Risk is a real and present part of any business. Whether it’s the risk of losing a customer, the risk of not meeting a deadline, or the risk of litigation, businesses face many potential dangers every day.
That’s why it’s so important for companies to have a comprehensive enterprise risk management (ERM) system in place. An ERM system can help businesses identify, assess, and respond to risks in a proactive and systematic way.
If you’re lagging behind your competitors when it comes to ERM, or if you’re not sure how to get started, this guide is for you. In the following pages, we’ll discuss what ERM is, why it’s important, and how to put an effective system in place.
Let’s jump right in!
What is enterprise risk management (ERM)?
Risk management in the corporate world is often considered simple workplace health and safety, but in reality, it is far more complex.
Enterprise risk management (ERM) is a strategic process that identifies, assesses and manages risks to the achievement of an organization’s objectives. It covers all aspects of the organization, from operational risks to strategic risks such as market volatility or regulatory changes.
The goals of ERM are to protect the organization’s capital, its reputation and its ability to continue operating. While individual risks can be manageable, when they are not properly managed they can lead to major losses for the company.
Why companies need ERM
ERM is not a new concept, but it has become increasingly important in today’s business environment. Rapid changes in technology, globalization and the economy have created an ever-changing risk landscape, and organizations must be prepared to manage a wide variety of risks in order to survive and thrive.
Here are the top five reasons why every organization should implement an ERM program:
- To protect the organization’s assets. Every organization has a limited number of assets, such as cash, property and employees, that need to be protected from potential risks. A well-executed ERM program can help identify and mitigate these risks before they cause damage.
- To ensure continuity of operations. In the event of a crisis, such as a natural disaster or a cyberattack, it is essential that the organization can continue to operate. A comprehensive ERM program will help ensure that critical business functions can still be carried out in the event of a disruption.
- To comply with regulations. Many regulatory agencies require organizations to have an ERM program in place in order to demonstrate that they are taking steps to protect their customers and employees.
- To manage business risk. Business risks can come from a variety of sources, such as financial instability, regulatory changes or strategic missteps. A well-executed ERM program can help organizations identify, assess and mitigate these risks.
- To improve business performance. Implementing an ERM program can help organizations operate more efficiently and effectively, making them more competitive in the marketplace.
If that’s not enough to convince your organization of the importance of ERM, consider that events like major recessions, natural disasters, and market crashes aren’t things we can predict or plan for — but they will happen. And when they do, the companies who have planned and prepared for them are the ones that come out on top.
With this in mind, how can you ensure that your risks are effectively managed? Let’s take a look through the key steps required to put effective ERM measures in place.
Step 1: Risk identification
Risk identification is the first step in any cohesive risk management plan. Without first knowing what risks your organization faces, you cannot hope to mitigate them. There are a variety of techniques for identifying risks, but the most important part is ensuring that all potential risks are considered.
Some common methods for risk identification include:
- Reviewing past incidents and near-misses. Often, you can learn a great deal about potential risks by studying what has gone wrong in the past.
- Conducting risk assessments. This involves assessing the likelihood and impact of potential risks. For instance, you might consider the probability of a data breach and the potential financial damage that could result.
- Identifying threats and vulnerabilities. It’s important to understand both the things that could potentially go wrong and the weaknesses in your organization’s defenses.
- Using risk registers. A risk register is a document that lists all potential risks, along with information about each one, such as likelihood and impact.
No matter which methods you use, it’s important to ensure that all risks are considered. This includes both major risks and minor risks, as even the smallest risk can have a significant impact if it’s not managed properly.
Step 2: Risk assessment
Risk assessment is exactly what it sounds like: assessing the risks that your business faces. This can be done in a variety of ways, but typically involves evaluating both the likelihood and severity of potential risks.
One key question to ask as you’re conducting your risk assessment is how likely it is that a particular risk will occur. This can be difficult to quantify, but it’s important to try to come up with some kind of estimate. After all, if a risk is highly likely to occur but has a low severity, it may not be as big of a concern as a risk that is less likely to happen but has a high severity.
Another question to ask is how much damage a particular risk could cause if it were to occur. This is referred to as the “impact” of a risk. Again, it’s important to try to quantify this as best you can.
Here’s an example of how you might go about assessing the risks facing your business:
Say you own a small business that sells shoes online. One of the risks you face is that a competitor could come in and take away your market share. To assess this risk, you would consider both the likelihood that it will happen and how much damage it could cause if it did.
If you think there’s a good chance that your competitor will come in and take away your market share, and that this would cause a lot of damage to your business, then this is something you would want to focus on in your risk management process.
Alternatively, if you think the likelihood of this happening is low, but the impact would be high, then it may still be worth your attention.
It’s important to note that risks can change over time, so you’ll need to revisit your risk assessment periodically to make sure you’re still taking into account all of the relevant risks.
Step 3: Risk response
Once you’ve made a comprehensive list of potential risks, and you’ve assessed their likelihood and severity, it’s time to come up with a risk response plan. This is where you decide what you’re going to do about each risk.
There are four basic options for responding to risks:
- Accept the risk: You may decide that the potential benefits of taking a particular action outweigh the risks. For example, you might decide to accept the risk of a data breach in order to gain a competitive edge.
- Avoid the risk: If you can take steps to avoid a particular risk, you may choose to do so. You might decide, for instance, to avoid doing business in certain countries because of the increased risk of fraud.
- Mitigate the risk: You can take steps to reduce the likelihood or severity of a particular risk. For example, you might install fire alarms in your office to mitigate the risk of a fire.
- Transfer the risk: The final option is to transfer the risk to someone else. For example, you might purchase insurance to cover the risk of a data breach.
Each organization will have its own risk response plan, tailored to its specific needs and risks.
The key is to make sure that your risk response plan is well-organized and easy to follow. You should also update it regularly, as the risks you face may change over time.
Step 4: Risk monitoring
This is the final step in the ERM process, and it’s perhaps the most important. Monitoring risks and taking action to mitigate them is what keeps an organization safe from harm.
For instance, imagine that your website has a bug that needs fixing, as it is causing the website’s appearance to change for some users. If this bug is not fixed, it could lead to customer dissatisfaction and even lost revenue.
Once you’ve fixed the bug, do you just forget about it and move on to the next issue? Absolutely not! You need to continue monitoring the website for any other potential bugs, as well as for any changes in how users are interacting with it.
The same goes for risks in your organization. You can’t just fix them and then move on; you need to constantly be on the lookout for new risks, as well as changes in how existing risks are impacting your business.
This is where risk monitoring comes into play. By using various tools and techniques, you can keep a close eye on all of your organization’s risks. This way, you’ll be able to quickly address any new issues that arise.
There are many ways to monitor risks, and the approach you take will depend on your organization’s specific needs. Some common methods include:
- Risk audits
- Risk assessments
- Trend analysis
- Scenario planning
There’s no one-size-fits-all approach to risk monitoring, so you’ll need to find the methods that work best for your organization. However, the key is to be proactive rather than reactive. You want to identify risks before they cause any damage, and then take steps to mitigate them.
Final thoughts on enterprise risk management
If this is your first time hearing about ERM, or if it’s simply served as a well-timed reminder, we hope you take the time to implement at least some of what you’ve learned. The benefits are there for the taking.
When done correctly, ERM can help your business avoid disasters, protect its bottom line and maintain a high level of performance. By understanding and managing the risks your company faces, you’ll be in a much better position to seize opportunities, thrive in the face of adversity and prevent costly mistakes.