In the modern world, an enterprise risk management (ERM) program is a must-have for businesses across all industries. An ERM program contains all possible risks a business is prone to, including finance, cybersecurity, human resources, natural resources, privacy, compliance, etc. It doesn't stop at identifying the risks but also offers possible solutions on the best ways to mitigate them to reduce their impact on a business.
In this blog post, we will discuss all the nitty-gritty of the ERM process—at the end of this blog post, you'll have all the knowledge you need to implement an effective ERM for your business.
What is Enterprise Risk Management?
Enterprise risk management (ERM) is a strategy that investigates and addresses all key risks an organization is prone to. An ERM program consolidates risk management activities across the departments for better measurement, visibility, and focus on a company's business goals and objectives to avoid emerging risks.
Enterprise Risk Management vs. Traditional Risk Management. What’s the difference?
Enterprise risk management and traditional management are similar in terms of the risks they address. The difference comes in how they address their risk management. Here are some examples of the differentiating factors to their strategic planning.
Traditional risk management (TRM) focuses on insurable and financially tangible risks, while ERM focuses on insurable and non-insurable risks. ERM also has non-quantifiable risks, such as damage to brand reputation.
In TRM, approach, metrics, and reporting are inconsistent across departments and employees. On the other hand, thanks to technology, the ERM program is integrated across all departments, which enhances collaboration.
The TRM uses a reactive approach where you wait for a risk to happen, react to it, and find ways to prevent its recurrence. On the other hand, ERM uses a proactive approach to identify possible risks and prevent them from materializing.
4. Risk mitigation
TRM risk mitigation focuses on the impact of a risk on a specific department. In contrast, the ERM focuses on a risk's root and how it can impact the entire organization.
TRM has a list of risks and responses. In contrast, ERM has a real-time responsive approach that considers possible changes in the risk landscape.
Challenges of Measuring Risk Performance
To have an effective enterprise risk management strategy, it's important to assess the challenges you're likely to encounter when measuring risk.
Most of the time, a risk manager isn’t specific about who is responsible for certain tasks. This poor delegation makes it hard to determine who the risk management team should go to for metrics reporting and collecting.
Poor data collection and storage system
An effective data collection and storage system is critical in a risk assessment. Past events play a huge role in deciding what to avoid and prevent. Sadly, many security teams have no success finding quality data – they deal with inaccurate, redundant, missing, and inconsistent data. This leads to inefficient and unproductive risk management processes.
Insufficient threat intelligence
Threat latency is one of the greatest challenges of risk management. Most security leaders aren't armed with enough hacks to respond to threats on time – the main problem is that many professionals use outdated software and tools. This makes the time taken between a breach and detection longer than it should.
Lack of confidence
Due to poor collection of data, use of outdated tools, and insufficient threat intelligence, many organizations aren't confident in the accuracy of their risk measurement metrics. If the security team uses outdated data, it's likely to lead to recurrent attacks, which can be discouraging.
How does a Company Implement an Effective Enterprise Risk Management Program?
1. Hold a Meeting with the Stakeholders
This is one of the most overlooked steps in implementing an effective ERM. Engage members in the areas of their expertise in internal control. Doing so gives you insights into the potential risks to focus on in each department and possible solutions. It's also a good opportunity to delegate who will be responsible for risk governance in various departments and their responsibilities.
2. Identify Risks
Take time to identify all possible risks your organization is prone to – these risks should be both external and internal. Determine all risk factors, including operational risk, probability risk, financial risk, and others.
In addition, ensure your risk identification covers current and future risks.
3. Assess Risks
After identifying risks, you need to assess them to know which ones are likely to happen and their damage extent. You'll need to review all your assets, including employees, suppliers, customers, and physical and financial value. Once you review your assets, perform a risk analysis to determine how opponents can exploit them.
4. Risk Response
Decide how you'll respond to different risks. Some possible risk treatments include:
- Accept: You can accept the probability of a risk and its possible consequences if the mitigation costs are higher than the correction cost. If this is the case, you can monitor the risk.
- Avoid: If a risk impact could be costly to your business, you can decide to invest in preventing it from happening.
- Reduce: If the impact of the risk will cost more than reducing its probability and severity, you can decide to find ways to reduce its occurrence.
- Share: You can also decide to share the risk by purchasing insurance.
5. Communication and Monitoring
Once you've got all the components of your ERM, you have to find an effective channel to share the information throughout the enterprise. An ERM strategy only works when everyone implements it.
