current and effective.

The risk management manual should be well structured, easy to understand and accessible to all relevant staff. It is an important document that provides guidance for risk management in the organisation and ensures that risk management is carried out effectively and consistently.

The Risk Priority Number (RPN) is an important metric in risk management that is used to prioritise risks and rank them according to their importance. The RPN makes it possible to assess risks in a standardised and objective way in order to direct resources and measures specifically to the most affected risks.

The risk priority number is usually calculated by multiplying two or more individual scores, each of which takes into account different aspects of a risk. The exact formula may vary depending on the company or organisation, but typically includes the following components:

  1. Probability of occurrence (EW): This component assesses the probability that a certain risk will actually occur. It is often rated on a scale of, for example, 1 to 5 or from "very low" to "very high".
  2. Impact (AI): This component assesses the potential impact or consequences of a risk if it occurs. Again, a scale of 1 to 5 or from "minor" to "catastrophic" can be used.
  3. Recognisability (ER): In some cases, the detectability of the risk is also taken into account, i.e. how easy or difficult it is to identify the risk at an early stage and to react to it appropriately.

The RPN is then calculated by multiplying the individual scores, for example: RPN = EW x AI x ER.

A higher RPN indicates a risk that requires higher priority and more attention because it has a higher probability of occurrence and/or more severe impacts. Risks with lower RPN values are considered less critical and may be able to be treated with less urgency.

The risk priority number is a valuable tool in risk management as it helps decision-makers to efficiently focus their limited resources and actions on the most important and urgent risks and enables better risk governance and management.

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Establishment of a risk management system

An effective Establishment of a risk management system consists of several interconnected steps and ensures that a company or organisation is better prepared for unforeseen events and potential threats and can take advantage of opportunities to achieve its business objectives.

Risk management structure

First, the objectives and context of risk management need to be established. This includes identifying the relevant business objectives, determining the risk appetite and defining the scope of the risk management process.

Establishing responsibilities in risk management is crucial to ensure that the risk management process runs effectively and smoothly. Responsibilities should be clearly defined and known to all involved.

In this step, potential risks that could jeopardise the achievement of the business goals are identified. Techniques such as brainstorming, interviews with experts, SWOT analyses (strengths, weaknesses, opportunities, threats) and checklists can be used.

In this step, the identified risks are examined in more detail and their potential impact on the company is assessed. Quantitative and qualitative methods are used to determine the probability of occurrence and the severity of the consequences. Examples of analysis techniques are Monte Carlo simulation, Delphi method and decision tree analysis.

Risk assessment involves prioritising the identified risks based on their importance and urgency. Various assessment methods such as the risk matrix or the risk priority number (RPN) can be used.

Once risks have been identified, analysed and assessed, it is important to develop appropriate strategies and measures to deal with the risks. Various approaches can be chosen here, including

  • Risk avoidance: Taking action to avoid the risk completely by rejecting or changing certain activities or decisions.
  • Risk mitigation: Taking measures to reduce the probability of occurrence or impact of a risk. This can be, for example, redundant systems, security measures or training programmes.
  • Risk transfer: Transferring risks to third parties, e.g. through insurance or outsourcing.
  • Risk acceptance: Consciously accepting the risk if the potential benefits outweigh the potential harms or if the risk is considered unavoidable.

The identified measures are put into practice to manage the risks. In doing so, it is important to establish clear responsibilities and ensure that the measures are implemented appropriately and effectively.

Clear and effective communication about risks is crucial to keep all relevant stakeholders adequately informed. This includes both internal and external communication and can be achieved through risk communication plans and strategies.

Risk management is an ongoing process. Therefore, it is important to continuously monitor and evaluate the identified risks and the effectiveness of the measures taken. If necessary, adjustments can be made to maintain the effectiveness of risk management.

Regular assessments of the risk management process help to evaluate its effectiveness and make improvements where necessary. The results and progress should be documented in reports and presented to management and other relevant stakeholders.

Performance measures in risk management

Risk management performance measures are ratios and metrics used to evaluate the success and effectiveness of the risk management process. They are used to track progress in identifying, assessing, managing and monitoring risks and to ensure that risk management is delivering the expected benefits and meeting the needs of the organisation.

