An Enterprise Risk Management Framework is a risk management process or guideline that organizations or businesses follow to identify, assess, manage, and monitor risks or potential events that might impact the company.
The aim of an ERM framework is to allow companies to identify and manage or mitigate potential risks before they cause damage. Managing risks will ensure business continuity.
What Is an Enterprise Risk Management Framework?
An Enterprise Risk Management (ERM) framework is a structured approach that organizations use to identify, assess, manage, and monitor risks that could affect their ability to achieve their business objectives or could potentially lead to losses. The framework helps organizations identify potential risks and mitigate them before they become a problem.
Read about other effective elements of risk management.
What Are the Three Types of Enterprise Risk?
Three main types of risk could affect a business or organization. These key risks are strategic risk, operational risk, and financial risk.
Strategic risk involves factors that can affect an organization's long-term goals and business objectives. Examples of strategic risk include market competition, technological changes, shifts in consumer behavior, and changes in regulations.
Operational risk consists of factors that can affect the day-to-day operations of an organization. Examples include equipment failure, human error, supply chain disruption, and cybersecurity threats.
Financial risk involves factors that can affect an organization's financial performance. Examples include fluctuations in interest rates, exchange rates, and commodity prices, as well as credit risk and liquidity risk.
What Are the Pillars of The ERM Framework?
The ERM (Enterprise Risk Management) framework has five interrelated pillars. These pillars are risk governance, risk identification, risk assessment, risk mitigation, and risk monitoring and reporting.
Risk governance outlines an organization's processes, structures, and policies for risk management. It includes defining roles and responsibilities for risk management, establishing risk appetite and tolerance levels, and setting up accountability mechanisms for risk-related decisions. Here risk managers like chief risk officers will be identified and listed.
Risk identification involves identifying and assessing risks that an organization may face. It includes analyzing internal and external factors that could affect the organization, evaluating the likelihood and impact of risks, and prioritizing risks based on their potential impact on the business.
Risk identification should consider all potential risks, including existing and emerging risks. Sometimes, an internal audit might be necessary to establish identified risks.
Risk assessment involves analyzing the identified risks to determine the organization's ability to manage or mitigate them. It includes evaluating how effective existing risk management strategies are and identifying gaps and areas for improvement.
Risk mitigation is where strategies to manage and mitigate risks are developed and implemented. It includes selecting the appropriate risk response strategy, such as risk avoidance, risk reduction, risk sharing, or risk acceptance, and establishing control activities to monitor and manage risks.
Risk Monitoring and Reporting
Risk monitoring and reporting monitors and reports on risk management activities to ensure effectiveness. It includes establishing key risk indicators (KRIs) and metrics to measure risk performance, conducting regular risk assessments, and reporting on risk management activities to stakeholders.
What Is the Best Risk Assessment Method?
There are many risk assessment methods available, and the best one depends on the specific situation and context. Different methods may be appropriate for different types of risks, industries, and regulatory requirements. Here are a few commonly used risk assessment methods that could be included in a risk management process:
Hazard and Operability Study (HAZOP)
Hazard and operability studies are commonly used in process industries such as chemical plants and oil refineries. It involves a systematic review of each step in a process to identify hazards and potential failures.
Failure Mode and Effects Analysis (FMEA)
Failure mode and effects analyses are often used in engineering and manufacturing to identify potential failures in a system or product and evaluate the likely consequences these failures might bring.
Structured What-If Technique (SWIFT)
A structured What-If technique involves brainstorming potential "What if" scenarios and evaluating their likelihood and consequences.
A bowtie analysis combines elements of both HAZOP and FMEA and is often used in high-risk industries such as aviation and healthcare. It involves identifying the potential causes and consequences of risk and designing controls to mitigate it.
Ultimately, the best risk assessment method is the most appropriate for the specific situation and provides a comprehensive and accurate understanding of the risks involved.
Can My Management Framework Help Avoid Risk?
A well-designed enterprise risk management framework can help organizations identify and mitigate risks. It could also be significant in cybersecurity management and threat intelligence efforts. Effective management frameworks typically involve a combination of policies, procedures, and controls designed to identify, assess, and manage risk across the organization.
What Is the Best Way to Mitigate Enterprise Risk?
The best way to mitigate enterprise risk involves a comprehensive and strategic approach that includes the following steps:
- Identify and assess risks
The first step is to identify and assess the enterprise's risks. This can be done by conducting a risk assessment considering internal and external factors, such as market conditions, regulatory requirements, and cybersecurity threats.
- Develop a risk management plan
A risk management plan should be developed once the risks are identified and assessed. The plan should include strategies and actions to mitigate the risks, including risk transfer, risk avoidance, risk reduction, and risk acceptance.
- Implement risk management strategies
The next step is to implement the strategies identified in the risk management plan. This may involve investing in new technology, hiring additional staff, developing policies and procedures, and training employees.
- Monitor and review risk management activities
Risk management activities should be monitored and reviewed regularly to ensure they are effective and to identify any new or emerging risks.
- Continuously improve risk management
Finally, risk management should be an ongoing process of continuous improvement. This involves learning from past experiences, evaluating the effectiveness of risk management strategies, and adapting to changing circumstances.
By following these steps, enterprises can effectively mitigate risk and protect themselves from potential losses or damages. However, it's important to note that risk management is an ongoing process, and it requires commitment and investment from all levels of the organization.
How Can Riskrecon Help Me?
Riskrecon by Mastercard can help you achieve better risk outcomes. We are ready to help your company create and implement a robust enterprise risk management framework. Take a look at our 30-day trial.