Make a habit of reviewing the progress of your ERM to get insights on areas that need improvement and better resource allocation.
What Common Types of Risks can be Mitigated through Enterprise Risk Management?
As a risk manager, you ensure every possible threat has been accounted for. You must ensure that all threats in your organization are managed to protect your company’s performance.
Many potential risks might hit your company. We've compiled the main risks you should include in your ERM program to get you started. They include:
1. Reputation Risk
We live in a world where your brand's reputation can be ruined in less than ten minutes worldwide with just one click. To maintain a good relationship with your customers, potential clients, and investors, you must keep your company's reputation intact.
Your ERM must, therefore, have a section on potential reputation risks and how to deal with them.
2. Operational Risk
All daily operations are tested and designed to minimize risks or losses. However, sometimes a global crisis, data breaches, IT systems failure, loss of people, and fraud can affect productivity and disrupt a company's risk functions. It's important to access the most critical daily operations and devise ways to manage potential risks.
3. Strategic Risk
Developing a strategy takes hours of research, consultation, and testing. That said, things out of your control could still happen and alter your strategy. Take the COVID pandemic as an example, it changed the structure of most businesses, and only those that could adapt succeeded.
Exploring any risks that might affect your strategy and how to navigate through them helps you stay afloat if it happens.
4. Healthy and Safety Risk
You're only as productive as your team – you could have the best strategy in the world, but you can't implement it alone. Therefore, you must address general health and safety risks to ensure your employees feel physically and mentally fit.
Every work environment has different risks, so you need to assess your company to know what area to focus on. For example, a construction company could prioritize physical risks, while a therapy practice could prioritize mental health risks.
5. Financial Risk
The first thing that comes to mind when people talk about avoiding risks is the financial factor, and that's fair. While you want to create a better world, you want to make lots of money.
Again, the financial risk varies from one business to another. As the business evolves, you must keep adjusting your ERM. For example, if you plan to expand and go international, fluctuation in the exchange rate can significantly impact your business. You'd, therefore, need to update your ERM to include this possible risk and how to mitigate it.
6. Compliance Risk
Every business must adhere to government bodies with several rules, laws, and regulations. The only challenge is that these compliance laws keep changing, which can lead to huge fines and penalties if you don’t update your systems.
Your ERM needs to address such risks and devise ways to prevent them from happening, as well as mitigation plans if it happens.
How can Companies Measure the Effectiveness of their Enterprise Risk Management Program?
There are many KPIs you can use to measure the success of your ERM program. Here are our personal favorites that we highly recommend:
1. The Number of Risks Identified before Materializing
Identified risks are those that you could predict before they happen and devise strategic planning to prevent them from occurring. Assessing these risks and creating better procedures to combat them before they emerge can reduce their impact on a business.
2. Number of Risks that Happened
This is another metric you can use to measure the effectiveness of your ERM program. Check how many risks materialized in a given period (in the early stages, a month is enough). These metrics can offer insights into your program's performance and areas that need improvement.
If the number of risks that occurred is too high, consider reevaluating your enterprise risk management program.
3. Percentage of Risks Mitigated
Besides the risks that materialized, it's crucial to know the risks you mitigated. This can give you insights into the type of risks your company is prone to and how best to mitigate them. You may invest more in preventing these risks from happening completely so that your risk management team doesn't spend many hours focusing on low-impact risks.
4. Percentage of Monitored Risks
It's always a good idea to monitor all the risks to get clarity on why they're happening, how they're happening, and find better ways to mitigate them. For example, suppose you've had several attempted cyberattacks. In that case, it can help to know how your cybersecurity policy program performs at every stage. This can help you decide whether to upgrade your program or continue depending on it.
5. Costs to your Enterprise because of a Risk
Every identified risk has a different impact on your business. It's important to evaluate the risks that have already happened to know where you need to put more focus and resources. Different ways a risk can affect a business include:
Effective risk management strategies should address all the ways a risk can impact a business and offer possible solutions.
Do you have an ERM for your business?
If you don't have an enterprise risk management program, you must push it high on your priority task. The significant risk of cyberattacks is higher than at any other time in history, so you must have a system to mitigate the risks promptly.
An ERM will help ensure your business doesn't suffer a huge impact. Even when an identified risk materializes, you can bounce back fast.
If you're just getting started with "hack-proofing" your business and don't know where to start, you can request a free demo from us. It might save you countless research hours!