What is Enterprise Risk Management?Mar 14, 2021
Managing risk efficiently is essential in any thriving organization, and it must be done continually. Enterprise risk management, or ERM, is a process that helps an organization assess and deal with potential risks as well as identify opportunities to be taken.
The foundation of enterprise risk management starts with understanding value.
ERM is an approach that prioritizes the evaluation of significant risks and putting into place appropriate responses to said risks. ERM increases operational effectiveness, provides the ability to respond to risks efficiently, and improves achievements of objectives. For example, ISO 31000 is an enterprise risk management standard.
How is enterprise risk management different from any other type of risk management?
Let’s compare it to traditional risk management.
Traditional vs Enterprise Risk Management
When an organization manages risk in the traditional way, responsibilities of risk management are placed on unit leaders to deal with risks within their area of expertise. These units can include sales, human resources, financing, production, and so on. The process of assigning each section leader to managing their own department’s risks is often referred to as silo risk management.
Comparatively, ERM looks at risks across the enterprise in a more holistic approach. Instead of each silo focusing on their part, ERM prompts communication between every department and a more team-oriented view of risk management. The way an organization implements risk management is the key difference between traditional and enterprise risk management.
The beneficial results of adopting ERM are as follows:
- Potential risks do not go unnoticed as an effect of “falling between silos”
- Both internal and external potential risks are assessed
- Strategic planning is enhanced
- Preparation to avoid or mitigate significant risks that threaten the achievement of core objectives organization-wide are improved
- Increased value and less missed opportunities
To fully understand the workings of ERM, let’s look at the fundamental concepts of enterprise risk management.
Framework of ERM
The foundation of enterprise risk management starts with understanding value. Gaining insight on what drives value for the organization is a necessary component when managing risks, and it should be at the core of informed decision making. When an organization’s risk management process begins with recognizing what’s most important for success, the ERM process is ensured that internal and external events are monitored for risk opportunities or threats.
There are 5 elements of an enterprise risk management process, and they are structured to form a continuous cycle. These elements are:
- Objective Setting
- Risk Identification
- Risk Assessment
- Risk Response
- Communication and Monitoring
Enterprise risk management is a constant process to habitually find and assess risks that are in direct relation to the organization’s objectives, as well as respond to said risks and monitor outcomes. This cycle allows the organization to continue to avoid catastrophes and take opportunities to further success.
When looking at potential risks, enterprise management frames the development of responses in two ways; causes and consequences. Considering what would cause the risk event to happen helps to form a preventative response. Considering the consequences of the potential risk event lets management create a response that minimizes impact.
Enterprise risk management is a process that aims to form a consistent understanding of an organization’s goals and the risks that may inhibit the organization’s strategic success.
When comparing ERM to traditional risk management structure, the benefits of the holistic approach can be recognized easily. The cyclical nature of the processes within ERM and the fundamental importance of achieving goals sets enterprise risk management out from the crowd as more and more organizations are embracing it.