Enterprise risk management, also known as ERM, allows organizations to take a step back and look at the bigger picture regarding risk and how to manage it. It provides an alternative to using traditional and siloed methodologies. With a comprehensive approach to risk management, you can respond to risks faster and minimize risk exposure in relevant sectors.
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ERM incorporates a continuous surveillance program to provide security in real time. It generates enough risk data for the senior management to make risk-aware business decisions. It’s an essential tool for determining your risk thresholds and how your organization approaches risk.
What This Guide Covers
- What Is Enterprise Risk Management?
- Importance
- Process
- Benefits
- Common Risk Management Standards and Frameworks
- Trends
- Conclusion
What Is Enterprise Risk Management?
Enterprise risk management is a framework for dealing with organizational risk as a whole. It combines tried and tested risk management strategies and best practices into a single holistic methodology. As the name suggests, it covers enterprise-wide risks, including financial, operational, legal, contractual and regulatory risks. Improved internet connectivity and the rise of smart devices have opened the door to new and complex risks you cannot identify via legacy systems.
The problem with legacy systems is that multiple units working towards the same goal create silos, making it challenging to identify and respond to risk instantly. In contrast, a holistic approach unifies all business units and creates a comprehensive risk assessment report, which you can reference for executive decision-making.
Today, managing risk is a task and a half. With an ERM structure in place, you can identify, assess and mitigate risks, manage IT governance, and handle compliance issues. You can lay down guidelines for dealing with specific risk incidents and identify anomalies. The program makes planning for unpredictable events easy — clearly defined roles, responsibilities and workflows make it easier to bounce back from almost anything.
While the word “risk” has inherently negative connotations, it’s important to remember risk management is not just about minimizing your company’s risk exposure. You have to determine an acceptable risk threshold, communicate your priorities and create opportunities wherever possible.
It follows a top-down implementation approach and requires active collaboration between senior executives and risk managers. You can’t grow your business without taking risks — you just have to figure out a risk-to-reward ratio that works for your organization.
While most companies have carefully honed their risk management methodologies over the years, the importance of ERM cannot be overstated. It delivers the agility necessary to keep up with the rapidly changing risk landscape.
Importance
Enterprise risk management is a natural step in the evolutionary ladder of risk management. It significantly improves the visibility of potential risk incidents and provides tried and tested methodologies to respond with. You can streamline the risk management process and improve productivity while keeping an eye on your organization’s compliance posture.
As a security framework, ERM is crucial in building risk resilience. Working in close contact with risk builds an overall risk-aware work culture. Additionally, you can plan for the unexpected to ensure minimum disruption of critical processes.
The global ERM market is expected to reach $4.6 billion by 2026, growing at a CAGR of 5.03%, according to a report.
The COVID-19 pandemic has further underlined the importance of agility in business continuity planning. It allows you to deal with supply chain issues, employee shortages and financial unpredictability as quickly as possible.
Flexibility and transparency are essential elements in today’s business landscape, and ERM ensures your company can scale while being completely transparent in its operations and risk exposure to relevant stakeholders. It essentially creates an interconnected risk management network where everyone is aware of their roles and responsibilities, can access relevant data and has open lines of communication to perform tasks to the best of their abilities.
Process
It’s safe to say every organization has a unique ERM framework, designed with specific objectives, milestones and services in mind. However, looking closely, you’ll notice a few structural similarities between the processes. You can break down the entire enterprise risk management process into five steps:
Identify Risk
In step one of the process, you have to develop an objective understanding of the risks currently threatening your organization and preventing you from fulfilling your goals. Once you have identified the primary threats, you can set the tone for your entire enterprise risk management program and determine which risks you want to identify and how to deal with them. This step accounts for both internal and external risks during implementation.
Assess Risk
You must submit every flagged risk for careful evaluation to develop a contextual understanding of key risk indicators (KRIs) and identify potentially vulnerable areas.
Keep in mind to make any risk assessment according to your company’s objectives and risk tolerance thresholds. With risk scores built into assessments, you can decide which incidents to prioritize over others to ensure smooth workflow.
