Understanding Your Enterprise Risk
Organizational understanding of risk lies at the core of your ability to successfully complete business objectives. With the possibility of risk present in every choice an organization makes, it’s essential to ensure that the risk management strategy you take is aligned with, and in support of, your organization’s performance objectives.
Mitigation needs to help push you towards your finish line, not take energy away from the accomplishment of goals. The pursuit of an enterprise risk management strategy that will allow you to mitigate risk, adapt to change, accelerate growth, and enhance performance throughout all levels of a business is an essential chase. The importance of considering risk in your business strategy and performance, and the potential repercussions of not doing so, are paramount to success.
Enterprise risk management frameworks allow you to optimize strategy and performance, increasing awareness of these ever-changing opportunities to build value. When you set your organization up to be adaptive to change, you’re managing volatile unknowns with improved visibility to overall business risks. More metrics improves understanding and prompts more productive conversations with senior leadership as well as stakeholders, resulting in better outcomes overall. Keep reading to find out exactly how to build an enterprise risk management framework that integrates with strategy and performance, and the value it can add to your overall risk program objectives and organization.
Risk Management vs. Enterprise Risk Management
Traditional risk management occurs within its own, isolated location – typically a department, or singular site – and focuses primarily on hazard-based risks. This approach to risk management reduces the ability to analyze a concerted effort on a singular risk function on the overall risk level of the enterprise.
Enterprise risk management (ERM), on the other hand, acts as an extension of this more traditional risk management by allowing you to focus on
- Strategic applications: Since ERM is truly enterprise-wide, not confined to individual departments, it fully supports the accomplishment of value-based objectives and encourages continuous review.
- Risks considered: By taking into consideration all types of risk, ERM allows organizations to invest time and energy into key components to meeting their goals.
- Performance metrics: Through its emphasis on results-based performance measurement, indicating whether a risk management technique came into play during the accomplishment of a business goal, ERM helps minimize the adverse effects of missed opportunities and reduce residual uncertainty throughout the enterprise.
Benefits of an Enterprise Risk Management Framework
The process of setting and adjusting strategy to adapt to the current business environment is a universal challenge for businesses around the globe. Making this process simpler and more streamlined requires the best possible framework for optimizing performance through strategy. Here, ERM comes into play, in its contributions to:
- Enhancing enterprise resilience by solidifying an organization’s ability to anticipate and respond to change.
- Increasing the range of opportunities available to an enterprise by looking at all possibilities, both positive and negative, and assessing the upcoming course of action.
- Identifying and managing risk entity-wide by taking into consideration the impact of risk on each aspect of an organization, regardless of the context that it arises in.
- Increasing positive outcomes and advantage and reducing negative surprises through increased consistency of risk identification and control measures.
- Reducing performance variability by anticipating risks that would affect performance, and putting in place the actions required to keep disruption at a minimum and increase access to opportunity.
- Improving resource deployment, assessing overall needs, accurately prioritizing deployment, and directing resource allocation to areas of the business that need it most.
With these areas of improvement in mind, it becomes clear that when ERM is effectively implemented, risk is not solely a constraint – it instead comes into play as a tool that gives rise to strategic opportunities, allowing organizations to preemptively and comprehensively assess their response to challenges, as well as fully capitalizing on myriad opportunities.
How to Integrate Strategy & Performance into Enterprise Risk Management
The establishment of an effective enterprise risk management framework is contingent upon alignment with an organization’s mission, strategy, and performance. Therefore, ERM must consider the possibility of strategy not aligning, the implications of the chosen strategy, and the management of risk to set objectives. With these in consideration, ERM successfully aids an organization in identifying, assessing, and managing risks to a strategy.
The enterprise risk management framework takes the shape of principles that can be organized into five interrelated components, all of which are essential to consider during development to ensure alignment with strategy and performance:
- Governance & Culture helps exercise board risk oversight, establish operating structures, demonstrates commitment to core values, and defines desired culture.
- Strategy & objective-setting helps analyze business context, define risk appetite, evaluate alternate strategies, and formulate business objectives.
- Performance identifies and prioritizes risks, assesses their severity, and implements risk responses and control measures.
- Review & revision assesses substantial change, reviews risk and performance, and pursues improvement in overall ERM frameworks.
- Information, communication, & reporting helps leverage information and technology, communicate risk data, and report on risk, culture, and performance.
Adhering to the principles within these 5 components during the development of your organization’s enterprise risk management framework provides you with the understanding required to manage and mitigate the risks associated with your strategy and business objectives.
Getting Started: Building Your Enterprise Risk Management Framework
Implementation of an enterprise risk management framework is not considered an easy task. It requires organizational agreement/cooperation and a strong senior management team. The clear benefits to ERM make it an easy choice to get started. By making a commitment to implementing an ERM framework, organizations will be better prepared to establish their own enterprise risk management programs. When you’re getting started, it’s essential to:
- Define the value your organization will gain from ERM
- Research and understand different standards and frameworks available to you
- Inventory the risk management action your organization is already taking
- Seek support, keep it simple, and start small to ensure consistency and accurate reporting
Throughout the process of researching and deciding the framework that functions best for you, it is extremely beneficial to dedicate time and energy towards:
- Defining a common risk language
- Formulating risk appetite statements in conjunction with organizational objectives
- Demonstrating the benefits/value of ERM (e.g. cultural issues increasing risk)
- Establishing ownership for types of risks and follow-up actions
- Identifying risks and measuring potential damage
- Ranking risks and establishing priorities across the organization
- Developing risk management plans to ensure appropriate oversight
- Deciding what information should be shared through risk reporting, as well as how
The functionality of a comprehensive enterprise risk management solution helps you in the process of identifying and mitigating risks, inserting individualized control measures, measuring the effectiveness of these measures, and rating their effectiveness on performance. With the implementation of enterprise risk management software, a successful enterprise risk management framework is significantly easier to establish and will help your organization adjust and adapt to the future – no matter what shape it takes.