6 Tips for Successful Enterprise Risk Management
Effective risk management has become essential for corporate success and is an integral part of enterprise strategic planning.
Enterprise risk management (ERM) must be carefully planned and executed by the leadership, and it should include all areas of the organisation, cutting across departments and silos.
It’s essential to implement an enterprise-wide ERM strategy since every company can face a multitude of potential risks. These risks can affect not only its core activities but also the peripheral ones.
The benefits of risk management
If ERM is carried out comprehensively and thoroughly, it can provide the organisation with a huge competitive advantage. In the best case scenario, ERM can actually enable an enterprise to take advantage of risks as they arise, while other companies are caught by surprise, and struggle to deal with them.
A good ERM process can reduce the likelihood of risks happening in the first place, but if risks do materialise, it can help to deal with them effectively, both via improved management capabilities, and with failsafe strategies.
Here are 6 tips to implement ERM for your organisation effectively:
1. Define what you want to achieve with risk management
It’s important to clearly define the advantages you expect from risk management before you implement ERM.
Examples of ERM benefits include improved decision-making abilities, a strategy to deal with potential compliance issues, and/or the development of appropriate backup strategies.
By defining what you want to achieve with risk management, you can determine how to implement ERM effectively in your organisation, and what results it will generate.
2. Carefully plan
Before you start ERM, take the time to carefully plan the scope and strategy of ERM.
An important part of the planning stage is to set priorities. Which areas of your business have the highest priority, and which have a lower priority? Your answers will determine the detail in you will perform ERM on those areas, and how you will plan for risk response.
For example, the various degrees of risk response strategies include risk tolerance, risk avoidance, and risk mitigation. Which strategy you choose to develop in each case will be determined by the priority level you have given to that activity.
Note that the scope and the priorities can change over time, and you should be prepared to adjust your ERM strategy accordingly. Since business processes are evolving much faster than ever before, your ERM strategy must keep pace with this rapid evolution.
Another important part of the planning process is to decide who will be responsible for implementing specific parts of the ERM. Responsibilities can be distributed among existing staff members, or you can hire new staff members dedicated to ERM.
3. Set up risk response strategies
Once you have planned out the scope of your ERM, you can then implement it.
Implementation of ERM consists of defining the most important risks your company is likely to face and generating appropriate risk responses to deal with them.
You can choose among the four fundamental types of risk response strategies:
Which risk response strategy you choose can be partly determined by the predicted financial impact of a specific risk if it were to occur.
4. Set up risk monitoring
After you have identified the most important risk and set up risk response strategies to deal with them, the next step is to create an effective process for measuring and monitoring risk development.
Some risk scenarios develop gradually, and hence it can be very useful to monitor that development since it allows you to react before too much damage can occur.
In the case of risks that develop very rapidly (such as cyber attacks or technological failure), risk monitoring must be coupled to a rapid response strategy.
Risk monitoring should be one of the main responsibilities of the staff members you have appointed with implementing ERM.
5. Adjust your risk management strategy
As you start to implement ERM in your organisation, you will start to learn from real cases in which ERM is implemented.
It’s quite common that the theory and practice of ERM can be quite different, and you should learn from your company’s experiences in order to improve your risk management strategy.
Optimal learning from experience depends on how well you analyse and report on events that require ERM. This kind of reporting should be another responsibility of the staff you have appointed with implementing ERM.
Hold regular ERM reviews to assess your risk management strategy, and adjust it based on your learning.
6. Create a risk-aware culture in your company
Ideally, you want all of your employees to take responsibility for risk management. This is much more effective than performing risk management as a leadership initiative, which is then carried out by a handful of staff members.
A great way to create a risk-aware culture is by holding training events about risk management, sending out risk newsletters, and giving rewards and recognition to employees who identify risks or help to deal with them.