As the entire world takes precautions against the spread of COVID-19, many businesses have been forced to close their doors, ultimately causing a significant decline in economic activity and touching nearly every industry. According to some researchers, our current economic situation could worsen, causing a devastating and lengthy recession. The Bureau of Economic Research reports that there have been 11 recessions since the Great Depression in 1945. The aftermath of these recessions have been widely visible in many aspects of the economy including GDP, income, employment, production and retail sales.
Risk managers are responsible for understanding the relationship between many different factors such as the economy and challenges facing the organization, both internally and externally, and how these might work towards or against strategic goals. This responsibility becomes increasingly important during economic recessions and in the midst of economic turndowns, like we’re experiencing in today’s economy. While our current pandemic might seem like uncharted territory, risk management teams are looking to history as a blueprint for what’s to come.
Lessons Learned from Historic Recessions
As risk management teams prepare their businesses and organizations for continued economic decline, many refer back to the 2008 recession, which exposed the ways in which risk management systems failed.
Undervaluing Apparent Risks
Risk managers look for correlations between different risks, which helps them identify the probability of those risks, ultimately allowing them to create a plan to avoid negative outcomes. However, during economic crises, it’s not uncommon to underestimate the probability of these risks or misread their correlative relationship. Researchers suggest that companies constantly evaluate their risk measurement methods, making changes as risks transform and evolve.
Ignoring Probable Risks
Sophisticated risk management teams continuously monitor vulnerabilities. However, as companies make changes to protect themselves from one risk, they unknowingly expose themselves to another.
Failing to Communicate
Oftentimes risk managers aren’t the ones making the final decisions. As seen in the past, many risk management teams did not effectively communicate a company’s vulnerabilities to the decision makers.
Managing Risk
Now is the time to be reviewing or creating a risk management plan for the coming months, if not longer. To error on the side of caution, risk managers must take precautions and act as if the coming recession will be worse than it actually might be. Here are a few ideas many risk managers adopt into their planning strategies:
- Identifying Risks- Using the current economic situation as your guide, identify your vulnerabilities and the most obvious ways your institution might be negatively affected. Inversely, you might consider reflecting on your business’ strengths in light of the economic downturn.
- Prioritize Decision-Making - As the economy changes, you might consider revising internal decision-making processes and procedures. Making decisions quickly and effectively could make the difference between succeeding and failing.
- Maintain Flexibility- Even if you have decision-making processes in place, it’s crucial for these decisions to be implemented swiftly. Making changes in staffing roles, policies, and communication channels can help implement the right decisions quickly.
- Manage Your Costs- There most certainly will be an increased strain on budgets. It’s crucial that businesses account for budget cuts before they happen. This could mean switching service providers or consolidating costs when appropriate.
The role of risk managers is critical during economic uncertainty. Preparing for crisis before it happens will help companies stay confident and successful even during trying times.