Efficiently managing risk is essential to any organization that aims to thrive. When comparing enterprise risk management (ERM) to traditional risk management, a host of differences is found. Although these concepts are similar, differentiating the two is important when deciding how to implement risk management.
So how do they differ, and does it really matter which one an organization chooses? The three main categorized differences are as follows:
- Risk Approach
- System Structure
Under these umbrella categories are subtle, yet significant, differences in the workings of traditional and enterprise risk management.
Insurable vs Non-Insurable
When an organization adopts a traditional framework of risk management, risks that are insurable are the only ones taken into consideration. Liability, data breach, and workers’ compensation insurance all aid the organization when it comes to hazards that may put the company at risk.
Enterprise risk management, however, aims to also identify and treat risks that are not able to be insured, such as reputational damage. Money will not help an organization’s non-insurable risks, so enterprise risk management implements preventative measures in these cases. If non-insurable risks are not considered, an organization will not reap as many benefits from managing risk.
The goal of traditional risk management is to avoid risk altogether, or otherwise labeled “risk-averse”. This framework favors approaching risk in a reactive way, instead of a proactive one. Traditional risk management treats risk as it comes, and inconsistently. This occasional assessment and treatment of risk in this system make traditional risk management less effective than its counterpart.
Approaching risk in an enterprise risk management setting starts with proactive decision-making. An organization implementing an enterprise risk management system sees risk and opportunity alike and is definitely not averse to risk. This framework is built upon preventative measures and constant improvement; it responds to risk and opportunity quickly and assesses progress to achieve this.
A traditional risk management system is structured in a way that is standardized, one-dimensional, and rigid. The managing of risk occurs separately, in a departmentalized fashion. Every unit of the organization deals with its own risks when they arise. This type of risk management is described as “siloed” due to this segmentation. Solutions to risk are based on the expertise and decision making within a silo, or department, without knowledge of any other units’ risks. Traditional risk management is rigid and often leads to unconnected activities organization-wide.
The structure of an enterprise risk management system is dynamic, multi-dimensional, and adaptable. This system looks at managing risk in a holistic way, considering risks in every department and how they relate to each other. Enterprise risk management analyzes every potential risk and strategically plans avoidance and treatment, all while considering the objectives of the organization as a whole, as opposed to the department by department. This enterprise-wide structure is adaptable and customizable to any organization, making it dynamic in nature compared to traditional risk management.
Although enterprise and traditional risk management may seem indistinguishable at first when diving into areas like insurance, risk approach, and system structure it is easy to find the outstanding differences. Enterprise risk management is a process with a goal to form a consistent understanding of an organization’s goals and the risks that may stunt the organization’s success. Whereas traditional risk management aims to deal with risks independent of each other as they arise, in order to mitigate damage to the organization. Both are forms of managing risk, but wildly different in practice.