How does risk management work?
Children realize that it can be dangerous to cross the road or ride a bike. Adults know the most important risks in life from their many life experiences and protect themselves systematically. For example, by wearing a seatbelt when driving a car.
Risk management at companies works in a similar way, e.g. in these 5 steps:
Step 1: Identify risks
The first step is to identify all possible risks. A catalog of standard risks, e.g. power failure or hacker attack, helps here. In addition, there are company-specific risks and newly identified risks that were not previously known.
Step 2: Assess risks
The probability of occurrence and the potential impact are now calculated for each individual risk and for the combination of several risks. These two factors have nothing to do with each other: the probability of an airplane crashing is very low, but if it happens, the consequences are dramatic. All risks are prioritized based on the calculation of the two factors.
Step 3: Check and improve measures
The next step is to go through each risk again and consider whether enough preventive measures have been taken to minimize the probability of occurrence or impact. High-priority risks are treated with particular care.
In this context, it is also checked whether the preventive measures taken are actually effective. In the event of a fire, typical preventive measures include fire extinguishers, trained employees and escape routes. The effectiveness of the concept can be checked using a simulated fire drill.
If the preventive measures taken are not sufficient to reduce the risk to an acceptably low level, consideration is given to what further preventive measures should be taken.
Step 4: Practicing emergency situations
As risks cannot usually be completely avoided, the next step is to consider what needs to be done if the risk does occur. It is worth planning these emergency situations in detail in advance, as there is often not much time.
If, for example, a baby food manufacturer discovers that a batch contains glass splinters, the warning to the public must be prepared in detail via various media. As soon as the emergency is under control, crisis management follows, which should also be planned in detail in advance.
Step 5: Restore “normal state
The final phase of risk management is completed with the restoration of normal conditions.
Conclusion:
Risk management in companies reflects the lifelong lessons we learn in dealing with hazards, namely recognizing risks, assessing their severity, taking preventive measures and always being prepared for emergencies. This systematic approach enables companies to reduce uncertainty and respond better in an emergency.
A wise person learns from their mistakes. A wise person learns from the mistakes of others.
When designing the plan or strategy, care is already taken to anticipate relevant risks and manage them responsibly.
In day-to-day business, it is then a matter of implementing this plan consistently. Whether the statutory seatbelt requirement in cars is effective, for example, depends on whether the occupants actually wear their seatbelts.