Prepare Mitigation Methodologies
You have to develop a risk response strategy to neutralize the biggest and meanest risks identified previously. Your risk controls and mitigation methods must be in sync with your objectives — it’s a decision that requires a lot of back and forth with top-level executives because it will ultimately determine how your company operates.
There are a lot of relevant enterprise risk management frameworks you can refer to while building your custom methodology. They are designed with different use cases and industries in mind and include best practices and risk controls that you can modify to meet your requirements.
It’s also important to document your risk response strategy with clear definitions of roles, responsibilities and hierarchy. That way, you won’t have to worry about employee turnover or accidental data loss.
Implement the ERM Framework
Now, all that’s left is implementing the custom enterprise risk management program. Because it’s applied across the entire organization, you can implement it in stages, one business unit at a time, to try and gauge the effectiveness. It’s always easier to understand and fix challenges when the scope is smaller in comparison.
Monitor and Adjust
Once you have successfully implemented the ERM framework, you must monitor it in real time for anomalies. Benchmark the performance with industry standards and oversee it in terms of efficiency, productivity and responsiveness. You can even collaborate with other organizations to develop joint risk databases to counter new and emerging threats.
The thing with risk is it’s never really gone. So run internal and external audits, and generate reports whenever possible. Keep related parties in the loop, don’t get complacent, and always look for ways to improve the performance.
Primary Benefits
Enterprise risk management has transformed the way organizations manage risks. In this section, we’ll discuss some of the benefits that ERM brings to the table:
Increase Risk Visibility and Awareness
ERM is a perfect example of putting all your eggs in one basket not being a bad idea. You can dramatically improve risk visibility by monitoring all business units in real time. It eliminates silos and notifies related parties as soon as possible, leading to faster response rates.
Constant visibility into risk further cultivates an awareness of common pitfalls. In the long run, a risk-aware workforce intuitively avoids unnecessary exposure to threats and responds via appropriate channels.
Optimize Resource Utilization
With real-time surveillance over risk management processes, you can figure out an optimum resource allocation strategy that works best for your organization’s needs. You can dictate how the enterprise risk management program interacts with specific business procedures and which risks it should prioritize. Having a structured and organized approach increases efficiency and enables intelligent resource utilization.
Standardize Risk Management Processes
ERM standardizes the risk management process by implementing a common taxonomy, database and workflow. It guarantees a certain level of consistency and maintains continuity despite employee turnover.
A standardized program also makes it easier to train new employees and reskill existing ones, saving a lot of time you can otherwise divert to billable activities.
Keep Track of Regulatory Change and Compliance
Having an ERM program more or less takes care of regulatory changes. You can set up workflows to continuously track all relevant regulations and compliance directives.
With clearly established responsibilities, your risk owners can immediately act on notifications about expiring licenses or regulatory changes, minimizing your company’s exposure to accidental errors.
Leverage Risk Data To Strengthen Decision-making
ERM brings a data-driven approach to risk management that is clearly lacking in traditional setups. The increased risk visibility helps consolidate data across the entire organization and gather contextual information on risk incidents and irregularities.
Additionally, you get access to custom reports and data visualization to make sense of the bigger picture and engage relevant stakeholders. These otherwise hidden insights are crucial to diagnosing potential vulnerabilities and predicting risk behavior in the long term.
Common Standards and Frameworks
Developing a customized ERM framework from the ground up is a lot of work, and there’s a lot that can go wrong. As a point of reference, you can use existing frameworks created by international organizations that have been tried, tested and modified over a large period of time. They provide tools to identify, analyze and mitigate risk depending on your industry of specialization.
COSO ERM Integrated
The Committee of Sponsoring Organizations of the Treadway Commission published this framework in 2017 as part of a joint initiative to develop holistic guidelines for enterprise risk management. It also accounts for the Sarbanes-Oxley Act as part of the framework’s composition and guidelines.
It primarily focuses on five interrelated components comprising 20 principles and can govern a wide range of industries and business models:
- Governance and Culture
- Strategy and Objective-setting
- Performance
- Review and Revision
- Information, Communication and Reporting
ISO 31000 ERM
Created by the International Organization for Standardization (ISO), this framework guides organizations irrespective of industry, size or scale. It puts special emphasis on creating, customizing, implementing and improving the ERM framework for businesses worldwide.
