Enterprise risk management (ERM) is an organizational process that prioritizes a holistic approach to identifying and mitigating risks within a company. In contrast to traditional risk management, ERM also evaluates potential opportunities for an organization. When implementing an enterprise risk management system, a company will benefit in a multitude of ways, including enhanced strategic planning, increased value, and avoiding significant risks.
ERM allows organizations to effectively manage risk and reward on an enterprise-wide scope continuously. However, specific steps must be taken in order to maximize the outcome of using enterprise risk management. Many companies have issues tackling the implementation of ERM, simply because a sturdy, fundamental foundation was not put in place first.
Every successful enterprise risk management system starts with a strong framework; without this foundation, the implementation process will fall apart. There are four main, broad concepts that must be defined for the creation of an ERM foundation:
Objectives – Defining organizational goals is the base of risk management. The company must determine core objectives and specify what value is being pursued. Then, an understanding of how risk management will assist the achievement of objectives must be established. Creating risk action plans and defining how to execute them is essential for reaching goals.
Scope – The types of risks that will be covered, the organization’s risk tolerance and appetite, and management processes that will be influenced all fall under the concept of scope. The company must discuss significant, potential risks to be managed. Risk tolerance and appetite must be established and especially embedded into management processes company-wide.
Responsibility – Specific risk management goals must be assigned somewhere within the organization. These stakeholders will be in charge of risks and opportunities in different departments but must work in conjunction to make risk management decisions. A strategy must be developed for the company’s risk management goals to get everyone on the same page.
Continuation – Creating consistent evaluation and improvement is essential in laying the groundwork for enterprise risk management. Risk monitoring reports should be regularly made and reviewed. Designing workshops for risk management education as information arises allows those within the company to constantly be improving.
Many companies struggle to implement enterprise risk management. A framework that interconnects organizational branches and clarifies goals and strategy is most often the missing link to success.
When implementing enterprise risk management into an organization, building a comprehensive foundation is essential. The fundamental concepts (Objectives, Scope, Responsibility, and Continuation) should be clearly defined and relayed to personnel. These concepts are broad and encompass more specific, customizable, and actionable ideas. The success of ERM processes depends on the groundwork laid before implementation.
The foundation of enterprise risk management, when structured and executed correctly, leads to a flexible and ever-improving system that balances risk and reward. Context should be established, feedback encouraged, and progress measured. Enterprise risk management is meant to be embedded in every aspect of an organization; remaining flexible and practicing regular progression assessments leads the way to productive risk management.