Running a company, regardless of the industry, comes with a host of risks. Whether it’s infrastructure problems, poor planning, dissatisfied customers, unforeseen acts of nature, or a cyberattack, companies are vulnerable. There is a lot of valuable data and assets that are entrusted to a business. Otherwise, it will be a short rise and fall for the organization. Given that, every organization has a duty to ensure that they’re prepared for any and every eventuality. This is called Risk management, and it takes two forms; Traditional Risk Management, and Enterprise Risk Management.
What does Traditional Risk Management Mean?
It’s safe to say that in any organization, one of the key roles of the management team is to navigate and manage risks. It’s part of the day-to-day list of tasks, and traditionally, the role of Traditional Risk Management (TRM) falls to the business unit leaders, to manage the risk that falls within the areas they’re responsible for. As an example, a Chief Technology Officer (CTO) is responsible for managing any risks that have to do with the organization’s IT infrastructure; a Treasurer is responsible for finances and cash flow; while a Chief Marketing Officer takes care of sales and customer relationships – whatever the management role is, they have their department to worry about. It’s essentially siloed, and what serves as a risk to one department, might not be as worrisome to another.
This can lead to several limitations and they mostly have to do with the separated nature of TRM. If there is a risk that falls between the silos, affects different silos in different ways, or deeply impacts the security of another silo, then the entire model falls apart. There’s no sense in relying on a risk management modality that protects one part of the company but leaves another vulnerable. We’ll be discussing these limitations in a later blog, but for now, it’s clear that this isn’t good enough.
This is where Enterprise Risk Management comes into play.
What Does Enterprise Risk Management Mean?
Enterprise Risk Management (ERM) is a methodology that takes a look at what strategies an organization can use to manage risks across the entire company. The strategy looks at all levels of the company, from the stakeholders and leadership on down, to identify, assess, and prepare for any potential losses, dangers, hazards, and anything else that can harm an organization’s operations and cause losses.
The basic structure of ERM takes a holistic approach – looking at a company as a whole. No longer does a business unit evaluate and handle their own risk, then report it to the CEO at a later date. Now, the senior management makes the assessment and takes care of the risk, to protect everybody. The goal is to build a strong buffer and risk management plan around the entire organization to maintain the continuity of their finances, operations, and objectives. In this model, the individual departments don’t get a say in risk mitigation, and that is by design. By looking at any vulnerable endpoints, at staff access, how private data is stored, what contingencies there are for infrastructure failures, and even if their Internet Security Management System (ISMS) is as secure as it can be for everyone, a company can manage their risk better.
Understanding How ERM Works
The goal for ERM is for corporations to holistically identify all the risks they manage and decide how to manage them actively, and to help steer the entire company in the right direction. When the top management has a look at the entire picture, they have a top-down, enterprise view of all the risks that might get in the way of strategic objectives. Then, they can make executive decisions that can work in favour of the entire organization, as well as for a specific department to manage their risks, without compromising another one that otherwise would have been siloed.
Essentially, ERM should be viewed as a strategic tool. As management and the board familiarize themselves with any risks on the horizon, they can develop strategies to ensure they’re nimble enough to avoid having their plans derailed. Proactively thinking through the risks provides a competitive advantage and reduces the likelihood of something derailing key strategic initiatives, and ensures you’re prepared to minimize the risk if something goes wrong. It also has another key advantage – trust. When an organization makes a comprehensive risk assessment and management plan, they can share it with their stakeholders as part of an annual report, demonstrating their commitment to success.
Elements of The Risk Management Process
The key element to keep in mind is that ERM isn’t a project with a set beginning or end. Risks constantly evolve, and an organization has to be vigilant, and constantly assessing and improving. In ERM, every step leads into the next in a circular process.
There are 5 key elements to ERM:
- Strategy/Objective Setting
- Risk Identification
- Risk Assessment
- Risk Response
- Communication and Monitoring
Then, you go back to Strategy/Objective Setting and the cycle starts again.
Breaking down every step warrants its own separate blog, but the key to success in this framework is to understand your strategy and what drives value and success for your organization. An effective starting point is to understand what currently drives value for your business and what’s in your strategic plan that will be new value drivers for the business.
Are there any internal and external risks that could compromise your short-term and long-term goals, in maintaining the continuity of your existing successful elements (popular product/service, your competitive advantage, unique differentiation, shareholder value, etc…)? What about your future plans and upcoming strategic initiatives? An unforeseen and unaddressed risk could compromise the launch of a new product, or pending acquisitions or expansions, and so on.
By having a rich understanding of the current and future drivers of value for the enterprise, rather than just the threats to individual departments, you can successfully move through the process to keep your business secure.
Who Is Responsible For Your ERM?
The entire responsibility of ERM rests in the hands of a Chief Risk Officer (CRO). This role is required by ERM and is the corporate executive who is responsible for identifying, analysing, and managing internal and external risks that could impact the entire organization. They have the benefit of removing the “silo-blinders” that keep other departments in the dark, and understand how to keep their entire entity safe. They also have the responsibility to ensure the company is in compliance with government and industry regulations, as well as keeping tabs on things that can impact the company’s investments or other operations.
At the functional level, a CRO looks at every business unit as a “portfolio” within the company, and they look to understand how the risks to individual business units intersect and overlap. They can also identify potential risks that are unseen by any individual unit. This birds-eye view serves to protect the company and helps to develop Key Risk Indicators (KRIs). The ownership lies in the hands of the CRO and is a way to keep a close eye on the risks with the highest priority, and the KRI’s serve as a predictor of any unfavourable events that can have an adverse impact on the company. This is an early warning sign to prompt an organization to report risks, prevent a crisis, and mitigate any problems.
K2 Partnering Solutions Can Help With Your ERM
Given how quickly the global business environment can change, it’s no surprise that the sheer number and complexity of risks that can affect an enterprise are growing at an incredible rate. Concurrent with that is the expectation from the boards and shareholders that a company manages their risk oversight without fail, regardless of circumstances. K2 Partnering Solutions is here to help, with our Managed Services Teams and specialist technical and functional enterprise applications consultants, we can help you protect your company by assessing, evaluating, and developing responses to your risks.
K2 Partnering Solutions will work with you as your trusted risk management provider. Step by step we will be there for you, meeting your enterprise needs, and helping you maintain compliance and business continuity.