When implementing enterprise risk management into an organization, it is critical to identify and define potential risks before attempting to initiate mitigation and treatment processes. Because of the holistic nature of enterprise risk management, it can be difficult for some companies to sort and specify the scope of possible threats. Therefore, a categorization of enterprise risks is necessary for the successful establishment of treatment plans.
There are multiple areas of classification that can help organizations clarify and sort risks. They are as follows:
- Hazard & Safety
- Operational & Strategic
Threats that fall under the compliance category can be defined as risks or opportunities that are in relation to laws and regulations. Any risk that is a violation of federal or state legal guidelines should be classified as a compliance risk. Data management, environmental impact, and corrupt practices are all examples of potential compliance risks. Risks that are linked to non-compliance and legal issues can bring about immense losses for an organization.
The financial risk category encompasses risks or opportunities to an organization in relation to monetary resources and cash flow. Funds, investments, and fraud are all risks within this category. Financial risks are essential in enterprise risk management, they heavily affect every aspect of a company.
Hazard & Safety Risks
Potential threats that may compromise the health and wellbeing of employees in the workplace should be classified under the hazard and safety risk category. Accidental injuries, geopolitical tension, and natural disasters are all safety risks to be assessed. Organizations must identify hazard risks in order to put into place control measures and treatment plans.
Operational & Strategic Risks
The classification of operational and strategic risks are similar in nature, and thus able to be sorted into the same category. Strategic threats are risks that are caused by external circumstances; such as shifts in consumer demand or technological changes. Operational risks refer to day-to-day internal workings that may fail; such as data breaches and human error in performance. Both internal and external risks should be recognized and analyzed.
Risks related to reputation encompass all other categories of enterprise risk, this is because a damaged reputation is most often a result of failure to address a risk listed above. Executive management, customer service, product quality, accounting, and operations can all be risks that result in reputational ramifications. Negative media is the most significant risk across all aspects of an organization and can be very difficult to control once it is publicized.
The identification and analysis of enterprise risks is a major part of implementing enterprise risk management, and the process of classifying each prospect will make it easier for an organization to do so. Each category (compliance, financial, hazard & safety, operational & strategic, reputational) defines the clear differences and nature of each type of enterprise risk, to assist the development of comprehensive and actionable risk treatment strategies. Due to its holistic nature, it may seem difficult to sort risks into a taxonomy in enterprise risk management. Risks intertwine and overlap, but understanding and defining each major category can help an organization untangle the knots and effectively implement the process of enterprise risk management.