Measures of success can vary depending on the specific objectives and nature of the risk management process, but typical examples of measures of success in risk management are:

  1. Risk reduction: The reduction in the number and severity of identified risks over time shows that risk management is effective and helps to identify and address potential problems at an early stage.
  2. Efficiency and effectiveness: Efficiency measures the costs and resources spent on risk management, while effectiveness assesses the results and value of the risk management process. A balance between efficiency and effectiveness is important to ensure that risk management is carried out appropriately and adds value.
  3. Response times: The time taken to react to identified risks and take appropriate action is an important indicator of the agility of the risk management process.
  4. Avoidance of risk occurrence: Preventing or minimising risk occurrence shows that the risk management process helps to identify potential risks in time and prevent them from actually occurring.
  5. Loss prevention: Limiting financial losses or other negative consequences due to risks is a critical indicator of the success of the risk management process.
  6. Improving risk communication: Improved and transparent communication about risks and risk management activities between different levels of the organisation and relevant stakeholders demonstrates a strengthened risk culture and sensitivity.

The selection of performance measures should be well aligned with the specific objectives and priorities of the risk management process and regularly reviewed and updated to ensure that the measures reflect the actual performance of the risk management process. Performance measures play an important role in continuously improving risk management and ensuring that risk management is delivering the intended benefits to the organisation.

The use of risk management software

Risk management software is a special type of software solution that helps companies and organisations plan, execute and monitor the entire process of risk management efficiently and digitally. These software solutions are designed to simplify and improve the way an organisation deals with risk by providing various functions and tools for risk identification, assessment, management, monitoring and reporting.

Risk management software can be available as a cloud-based solution or as a locally installed application. The selection of the appropriate risk management software depends on the specific requirements and sizes of the company. Using this software helps companies to proactively manage risks, optimise the risk management process and improve decision-making.

Advantages of using risk management software

The use of risk management software helps companies to professionally structure the entire risk management process, facilitate collaboration and gain a better overview of their risk landscape. By automating many processes, resources can be saved and risk management optimised. In addition, improved transparency and reporting contributes to better decision-making and the establishment of a robust risk management system.

  • Central data storage: Risk management software enables central data storage of all information on identified risks, assessments, measures and status reports. This gives all relevant staff and departments access to up-to-date and consistent information.
  • Structured risk identification: The software supports the systematic recording and documentation of risks. It often provides ready-made templates and forms to ensure that all relevant information is captured.
  • Automated risk assessment: Risk management software enables the automatic calculation of risk priority numbers (RPNs) or other assessments based on probability of occurrence, impact and other criteria. This speeds up and standardises assessment processes.
  • Risk monitoring and early warning system: The software enables continuous monitoring of risks and often has early warning systems that make it possible to react to developing risks at an early stage.
  • Workflow support: Risk management software often offers workflow functionalities to facilitate the tracking of actions and responsibilities. This facilitates collaboration and coordination between teams.
  • Reporting and analysis: The software enables the creation of clear reports and analyses on the current status of risks and the risk management process. This facilitates communication with management and other stakeholders.
  • Integration into other systems: Many risk management software solutions can be seamlessly integrated with other business systems such as ERP systems or business intelligence tools. This allows data to be easily exchanged and synergies to be exploited.
  • Scalability: Risk management software can be scaled according to the needs and size of the company. It is suitable for both small businesses and large organisations.
  • Data security and data protection: Modern risk management software often offers high security standards and data protection measures to protect confidential company information.

Video: Performing risk management with Robin Data ComplianceOS

Video realisation risk management

Perform risk management with Robin Data ComplianceOS®:

The importance of risk prevention and systematic risk assessment is constantly increasing for organisations in order to ensure protection against financial losses and to secure the organisational future. In the recording of the Robin Data Hacks, you will gain a comprehensive insight into the requirements for effective risk management, as the basis for many management systems and various compliance fields. The Robin Data Hacks take place online and participation is free of charge. Further information, dates and the opportunity to register.

Unfortunately this content is currently only available in German. Please feel free to contact us for more information.

Schedule a meeting with Robin Data

We would be happy to show you in a personal online appointment how you can implement your requirements with Robin Data ComplianceOS®. Get an insight into the structure and scope of functions and ask your questions from the user's point of view.

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Conclusion

Effective risk management is key to staying safe and seizing opportunities in an uncertain business environment. By proactively identifying risks, analysing them and implementing appropriate mitigation strategies, companies can minimise potential damage while identifying beneficial opportunities. Risk management should be viewed as an integrated and continuous process that ensures the stability and long-term success of a business.

Caroline Schwabe
Latest posts by Caroline Schwabe (see all)

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