What is Enterprise Risk Management (ERM)?
Enterprise Risk Management is the process of understanding, assessing, and managing risks in an organization. Understanding these risks helps organizations meet their objectives more efficiently and effectively and develop strategies for mitigating those risks. By incorporating ERM into your day-to-day activities, you can better prepare yourself for unexpected events that may occur in the future.
The key components of an ERM plan include:
A review and analysis of past events where there was harm or potential for harm, including their causes, consequences, and lessons learned.
An assessment of current and emerging enterprise risks that have a significant impact on the organisation's operations.
Strategies to reduce exposure to identified risks to avoid loss or damage.
Plans for responding appropriately if the risk materialises.
Enterprise Risk Management Framework
Risk management is essential for every enterprise to properly understand the risks they are exposed to and how these risks can be managed if necessary. Risk management also refers to a set of practices that an organisation undertakes to identify, assess, control, or minimize potential losses before they happen.
Risks: The first step towards good ERM involves identifying all potential sources of harm or loss for the company
The Enterprise Risk Management Framework is grounded in five key principles:
- Identify and prioritize risks.
- Assess potential impacts to the organization.
- Develop proactive strategies to manage identified risks.
- Implement controls to reduce or eliminate identified risks.
- Monitor effectiveness of preventive measures.
The Fundamental Elements of ERM are:
Identification of key risk factors - What are your company's vulnerabilities? How will they affect your business if they occur? Which ones are you better equipped to handle than others? These questions should help you determine what type of analysis would be most beneficial when considering each potential risk factor.
Quantitative assessment - Consider the probability, severity, and impact of a risk event as well as your response capability.
The other three concepts that are essential to ERM are risk philosophy, strategy, and culture.
- Risk philosophy or strategy refers to the attitude towards risk in the organization.
- Risk culture refers to how employees respond to different types of risks and events in their work environment.
- Risk appetite describes the amount of risk that is acceptable within an organization.
The best way to quantify these factors varies depending on how you're identifying which ones are most important for your organization.
What are the questions to consider while implementing ERM?
ERM implementation is a complex process, and it can be challenging to know where to start. However, some basic questions should be answered before you get started. These include:
- What data do I want to collect?
- Who will have access to the data?
- How often will I need reports on this data?
- How do I plan on analyzing this data?
- What are my long- and short-term goals with the ERM system? These questions should be answered before you start a project. Doing so will help ensure that your expectations match what is possible to accomplish from an ERM solution.
ACTION TO DO
ACTION TO AVOID
1. Define expectations: What do we hope to achieve with these new processes?
1. Don't put a plan in place to create a culture of safety and risk management.
2. Document everything: Documenting our current procedures and policies gives us an excellent baseline for measuring improvements or lack thereof.
2. Avoid creating or updating the policies, procedures, and programs that would be required for an effective ERM system.
3. Assign responsibility: Who owns this project? Who's accountable for getting it done?
3. Make sure you don't develop training programs to educate your employees on identifying hazards and risks in their work areas.
4. Create a risk profile: What is the risks associated with these new processes?
4. Keep all information about potential hazards from being shared with employees who may need it most (e.g., supervisors).
5. Educate employees on ERM: Helping people understand why this is important and how it will affect them.
5. Ignoring risks - Don't ignore a potential threat just because it doesn't seem likely or feasible now. Remember: it only takes one event to cause significant damage!
6. Create checkpoints for success criteria before implementation begins; continually monitor progress at those points throughout implementation.
6. Trying to go with a free or cheap ERP system just because of budget constraints
Type of Risks:
ERM is an integral part of any organization. It helps identify and manage risks that may affect the organization's success. ERM can be broken down into three categories:
- Financial Risks - These are money-related risks, such as loss or theft of cash, stock certificates, or other valuable assets.
- Legal Risks - These are risks associated with laws or regulations that govern how a business must operate in its chosen industry.
- Operational Risks - These are related to day-to-day operations and include equipment failure, employee injuries/accidents, natural disasters (hurricanes), etc.
Risk Response Strategies for Enterprise Risk Management
- Risk Avoidance: Risk avoidance is a critical component of any good ERM program. Risk avoidance can take many forms, but it is always essential to have a plan to avoid the risks.
- Risk Reduction: Risk reduction can be made by adopting a framework that analyzes the organization's strategic goals and identifies areas where it may be exposed to risk. It then evaluates these risks through a set of criteria that categorizes them into different types (e.g., physical threats, internal failures). This analysis provides an understanding of how best to mitigate each type of risk for businesses to achieve their objectives with minimal harm.
- Alternative Actions: Always consider other possible ways to reduce the risks.
- Risk Acceptance: Risk acceptance is the process of acting despite a potential adverse outcome. This can be a tough decision, but it is necessary for companies that are not exclusively risk averse.
Six Benefits of Enterprise Risk Management:
- An Enterprise Risk Management plan will help you identify and measure risks in your company so that they are easier to manage.
- A robust ERM strategy will help you minimize risks by understanding the potential impact before they happen.
- Having an ERM strategy in place allows for fast responses when emergencies arise - such as natural disasters or unforeseen events - which minimizes damage and maximizes recovery time frames.
- Risks identified in this step are ranked according to their potential impacts on the company, with a ranking of "high," "medium," or "low."
- The highest priority is given to "high"-ranked risks because they have the most excellent chance of materializing into actual losses for an organization.
- This process can be conducted annually or when there are structural changes within the business.