Risk Management: Methods for Safe Corporate Decisions

Progressive digitalization and the worldwide merging of markets are presenting the corporate world with new challenges and obligations at national and international level. Dealing responsibly with risk is not an option, but a prerequisite for being able to survive in the demanding competitive environment. What risk management is and how it has to be managed in the digital change is the topic of this article.

Risk Management: Methods for Safe Corporate Decisions

Risk Management in the Digital Age

Risk management is anchored in business administration and generally refers to the way companies deal with risk. A risk is to be understood as the probability of the occurrence of a potentially negative event that can have far-reaching consequences for the company and its immediate environment.;

For this reason, not only top managers and employees, but also business partners and investors have great interest in the calculated forecast of a loss or damage.

The starting point of risk management, which in times of digital networking is usually supported by risk management software, is a risk guideline. It provides detailed information on what risk management means in a company and how to proceed systematically in this process.

In fact, risk management is not a one-off task, but rather a continuous process in which risk analysis software tailored to the needs of the company is also used in practice.

As a rule, the management or the board of directors is responsible for the adoption of a risk guideline. The strategic planning and implementation of risk management is undertaken jointly by the risk manager and the risk committee. While the risk manager - often at the second management level - is responsible for overall risk management, the risk committee consists of employees from different organizational specialist areas. 

The clarity and transparency of tasks form a company-wide risk awareness and ensure a sustainable risk culture.

Aim and tasks of risk management

Risk management is designed to identify and remedy internal and external threats and weaknesses in good time. It is in the interest of companies to be able to prepare for the unplanned. Risk management also signals to stakeholders that the company is acting proactively and thus is trustworthy. It takes on the following tasks:

Risk identification 

The first step in reducing the probability of a risk occurring is to identify possible risk areas. There are many risks lurking in the business world to which the company must adapt if it wants to remain competitive and appear reliable. Operational, strategic, financial, market and environmental risks must never be neglected. 

Risk assessment 

Once the company has identified potential risks, it should conduct a careful analysis of the probability of occurrence and extent of damage in qualitative and quantitative terms. Various models serve this purpose, including the value-at-risk (VaR) and cash-flow-at-risk (CFaR) concepts. It is also advisable to use a multi-level classification for risk assessment. 

Risk documentation 

The results of a regular risk assessment are summarised in the risk management report and filed in the risk management file. The process can be optimized using risk analysis software. Access to the entire risk documentation is primarily available to top managers, employees, business partners and investors. They all need to be kept up to date on the risks and their development at all times.

4 defensive strategies in risk management

Consciously accepting risks: Those companies that react proactively to changing customer and market requirements and remain agile are best prepared to turn risks into opportunities. They recognize their own strengths and potential, grow in a familiar environment and invest in innovations that have a future. What distinguishes them is their high willingness to take risks and the courage to discover new things despite lurking dangers.

Minimize risks: If companies take concrete measures to avert losses, they contribute largely to risk reduction. The prerequisite for this defensive strategy is that companies implement all necessary processes smoothly. Risk simulation is suitable for early planning of countermeasures. Here, for example, the Failure Mode and Effect Analysis (FMEA) can be of assistance.

Transferring risks to third parties: In principle, companies have various options at their disposal for transferring certain risks to other parties. Particularly worth mentioning are insurance companies that specialize in assuming risks and - if necessary - paying for any damage that may occur. The state also assumes a function of insurance in the market by being liable for particularly high risks such as natural disasters.

Avoiding risks in advance: It happens that, for reasons of prudence, companies do not enter certain transactions in order to avoid possible risks. Sometimes this defensive strategy proves to be advantageous in risk management. But it can also be a disadvantage, because it can cause companies to miss promising opportunities and leave economic potential unused.

Advantages of risk management software

In the course of digitization, companies must be open to new challenges if they do not want to lose their competitive position. Customers, markets and institutions define requirements that companies must respond to quickly and efficiently. A professional risk management software that optimizes risk management in conjunction with the company's internal IT infrastructure helps to achieve this. Regardless of whether it is comprehensive risk management software or specialized risk analysis software, quality assurance and cost savings remain the top priority. Your advantages also result from the transparency and clarity.

Both a risk management software and a risk analysis software can be integrated smoothly into existing business processes. Thus, they form an important part of the daily business routine without burdening it unnecessarily. It is important to note that every technological solution that is used in practice in the company must comply with the law and standards. In the area of risk management, the German Law on Control and Transparency in the Corporate Sector (KonTraG) is one of the relevant laws. In addition to legal requirements, companies are called upon to comply with international norms and standards such as ISO 31000:2018 and IEC 31010:2019 in business practice.

It should not be overlooked that risk management software and risk analysis software can also be used for project management purposes. In this way, both IT solutions can facilitate project-related teamwork and stimulate cross-departmental collaboration. This also shows that risk management is a shared responsibility. All employees involved in corporate projects contribute to risk assessment and mitigation in equal measure by being aware of the risks and being able to effectively address any dangers that may arise.