Early warning systems as part of risk management

The economic environment in which companies operate today is often characterized by rapid technological change, cost pressures, and competition. Successful companies are always distinguished by their ability to respond quickly to changes and anticipate trends. Of course, in some cases there may still be the entrepreneurial type who always makes the right decisions from the gut and is a master of spontaneous improvisation. However, such entrepreneurs are exceptions. Almost without exception, successful companies are instead backed by effective risk management and a sensitive early warning system.

An early warning system is a device that detects emerging dangers early on and quickly informs decision-makers. Through timely response, hazards are intended to be averted or mitigated.

Particular attention must be paid to the design and implementation phase when introducing an early warning system. As with almost all new implementations, it is wise to start here with a Overview. In the course of the inventory review, the entrepreneur must be particularly clear about the following points:

• What are the critical success factors?
• How do I measure these factors?
• How do I quantify the opportunities and risks?
• What information and processes already exist within the company?
• How do I check the effectiveness of my early warning system?

Critical success factors are usually always technological change, employees in key positions, delivery reliability, customer satisfaction, information management, and financing. These factors can be measured in a wide variety of ways. For example, customer satisfaction can be measured very well by the number of complaints received, the duration of the customer relationship, and the number of recommendations from existing customers. An increase in customer complaints is usually a sign that customer satisfaction is declining and the risk of losing customers is increasing. A functioning early warning system should already sound the alarm!

In this process, in practice it is often shown that companies gain important information about themselves by being deeply involved in important issues, and often immediately identify immediate potential for improvement ("quick wins").

Once these questions have been answered, a strategy for the early warning system can be formulated as an interim result. This Strategy This should be documented in writing and the persons involved in the decision-making process should make a clear commitment to the planned nature and objectives of the early warning system. An exchange of information with external consultants can provide essential input in this regard.

The next step is then the Implementation phase It should be noted that the required time for establishing an early warning system is not to be underestimated. Depending on size, this phase is expected to take between two and six months (sometimes even longer for very large and complex companies). Increasingly, early warning systems are heavily supported by computer systems. It is therefore particularly important to ensure that the information processed in the early warning system is accurately extracted from the data in the financial accounting, cost accounting, etc.

The results and Effectiveness one of the early warning systems is an ongoing Review It is therefore necessary to ask, in the context of an ex-post analysis, whether the developments identified as significant could be derived from the early warning system, or whether developments were overlooked or information was misinterpreted. It is important that this review process not involve only those individuals who were responsible for the strategy and implementation. Only in this way can an objective judgment be guaranteed.

Based on the controller results, a refinement, adaptation, or possibly a reorientation of the early warning system can be carried out.

Finally, it should also be noted that a well-documented risk management system can already bear fruit very quickly and ultimately also bring benefits to your company in terms of obtaining a good rating from banks (the Basel II issue).