The past few months have been a clarion call for the global business ecosystem. Despite the given uncertainty and disruption, healthy organizations are continuously making headways. However, as the trend unfolds, new pieces are being added to the corporate risk puzzle that can impact operational efficacy and regulatory compliance.
These risks translate into opportunities and challenges. However, simple awareness will not suffice to outwit these risks. Hence, companies are at crossroads to adopt enterprise risk management (ERM) to survive, thrive - and build real value.
ERM is the consistent, forward-looking identification and analysis of potential risks to a company’s financial well-being and market opportunities. These risks can be financial, operational, environmental, and legal. Simply put, ERM is the set of efforts to handle risks to projects, people, and profits. The primary aim of ERM is to understand a business’s risk appetite, and then classify and measure it.
In a world that keeps evolving by the hour, ERM has held the stage as businesses struggle with the long-term implications of global health events. Decision-makers have realized that effective ERM strategies are the need of the hour to stay competitive in the current era.
Enterprise Risk Management vs Traditional Risk Management
There are two ways organizations can identify and manage their risks: traditional risk management (TRM) and enterprise risk management. While both these concepts are similar, they exhibit significant yet subtle differences in their respective workings.
Risk Based Approach
Addressing risk in an ERM framework begins with proactive decision-making. Companies deploying an ERM program perceive and prioritize risks and opportunities in a similar fashion. The setting runs on preventative actions and continuous improvement. Additionally, the virtual crystal ball responds to opportunity and threat fast and evaluates the progress to achieve the enterprise objectives.
On the contrary, TRM approaches risks in a reactive manner; it treats them as it comes, and incoherently. This sporadic analysis and management of risks make TRM less efficient compared to its counterpart.
Systemic Framework
With ERM, the responsibility of risk treatment is not placed on individual divisions or corporate units. Instead, the company’s senior management analyzes risks from an enterprise-wide lens and defines expectations accordingly.
This method sets ERM apart from the “siloed approach” of TRM. In conventional risk management, every department deals with potential risks separately. The caveat with this stove-pipe approach is that sometimes risks fall beyond the defined silos. Besides, the same obstacles might have ripple effects on other divisions, which go unnoticed due to lax communication.
Another shortcoming of TRM frameworks is that they often result in wasted resources. A particular threat might have a considerable impact on a department but the minimum impact on the entire company.
ERM connects the obstacles and tackles their collective influence across various business units. It stitches these distinct siloes together, offering organizations a 360-degree view of opportunities and risks.
Insurance
When companies adopt TRM, they only consider risks that are insurable, for instance, data breach, liability, and workers’ compensation insurance. ERM goes past insurable hazards to incorporate areas of risk that are not transferable through insurance. Money will not help in businesses’ non-insurable risks – vendor disruptions, strategic goals, and social media. Hence, ERM implements proactive measures in such situations.
While these risks do not seem to carry weight, they can dismantle an enterprise when put together.
The Significance of Enterprise Risk Management
An integrated ERM program helps manage, minimize, and in some cases, stave off risks, to keep companies safe and in action. In fact, about half of the decision-makers assert that proactive risk treatment is as critical as effective risk mitigation.
In multiple sectors, ERM empowers businesses to understand the link between risk and value building. It levels up supply chains, reduces operational expenses, boosts revenues, and helps companies better plan their inventory and project demand trends.
If any firm, for instance, focuses on scientific research and development, ERM can help monitor risk throughout the whole product/project lifecycle, safeguarding the progress at every stage.
Apart from that, ERM provides financial benefits as well. Holistic risk treatment saves organizations money not only by preventing business disruptions but also by helping the accounting team audit on time. Moreover, it will help firms weigh their risks against their opportunities, enabling them to flourish with greater peace of mind.
Furthermore, an ERM framework transforms risk management into a sustainable business strategy that blends smoothly into routine business operations and aligns with organizations’ missions and goals.