It has its own set of guiding principles to ensure the risk management process is effective and encourages innovation:
- Integrated
- Structured and Comprehensive
- Customized
- Inclusive
- Dynamic
- Best Available Information
- Human and Cultural Factors
- Continual Improvement
COBIT ERM
The Information Systems Audit and Control Association (ISACA) created this model in 2019. While its primary function is to provide an IT governance and management framework to large organizations, you can customize it to fit small and medium businesses as well.
It has three governing principles critical to the success of a governance and management framework:
- Conceptual
- Agile
- Aligned (To Business Objectives)
Casualty Actuarial Society (CAS) ERM
The Casualty Actuarial Society created the framework in 1914 to deal with property and casualty risks. Its specialties include insurance, finance, reinsurance and enterprise risk management.
This framework covers four types of threats — financial, hazard, operational and strategic risk.
It breaks down the risk management process into seven sequential steps:
- Establish Context
- Identify Risks
- Analyze
- Integrate
- Prioritize
- Access or Exploit Risks
- Monitor and Review
RIMS Risk Maturity Model ERM
The Risk Management Society (RIMS) ERM framework acts as a flexible umbrella guidance model for enterprise risk management. Based on the maturity of their ERM program, organizations get assigned a maturity level — ad-hoc (level 1), initial (level 2), repeatable (level 3), managed (level 4) and leadership (level 5).
The Risk Maturity Model outlines seven critical attributes that must be present in any ERM framework to be successful and consistent:
- Adoption of an ERM-based Process
- ERM Process Management
- Risk Appetite Management
- Root Cause Discipline
- Uncovering Risks
- Performance Management
- Business Resilience and Sustainability
Trends
With rapid developments in the field of big data analytics and machine learning, more and more organizations are waking up to the benefits of enterprise risk management. To cope with the growing complexity of risk, the ERM industry is also changing rapidly to keep pace with new developments.
We’ve outlined some of the recent trends in ERM that can transform the risk landscape in the future:
Rising Importance of Data Analytics
Data-driven risk management programs have slowly grown in popularity over the last few years. As more organizations warm up to the advantages of data analytics, risk and its effects are becoming more and more quantifiable.
With access to granular data about specific risk incidents, you can get the complete context behind loss events. Slowly and steadily, data analytics is leading the way to building better and more accurate risk prediction models with early warning signals and set risk thresholds.
Change of Stance From Reactive to Proactive
When it comes to risk management, most risk teams have finally had enough of being caught in a reactive loop. There are two common pitfalls. You either:
- Focus too much on the bigger picture, leaving the business shortsighted.
- Allocate too many resources to everyday risks, resulting in stagnation.
Top-level executives and risk teams are coming together to adopt a proactive approach to risk management rather than a reactive one. With a collaborative effort, it becomes easier to spot vulnerabilities, track KRIs, develop controls and identify positive risk opportunities before any loss event.
Increased Focus on Automation and AI
Advancements in AI have greatly benefited the ERM industry. AI and machine learning improve the accuracy of predictive models and early warning systems and help analyze risk trends and anomalous behavior. The ability to recognize irregularities is crucial to detecting fraud, theft, and internal and external vulnerabilities.
AI-based automation can automate tasks like tracking regulatory changes and performing routine risk assessments and internal audits. Also, the introduction of natural language processing (NLP) and chatbots has positively impacted incident response rates while simultaneously decreasing workload and enhancing performance.
Conclusion
The primary function of any enterprise risk management framework is to successfully identify, analyze and eliminate or exploit risk within your organization’s infrastructure. While building an ERM model isn’t easy, there is plenty of guidance around it.
Learn from existing frameworks, talk to your industry peers and familiarize yourself with your company’s needs. Communication is key — keep your superiors and team members in the loop. Always remember, risk management is a group effort, and you’re not in this alone.
Did we miss anything important? Do you think ERM is the future of risk management? Leave a comment below if you want to add to the conversation.