Ready for take-off with the champions of the skies

EADS chief risk officer Christoph Schwager says taking risks is central to the work of the European aeronautic,  defence and space company.

“With the launch of a new aircraft – for  example the A350 – we lock into a high-risk  position, because we go out and sell the product, and it is of utmost importance to satisfy our customers and not to lose money on the contracts ,” he says.

“The aerospace and defence industry’s complex programmes, and its long-term returns on investment over volatile market cycles amplify risk and opportunity.

“Our business is with aircraft, rockets, satellites, helicopters and defence, with the focus on everything that flies. It is highly complex and at the edge of physics and technology.  As one can imagine, this comes with a huge amount of technology and complexity risks.”

“The more innovative EADS’ products have become, the more risks we must take. The challenge is to take reasonable risks and go in with our eyes open, to know exactly where we are, and use our capabilities to monitor and control the risks. We take this very seriously.”

From implicit to explicit 

Schwager believes successful risk management in such an environment is all about building a  state-of-the-art enterprise risk management (ERM) plan. “EADS’ unique strength in risk management is that we systematically integrate enterprise risk management across the group,” he says. “By doing this, EADS is mitigating risk and increasing opportunity, so supporting value creation.”

He says that ERM delivers a competitive advantage for the company by helping to factor risk and opportunity into management decisions and processes – a vital function, given the nature of EADS’ business.

However, establishing the ERM plan at the company was not a straightforward process. “We discovered that something was missing if we were to really become a champion in risk management,” Schwager says. “We discovered that it is human nature to do risk management implicitly, rather than explicitly. It’s not a natural thing to do [explicitly]. Life is too short to always worry about what could happen.”

To overcome this hurdle, EADS introduced a  third-party organisation dedicated to holistic risk management that could put a bracket around risk management activities, maintain a constant push for improvement, challenge the business and remove routine blindness.

“We’re convinced,” says Schwager. “It has been proven that the ERM function is needed for eff ective risk management.”

Lean and dynamic

Schwager argues that, to succeed, ERM has to add value to the business. “The trick is to keep the responsibility where it belongs – at the line management – and then move to a lean but effective risk function, as close as possible to the business as a business support.

“For that we need qualified [risk managers], which are sometimes [scarce] in today’s environment. It is of such importance to educate and train highly-qualified risk managers.”

Constant monitoring and self-improvement are also vital to create systems that learn from experience. “An audit committee supervises the effectiveness of the ERM process, while  the ERM function is steadily strengthening across EADS by progressively being embedded more deeply into the group’s day-to-day operations, making its application increasingly homogenous across our four divisions,” Schwager says.

He believes this progress is improving ERM governance and execution at the company, and is beginning to lead to better management of risk and opportunities.

“For example, the system sets out how many risk assessments and reviews should be performed a month or week, who should participate, what the roles and responsibilities are,  and these actions are tracked,” he says. “One set of guidelines, one risk language, one basic  practice exists for everybody, but it is adapted to the circumstances of the business.”

He adds: “Anyone looking to implement effective ERM – or revitalise existing systems – needs to be aware that risk management must be a dynamic process, with clear allocation of responsibilities, solid risk management governance and strong involvement of the risk function in the business.

Schwager discusses some of the other techniques used as part of EADS’ strategy. “Supported by the tool of risk waterfalls, dynamic risk management has been a great success for better risk management in EADS,” he says. “It enables management to track how risk changes over time.

“For example, the Airbus A320neo’s risk waterfall shows how the risks evolve and diminish over the project’s life. Management can follow the anticipated progression of risks throughout the life of the A320neo against what actually happens.”

Lessons learned

Schwager says risk managers must become fully integrated within the business – as part of the “second line of defence” against threats.

“While the frontline business functions are the first line of defence, the risk function  checks on the business functions are the  second line,” he says. “Internal audits then checks on both the business and the risk function as the third and final line of defence.

“Risk managers should also execute the results of lessons learned, which is becoming an important ERM topic. Borrowing from commercial aviation’s approach of learning from accidents to improve safety, ERM intends to reduce the risk in the business.”

Since the programme was introduced, ERM  training has become more standardised across EADS, Schwager says. New simulated and classroom-based training courses have been launched and e-learning training courses are ready for introduction. This, Schwager hopes, will help develop “a true risk culture”.