Leveraging Enterprise Risk Management for Business Advantage
Firms, in today’s enormously competitive business environment, require an appetite to take risks and bet big to gain a competitive advantage and grow in their industry. Companies of all sizes are looking to enhance their capabilities, by exploring different approaches whilst also trying to reduce costs. Whilst many firms today are implementing technological changes to become more innovative, efficient, and agile, the cream lies in creating a comprehensive ERM strategy. Not only can this drive business performance and aid growth prospects but it can also help the organization build an unmatched competitive edge.
A sophisticated and nuanced approach to an effective risk management process is identifying, assessing, and managing risks is absolutely necessary for today’s day and age. It can help safeguard the company’s assets, maximise profits and maintain reputable credit ratings. In fact, “A well-designed Enterprise Risk Management (ERM) program is an oﬀensive, not a defensive strategy”, according to PwC’s report titled How to Overcome 10 Key ERM Challenges.1
Steps To Implement An Effective Erm Strategy For Business Advantage
- Create An Erm Structure
Firms must identify, communicate and proactively manage risk to fully grow as a business. In order to do this, an ERM structure must first be put in place which includes a consistent policy and process, a single repository for their risks and a common reporting format. It is essential that the practices doing, however, align with the mission and vision of the company.
Businesses may also choose to use their different departments to their advantage to optimise the risk assessment, making it specific for each department. Naturally, a businesses’ health and safety manager will identify different kinds of risks from the finance manager, while asset risk management and business continuity are disciplines in their own right. That’s the finest aspect of any effective, systematic ERM strategy! It brings together risk registers from different disciplines, allowing visibility, communication and central reporting while maintaining distributed responsibility. This way, each department of the business gets to leverage the constructive potential of ERM!
Responsibility for each department’s appropriate enterprise risk structure must also be assigned to members within the business. For example, each department could have an associated manager (executive, functional or business), who will be responsible for achieving the objectives set up by the ERM strategy and managing the associated risks.
▪ Create An Enterprise Risk Map
Even though an ERM strategy may be in place, creating a risk map helps mitigate risks further. What if the cause of the risk arose due to a department of the organisation not being taken into account in the strategy or the severity/theme of a particular risk is simply unknown to the business? Hence, risk mapping helps eliminate the ambiguity of the causes of risk and instead, allows solutions to be identified. This is a comprehensive approach, where risks are managed more efficiently by mapping risks to different parts of the structure of the business.
ERM risk maps normally consist of three elements –
A set of common themes/categories- This will help categorize risks, allowing executives to search and filter on these themes and to bring common risks together under a parent risk.
Risk Relationships- This element is crucial for businesses to implement as it delegates all types of risks to the appropriate management, leading to more effective mitigation and risk assessment. Risks associated with each department must include a local and global relation who can be called upon in case of a risk review when appropriate. For example, if skills shortage risks are associated with HR, the HR manager can easily call up a register of all the HR risks, regardless of the project, contract, asset, etc. across the organisation and manage them collectively2. This not only saves time for the business but also ensures that the department equipped in that area of the business handles the risk efficiently.
Scoring systems (including impact types)– A scoring system helps map risks according to high, medium or low impact. Executives shouldn’t have to choose between a $100,000 risk and a $1m risk, should they? Risk scoring systems act as an easy, effective way for management to assess risks based on the order of priority and carry out the actions necessary to mitigate the risk.
▪ Decision Making Through Enterprise Risk Reporting
Let’s say that you’ve created a systematic risk structure, created an effective risk map and assembled a hierarchy of risk management roles within your business. You still would have not covered the most important aspect of risk management – carrying out the appropriate actions to manage the risks! It may not be possible for businesses to mitigate each and every risk that comes their way; they can, however, prioritise and make decisions on where to focus management attention and resources (using the scoring system explained above!)
▪ It’s All In The Culture
Both a bottom-up and top-down approach is required in businesses today when it comes to risk management. Furthermore, to ensure a proactive environment, the senior management must be engaged. This not only encourages them to see the benefits of managing risk but also helps businesses as a whole to recognize and understand the value of proactive risk management.
One of the best things businesses can do to leverage the power of ERM today is to start a risk steering group comprising the functional heads and business managers of each department within the business. The benefits of such a group getting together to understand inter-discipline risk help break down stove-piped processes. This can lead to productive cross-discipline discussions and a united co-focus that aligns the business objectives with an aim of acknowledging and mitigating the business’s risks. Businesses can also conduct coaching and training with respect to ERM, which can help leverage the power of ERM from anyone from an HR manager to the CEO of the business.
In a day and age wherein global competition and economic instability can lead to increased uncertainty and unsuccessful business decisions, an effective ERM strategy of emerging risks can yield a significant advantage to businesses by boosting competitive business advantage and enhancing risk response capabilities. Creating a practical structure for Enterprise Risk Management for business, setting clear responsibilities within and holding appropriate management accountable is key for businesses to be able to leverage the empirical power of ERM for their growth.
Businesses today must be able to look ahead and take action to avert (or exploit) risk to the benefit of the organisation. Unfortunately, very few firms today have started to implement horizontal, functional or business risk management systems. If potential problems can be identified (as risks) before they arise, a business will have far more options available to choose from in mitigating its risks and the process can shift from being a costly and overly long process to one better matching the original objectives set!
Blog Author: Syna Mody – Student Risk Committee Member, IRM India Affiliate