What Is Enterprise Risk Management | 4 mins read

What is Enterprise Risk Management? 5 Benefits to Consider

what is enterprise risk management 5 benefits to consider
Lauren Christiansen

By Lauren Christiansen

What is Enterprise Risk Management?

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What is enterprise risk management? In layman's terms, a business uses an ERM framework to mitigate and manage risk across the supply chain. It consists of the people who handle the disruption, any rules or procedures, and the tools to optimize the risk management process. To put it all together, a business assigns a group of people to utilize a set of best practices and technologies to manage risk.

Most businesses aren't sure how to create and implement an ERM program. They either don't know which risks to mitigate, or they aren't sure how to make management programs an integral part of the business.

The majority of business owners recognize how critical it is to minimize financial risk and prevent non-compliance. At the same time, they are unable to identify the other potential problem areas or opportunities that fly under the radar. An effective ERM system helps business owners identify all potential risks along with opportunities to increase profit.

Here is how an ERM enterprise benefit from a risk framework-

  • 57% of executives claim risk and compliance are the two categories they are not equipped to address
  • Only 36% of organizations have a formal ERM program in place
  • 69% of executives are not certain that their current risk management strategies are enough to meet future needs
  • 62% of organizations have dealt with a critical risk in the past 3 years

1. An ERM Framework Creates a Risk-Centric Company Culture

A good ERM framework can increase the risk-related focus across all sectors of an organization. This change in the company culture empowers individuals to manage risks and discuss potential weaknesses openly. It eliminates any silos between management and employees that prevent anyone from managing risk effectively.

Different business units discover that the ability to discuss risks freely helps them too. It's much easier to provide information to high-level executives and offer ideas. Everyone becomes more informed and is equipped to perform their jobs. This optimizes decision-making across the organization and creates a culture that values communication.

2. A Risk Management Framework Optimizes Reporting

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A risk management framework encourages individuals to analyze and report risk-related data. Stakeholders use information technology to track risks across specific metrics and generate reports to present findings.

A risk management enterprise standardizes reporting to ensure they monitor all key risks, which helps to improve decision-making. Because there is such a wide variety of data available, leaders will know which operational risk areas to watch out for.

A good ERM program uses key operational risk indicators, tracks each management strategy, and pinpoints any new opportunities. Reports also help management understand the organization's risk appetite and overall health. Decision-makers can then adjust policies or strategies to improve the risk appetite and growth potential.

3. Improve Perspective on Risk Assessment

Businesses use ERM to create specific indicators of risk. This framework gives leadership plenty of warning before a problem occurs. Organizations also use metrics and mechanisms to measure the progress of risk strategies, which helps to optimize reporting and analytics. Individuals can easily track potential shifts in vulnerability to operational risks and alert the correct individuals to act.

ERM gives everyone a greater perspective on risk. In the past, risk prevention focused on elimination and avoidance. However, there are many risks that an organization should take. The challenge is in knowing which ones to take and which to eliminate. An ERM process provides the tools and foundation to assess opportunities to increase profit and reach new markets.

  • Involve the appropriate personnel
  • Reduce groupthink and think outside the box
  • Focus on all of the dimensions of strategic risk
  • Understand any assumptions and data supporting the strategy
  • Utilize correct criteria to handle high-risk, low reward disruptions

4. Enterprise Risk Management Optimizes Resource Allocation

When there isn't an ERM strategy in place, individuals manage and discuss risk across various departments. While it's certainly important for each business unit to manage risks, a good ERM program strengthens this process and makes it more consistent.

It eliminates duplicate efforts and provides specific metrics to track progress from one centralized location. Management must train key individuals on an ERM program to mitigate redundant processes. If an organization implements training and standardizes ERM best practices, it's easier to manage resources to mitigate risk.

5. Enterprise Risk Management Coordinates Compliance

Industry-related compliance concerns are the biggest risk-related threat that most businesses face. It's challenging to navigate these complex regulations, particularly for larger enterprises.

Many auditors and examiners use all reporting data from enterprise risk management programs. This decreases the expense of audits and minimizes the resources wasted on such efforts. Data in the form of reports ensures that an organization takes the necessary steps to comply with all regulations.

  • 29% of non-compliance is due to a lack of internal controls
  • 20% of workers observe bribery or other misconduct at work
  • Corruption cases cost an organization $200,000 on average
  • More than 90% of CEOs say their board members are adequately informed on compliance requirements

Key Takeaways What is Enterprise Risk Management?

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In conclusion, here are the key takeaways of enterprise risk management

  • An ERM framework creates a risk-centric culture that discusses risk management across all sectors. This optimizes decision-making and improves problem-solving.
  • Risk management improves reporting and ensures accurate data is presented to managers. They use these insights to identify opportunities and assess weaknesses in operations.
  • An organization improves its perspective on risk assessment and gains more advanced warning to handle a problem before it occurs.
  • ERM optimizes resource allocation so decision-makers have more money to capitalize on opportunities and implement operational risk management. It also helps to coordinate compliance with auditors, which saves time and money.