Enterprise risk management (ERM) is a methodology that looks at risk management strategically from the perspective of the entire firm or organization. It is a top-down strategy that aims to identify, assess, and prepare for potential losses, dangers, hazards, and other potentials for harm that may interfere with an organization’s operations and objectives and/or lead to losses.

Importance of ERM

1. Improved Decision Making: Imagine facing a critical business decision without considering potential risks. ERM sheds light on those risks, allowing you to make informed choices that consider potential pitfalls and opportunities. This can lead to better resource allocation, strategic planning, and overall business direction.
2. Enhanced Profitability: Unexpected disruptions can be devastating to a company’s bottom line. By proactively identifying and mitigating risks, ERM helps organizations avoid costly losses and disruptions. This translates to smoother operations, fewer setbacks, and ultimately, increased profitability.
3. Stronger Stakeholder Confidence: Investors, customers, and partners all value stability. A robust ERM program demonstrates that the organization is actively managing risks and taking steps to safeguard its future. This transparency fosters trust and confidence, attracting investments, partnerships, and loyal customers.
4. Increased Efficiency and Compliance: ERM helps streamline processes by pinpointing areas where risks might hinder efficiency. Additionally, a strong ERM program ensures the organization is aware of and compliant with relevant regulations and standards. This reduces the risk of legal ramifications and helps maintain a positive reputation.
5. Fosters a Culture of Risk Awareness: ERM goes beyond simply having a plan. It encourages a company-wide culture where employees are aware of potential risks and actively participate in risk mitigation strategies. This collaborative approach strengthens the organization’s overall resilience.
6. Creates Opportunities: ERM isn’t just about avoiding problems. By identifying potential threats, you might also uncover hidden opportunities. For example, a risk of a new competitor entering the market might also present an opportunity to innovate and improve your product or service.

Components of Enterprise Risk Management

1. Internal Environment

A company’s internal environment is the atmosphere and corporate culture within the company set by its employees. This sets the precedence of what the company’s risk appetite is and what management’s philosophy is regarding incurring risk. The internal environment may be set by upper management or the board and communicated throughout an organization, though it is often reflected through the actions of all employees.

2. Objective Setting

As a company determines its purpose, it must set objectives that support the mission and goals of a company. These objectives must then be aligned with a company’s risk appetite. For example, an ambitious company that has set far-reaching strategic plans must be aware that there may be internal risks or external risks associated with these lofty goals. In response, a company can align the measures to be taken with what it wants to accomplish, such as hiring additional regulatory staff for expansion areas it is currently unfamiliar with.

3. Event Identification

Positive events may have a great impact on a company. On the other hand, negative events may have detrimental outcomes on a company’s ability to continue to operate. ERM guidance recommends that companies identify important areas of the business and associated events that may have dire outcomes. These high-risk events may pose risks to operations (e.g., natural disasters that force offices to temporarily close) or strategic (e.g., government regulation outlaws the company’s primary product line).

4. Risk Assessment

In addition to being aware of what may happen, the ERM framework details the step of assessing risk by understanding the likelihood and financial impact of risks. This includes not only the direct risk (e.g., a natural disaster yields an office unusable) but also residual risks (e.g., employees may not feel safe returning to the office). Though difficult, the ERM framework encourages companies to consider quantifying risks by assessing the percent change of occurrence as well as the dollar impact.

Advantages and Disadvantages of Enterprise Risk Management

Advantages

• ERM sets the organization-wide expectations around a company’s culture. This includes communicating more openly about the risks a company faces and how to mitigate them. This leads to less unexpected risks and more guided direction on how to respond to certain events.
• In addition, this may lead to greater employee satisfaction knowing plans are in place to protect company resources, as well as greater customer service knowing how to respond to customers should certain risks actually occur.
• ERM practices are often synthesized by a standardized risk report delivered to upper management. This report succinctly summarizes the risks a company faces, the actions being taken, and the information needed for decision making. As a result, a company may be more efficient with its time, especially considering what is delivered to upper management.
• ERM may also have a company-wide positive impact on the resourcefulness of the business. ERM may eliminate redundant processes, ensure efficient use of staff, reduce theft, or increase profitability by better understanding what markets to enter into.

Disadvantages

• As a company builds out its ERM practices, it will likely consider familiar risks it has been exposed to in the past. Therefore, ERM is limited in identifying future risks that the organization is unaware of that may have more detrimental impacts. In this manner, some may consider ERM as reactive, as companies can only forecast risk based on what they have prior experience with.
• ERM also relies very heavily on management estimates and inputs. This may be nearly impossible to accurately predict. For example, in the very low chance that a company forecasts the occurrence of the COVID-19 pandemic, would a company be able to accurately calculate the fiscal impact of business closures or changes in consumer spending? ERM mitigation costs may also be difficult to assess.
• ERM practices are time-intensive and therefore require the resources of the company to be successful. Though the company will benefit from protecting its assets, a company must detract time of its staff and may make capital investments to implement ERM strategies. In addition, a company may find it difficult to quantify the success of ERM, as financial risks that do not occur must simply be projected.

How to Implement Enterprise Risk Management Practices

ERM practices will vary based on a company’s size, risk preferences, and business objectives. Below are best practices that most companies can use to implement ERM strategies.

