In an increasingly complex world, businesses must be more disciplined in managing risk to remain competitive—and profitable. Even a tiny mistake could have catastrophic consequences. Therefore, every small to already-established business should have a comprehensive ERM program.
Enterprise risk management (ERM) is a process that helps organizations identify, assess and manage risks that could affect their business objectives. ERM provides a framework for companies to make informed decisions about allocating resources and managing risks in a way that protects and enhances shareholder value.
Without batting an eyelash, this article will share with you why your business needs ERM—and how you can implement it today.
3 Reasons Why Enterprise Risk Management is Important
An effective ERM will:
- Safeguard Company Assets
A significant part of a company’s risk management strategy is to protect its assets. It includes property, inventory, data, and money.
By identifying and assessing the risks that could impact these assets, businesses can take steps to minimize the chances of loss.
- Reduce the Impact of Incidents
Incidents happen, even in the best-run businesses. But Enterprise Risk Management can help minimize its impact. It will reduce financial losses, minimize damage to reputation, and avoid legal liabilities.
- Improve Decision Making
When businesses clearly understand their risks, they can make informed decisions about how to respond. It leads to better outcomes for the company and its stakeholders.
What is Integrated Risk Management (IRM) in ERM?
IRM is a subset of ERM focused on identifying and mitigating risks associated with the business’s technology. Both are necessary and sufficient practices to ensure that your company remains safe.
It is a holistic approach that recognizes all types of risks (financial, operational, strategic, reputational, etc.) are interconnected, and you need to manage them in an integrated manner.
Implementing IRM can be a challenge for organizations, but the benefits outweigh the costs. The advantages include:
- It is the most effective way to manage risk and protect an organization’s assets, reputation, and bottom line.
- Provides a framework for identifying, assessing, and responding to threats in a proactive and coordinated manner.
- Helps organizations better prepare for and respond more effectively to unexpected events.
- Helps organizations improve their decision-making by taking into account all types of risks.
- Improves communication and coordination between different departments and functions within an organization.
But which one should be your first port of call? IRM or ERM? Generally, it’s best to start with IRM when implementing a new risk management program.
Once the IRM program is up and running, the organization can then focus on implementing an ERM program, which focuses on identifying and managing risks at the strategic level.
Components of Enterprise Risk Management
There are a few things that every business owner or newbie must know about Enterprise Risk Management. ERM is built on eight key elements:
1. Code of Conduct
The code of conduct sets out all employees’ expected standards of behavior. It also provides a framework for managing unethical or illegal behavior risks.
A well-designed code of conduct can help prevent and detect wrongdoing and provide a basis for taking disciplinary action when necessary.
2. Objective Setting
An organization must first identify its key stakeholders and risk tolerance levels to set objectives. Once done, the organization can develop a risk management strategy tailored to these stakeholders’ needs.
This strategy should protect the organization’s assets and reputation while ensuring it meets its regulatory obligations.
3. Risk Identification
Here, the organization must identify the risks that it faces, both external and internal. These risks can come from various sources, including financial, operational, reputational, and compliance-related threats.
You can use several methods to identify risks, such as brainstorming, review of historical data, and interviews with key personnel. Once you’ve identified potential risks, analyze and prioritize them to implement appropriate mitigation strategies.
4. Risk Assessment
This assessment should include an evaluation of the likelihood of each risk occurring and the potential impact if it happens. Risk assessment uses quantitative or qualitative methods to lessen the possibility and influence of adverse events. Risk assessment is an ongoing process that should be regularly reviewed and updated.
5. Risk Response
It involves the development of mitigation strategies to reduce the likelihood or impact of each identified risk. Risk response can include using risk management tools and techniques, like:
- Risk reduction-reduce the threats to lower the effects.
- Risk acceptance-accept the issue if it’s negligible.
- Risk avoidance-sidestep the problem.
- Risk transfer-entrust the mitigation to a qualified third party.
The goal is to minimize the negative impact of risks and maximize the opportunity for positive outcomes.
6. Internal Business Environment
The internal business environment includes the company culture, the organizational structure, and the allocation of resources. Keeping a close eye on the internal business environment is essential because it can significantly impact the company’s overall risk profile. If there’re problems within the organization, they can often be magnified when it comes to risk.
7. Information and Communication
Effective communication helps to ensure that all stakeholders are aware of the risks associated with the business and understand how these risks are being managed.
The information must be accurate and up-to-date so that everyone has the same understanding of the situation.
Good communication also helps to build trust between the different parties involved. If stakeholders feel they are being kept in the loop and can discuss risks openly, they are more likely to have confidence in managing those risks.
Monitoring helps in keeping track of all the activities, risks, and potential solutions to address them. It is imperative to have a system that measures the progress towards the desired outcomes.
Monitoring keeps track of progress towards the desired results by collecting data on key risk indicators, such as the percentage of bills being paid on time or the number of unclaimed benefits.
ERM doesn’t just involve manual data collection; it also includes understanding current trends and patterns to identify potential issues before they become problematic. As such, monitoring is an ongoing process that requires constant vigilance.
The global financial crisis has demonstrated that the world is still not immune from significant risks. These risks come from various sources:
- Political instability and violence
- Natural disasters
- Economic uncertainty
These threats are always part of the picture and may prevail more if not remedied. So, businesses need to do more than protect their assets from risk—they need to understand and mitigate risk to continue doing business.
Whether you need help managing the risks of a small business or a large corporation, both ERM and IRM provide strategic frameworks that can help you manage risks effectively.
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