Key Elements of an ERM Process
Enterprise risk management is a coherent cyclical process. It surveys the outlook for familiar risks as well as helps businesses prepare for unexpected developments that can disrupt operations. Following are the interrelated elements of ERM based on a business’s decision-making and processes:
Internal Business Setting
A firm’s codes of conduct and underlying principles play a significant role in defining its risk aptitude, especially in the wake of the ever-evolving market trends. A healthy work culture sets the pace for employees’ work standards and the ability to tackle enterprise risks.
The onus is usually on the capacity of the upper echelons of the business hierarchy, responsible for defining the workflow guidelines. The managerial skills of the team executives are critical to a sound risk-aware environment and ensuring that no risk goes ignored.
Setting Business Goals and Objectives
Enterprise risk management must function in the context of organizations’ strategies. The first element in this integration for companies is determining their goals and objectives. Typical business strategic objectives entail earnings growth, market share, market value targets, and stakeholder returns.
Besides, companies need to gauge their:
- Risk appetite: The degree of risk organizations are willing to take to pursue their mission and goals.
- Risk tolerance: The maximum risk level that organizations can take to meet their objectives and goals.
Decision-makers must define the organization’s mission and success parameters to ensure that those objectives amalgamate with the decided risk tolerance and appetite.
Involving Employees in the Strategy
In enterprise risk management, all employees must be adept at detecting potential threats and informing the C-level executives and shareholders about the same. For this, organizations must invest in training programs to educate their employees about risk identification and analysis. Involving employees in the ERM process will help them make decisions to reduce the company’s risk exposure.
Identifying the Event
Business owners encounter two kinds of events during project implementation - risks and opportunities. While the former can interrupt project advancement, the latter can offer companies tangible benefits. Evaluating these events lies at the heart of the overarching ERM strategy. Furthermore, decision-makers must assess the potential risks and opportunities from a strategic goal perspective.
Analyzing and Ranking the Probability of the Risks
This is the most technical, data-hungry, and context-centered element of the ERM framework. Only companies and their key investors can ascertain the critical organizational risks that demand the most attention and planning. They must consider the following potential effects with every risk:
- Physical infrastructure
- Tech stack
- People
- Clients and their customers
- Debt-to-income (DTI) ratio
- Stakeholders
- Financials
Organizations must analyze the possibility and consequences for each risk and rank them based on their relative importance. Then, they must create a risk register with all relevant data associated with these risks.
Devising Risk Response and Mitigation Strategies
After determining the risks that can potentially impact their overall workflow, businesses must create response strategies according to the severity involved in a given event. They can pick a playbook to:
- Avoid: Remove or ignore the risk.
- Accept: Accept the impact, whether it is minimal or negligible.
- Reduce: Minimize the impact of the risks.
- Transfer: Approach third parties to mitigate the risk.
The business’s executive board must ensure that employees apply the appropriate risk response to support the ERM program.
Checking Risks Over Time
Monitoring ERM strategy is an ongoing activity that requires organizations to check all the data associated with risks daily to address problems before they escalate into adversaries. Decision-makers can follow these guidelines for risk monitoring:
- Keep records about events updated, including index number, source, and intensity, to identify the trends and deploy countermeasures accordingly.
- Check the relevance of existing strategies by comparing them with potential emerging risks. Tweak the strategies immediately if necessary.
- Daily analyze the effectiveness of risk mitigation strategies to determine whether they are accomplishing the desired objectives while also spotting potential challenges due to policy enforcement.
These data will help businesses create a risk register which they should manage based on their cost-benefit assessment. Hence, companies can prioritize activities and strategies offering optimum ROI.
Why Choose Beroe For Enterprise Risk Management Services?
Beroe’s enterprise management platform tool helps nurture a risk-aware culture within organizations of all sizes and industries. Our cloud-enabled tech suite allows clients to detect and evaluate multiple potential threats - cyber risk, financial stress, and sustainability.
A trusted partner for 10,000+ clients, Beroe enables users to assess and categorize the risks by their possibility, impact, and exposure. The interactive dashboard provides in-depth compliance reports or critical executive summaries, including analytics to monitor risk status and evolution with time.
Thanks to the immense expertise and experience of Beroe’s professionals in tackling various risk types, we align clients’ expectations and devise effective ERM capabilities to help meet their goals.
For more info, check out Beroe LiVE.Ai™