• Define risk philosophy. Before implementing any practices, a company must identify how it feels about risk and what its strategy around risk will be. This should involve strategic discussions between management and an analysis of a company’s entire risk profile.
• Create action plans. With a company’s risk philosophy in hand, it is time to create an action plan. This defines the steps a company must take to protect its assets and plans to protect the future of the organization after a risk assessment has been performed.
• Be creative. When considering risks, ERM entails thinking broadly about the problems a company may face. Though far-fetched, it is in a company’s best interest to think of as many challenges it may face and how it will respond (or decide to not respond) should the event happen.
• Communicate priorities. A company may determine that several high-importance risks are critical to mitigate for the continuation of the company. These priorities should be communicated and broadly understood as the risks that should not be incurred under any circumstance. Alternatively, a company may wish to communicate the plans if the event were to occur.

Types of Risks Does Enterprise Risk Management Address

• Compliance risk threatens a company due to a violation of external law or requirement. An example of compliance risk is a company’s inability to produce timely financial statements in accordance with applicable accounting rules, such as generally accepted accounting principles (GAAP).
• Legal risk threatens a company should the company face a lawsuit or penalty for contractual, dispute, or regulatory issues. An example of legal risk is a billing dispute with a major customer.
• Strategic risk threatens a company’s long-term plan. For example, new market participants in the future may supplant the company as the lowest-cost provider of a good.
• Operational risk threatens the day-to-day activities required for the company to operate. An example of operational risk is a natural disaster that damages a company’s warehouse where inventory is stored.

ERM tools and software

1. MetricStream:

• Features: MetricStream offers a comprehensive ERM platform with a broad range of features, including risk identification, assessment, mitigation, reporting, and analytics. It provides a central repository for all risk data and integrates with various other enterprise systems.
• Target Users: This software is well-suited for large enterprises with complex risk management needs across various departments (e.g., finance, IT, operations).

2. LogicGate:

• Features: LogicGate is known for its user-friendly interface and flexibility. It offers a wide range of features but is also highly customizable, allowing organizations to tailor the software to their specific risk management processes.
• Target Users: LogicGate caters to a broad audience, from small and medium-sized businesses to large enterprises. Its adaptability makes it suitable for various industries.

3. SpiraPlan:

• Features: SpiraPlan integrates ERM functionalities with project management and quality assurance tools. This makes it ideal for software development companies where risk management is crucial throughout the software development lifecycle.
• Target Users: SpiraPlan is a perfect fit for organizations involved in software development, particularly those looking for an integrated solution for project management, quality assurance, and risk management.

4. Essential ERM:

• Features: This software focuses on core ERM functionalities like risk identification, assessment, and reporting. It’s known for its user-friendly interface and cost-effectiveness.
• Target Users: Essential ERM is a good option for small and medium-sized businesses that are looking for a user-friendly and affordable ERM solution to implement a basic but effective risk management program.

5. Camms.Risk:

• Features: Camms.Risk differentiates itself by placing a strong emphasis on user training and education alongside its core ERM features. This can be beneficial for organizations looking to build a strong risk management culture while implementing the software.
• Target Users: Camms.Risk can be suitable for companies of various sizes that value both a user-friendly software solution and a focus on employee training and risk management awareness.

Career in Risk Management

Skills for a Successful Risk Management Career:

• Analytical Skills: Strong analytical skills are essential for assessing risks and making informed decisions.
• Problem-Solving Skills: Risk managers need to be adept at identifying problems, evaluating solutions, and implementing effective mitigation strategies.
• Communication Skills: Conveying risks and mitigation plans to stakeholders requires clear and concise communication.
• Organizational Skills: Juggling multiple tasks and prioritizing effectively are crucial for success.
• Computer Skills: Familiarity with ERM software and data analysis tools is increasingly important.

Career Paths in Risk Management-

There are various specializations within risk management, allowing you to tailor your career to your interests. Some examples include:

• Operational Risk Management: Focuses on risks associated with daily business operations.
• Financial Risk Management: Manages financial risks like market fluctuations and credit defaults.
• Enterprise Risk Management (ERM): Oversees the organization’s overall risk management strategy.
• Information Technology (IT) Risk Management: Identifies and mitigates risks related to technology infrastructure and data security.
• Cybersecurity Risk Management: Focuses on protecting the organization from cyberattacks and data breaches.

Conclusion

Enterprise Risk Management (ERM) is no longer an optional add-on for businesses; it’s a strategic necessity in today’s dynamic and uncertain world. By proactively identifying, assessing, and managing risks across the entire organization, ERM empowers organizations to make informed decisions with a clear understanding of potential risks and opportunities, organizations can make strategic choices that consider potential pitfalls and pave the way for success.

Enterprise Risk Management – FAQs

What is the difference between ERM and traditional risk management?

Traditional risk management often focuses on specific departments, while ERM considers risks affecting the entire organization. ERM is also more proactive, aiming to identify and address risks before they occur.

What about ERM software? Is it necessary?

ERM software is not mandatory, but it can be a valuable tool to automate tasks, streamline processes, and provide valuable insights for effective risk management.

How can we ensure employee buy-in for the ERM program?

Clear communication, training, and demonstrating the benefits of ERM (improved decision-making, job security, etc.) can help foster employee buy-in for the program.

Why Is ERM Important?

ERM is important because it helps prevent losses or unexpected negative outcomes. ERM is also important because it helps a company set the plans in place to strategically approach risk and garner employee buy-in.

What Are the 3 Types of Enterprise Risk?

ERM often summarizes the risks a company faces into operational, financial, and strategic risks. Operational risks impact day-to-day operations, while strategic risks impact long-term plans. Financial risks impact the general financial standing and health of a company.

What Are the 8 Components of ERM?

The COSO framework for ERM identifies eight components: internal environment, objective setting, event identification, risk assessment, risk response, control activities, information & communication, and monitoring. These eight core components drive a company’s ERM practices.