All this while, companies have been dealing with risk in a very reactive manner. Instead of preparing for any risks to their company, projects, and other stakeholders, they respond to risks only when they face them. This ad hoc method of dealing with risk is extremely irresponsible and can affect the health of the company.
According to the 2010 Report on the Current State of Enterprise Risk Oversight: 2nd Edition, it was noted that all existing risk management processes have been relatively immature and ad hoc. This is the condition in the finance industry, but there are risks that need to be addressed in organizations regardless of industry. The retail sector, agriculture sector, and the IT sector are some of the many industries that also face many risks. Here the development of enterprise risk management solutions is at an even more immature stage.
At this stage, the value derived from an enterprise risk management solution is very limited. There is no implementation of a solution with this crude method. What ends up happening is that companies are generally just left with a list of risks and virtually no means on how to mitigate or manage them. The employees have not been trained on how to properly deal with risk and the entire risk management process becomes mismanaged and serves no purpose.
Over the last few years though, various institutions have realized this flaw in their processes and are working on improving their operations. An enterprise risk management solution can help with that. It helps in streamlining various processes in the company to come up with a clear idea of how to properly identify and assess risks. Then the ERM comes up with innovative solutions to manage and mitigate these risks. This makes all the projects go on smoothly and the company does not have to constantly worry about the risks they might face because they are already preemptively addressing them.
So the next question to ask would be, what exactly is an enterprise risk management system?
What is ERM?
There are a lot of aspects to creating a successful enterprise risk management solution. An ERM can be defined as a structure created for an organization to continuously improve its capability of managing risk in a constantly changing business environment. It is a discipline and culture embedded in any organization that helps them effectively manage and adapt to many risks.
Enterprise risk management is an ongoing process. It is applied in the form of strategies across all the departments in a company. The enterprise risk management system is created to identify potential threats that could affect the capabilities and functioning of an organization. The ERM then manages the risk within the company’s risk appetite. This ends up providing stakeholders some level of certainty that will aid them in achieving their business objectives.
Enterprise risk management is a crucial part of all organizational processes and also the decision making in a company.
The Importance of Enterprise Risk Management
There are a lot of ongoing issues that organizations across any industry can face. Business owners have realized that their world is constantly changing, which will impact the business fundamentals. The CEO and board members of organizations need to be ahead of the curve and anticipate these changes so that they can be successful in their ventures.
This is where enterprise risk management comes into play. Risk management is mainly about securing a company’s place to ensure the success of its operations in the future. This will help organizations maintain their foothold in the marketplace.
Companies need to be fully aware of all the strategic uncertainties that they might have to face. This requires a deep level of understanding about the assumptions they make about their strategies, after which they can monitor the changes to the business environment to see whether or not their assumptions stay true in the future.
The main question that enterprise risk management answers is: Do we have the processes in place to identify and manage future risks good enough?
The Need for Enterprise Risk Management
A recent study has shown that about 69% of business executives are not confident about their current risk management practices and policies. They do not know if their current policies will be enough to meet future needs. This only emphasizes the need for ERM in this challenging business climate.
Organizations need to take a more strategic outlook to apply to their operational risks. This means that there is a need for an extended view of the entire organization to monitor all existing relationships between departments, team members, and employees. An enterprise-wide view will help expose if any component of the organization is missing or at risk at any given point in time.
Eventually, all organizations will face a crisis that will test the business operations of the company. It doesn’t matter how effective your enterprise risk management solution is because it won’t be able to prevent this from occurring. What an effective enterprise risk management solution can do for any organization is to help them minimize the damage. It will help companies brace for the speed, the duration, and the severity of the impact. An enterprise risk management system creates the organization’s response readiness to all risks.
The first step in the successful implementation of any enterprise risk management solution is to understand and create a strategy for your organization. This strategy should have an in-depth understanding of all the assumptions that go with it.
The reality of today’s continuously changing business environment has put enterprise risk management as a priority for companies. Organizations are taking a fresh look at the ways in which they have been managing risks, and they have come to understand the importance of an effective ERM process. When companies implement the enterprise risk management system and properly train their employees in IT Security and Governance training courses on how to evaluate and manage risk, they can address their changing business climate better and create a more aware working environment. This will help protect their company against any turbulence they might face in the future.