8 Ways Enterprise Risk Management Is Different and Better Than Traditional Risk Management
Almost every business lacks a better risk management system, making the term “risk management” a scary word. A large majority of businesses still follow the traditional method of mitigating risk, and an organisation could face hundreds of risks every day.
Could this method be effective?
How do we manage and mitigate risk better: through enterprise risk management or through traditional risk management?
Let us discuss how enterprise risk management differs and better from traditional risk management.
Enterprise risk management Vs Traditional risk management
Enterprise risk management (ERM) is a holistic approach to managing an organisation’s risks. It takes into account all aspects of an organisation’s business, including its strategic objectives, operating environment, and appetite for risk. ERM provides a framework for identifying, assessing, and managing risks across the enterprise.
Traditional risk management (TRM) is a siloed approach that focuses on specific risks in isolation. It fails to take into account the interdependencies between risks and the impact of one risk on another. As a result, TRM can leave organisations exposed to hidden risks that can have a significant impact on their business.
ERM is a more effective approach to managing risk because it:
- Identifies all types of risks that could impact the achievement of an organisation’s strategic objectives.
- Assesses the potential impact of those risks on the achievement of those objectives.
- Prioritises risks based on their potential impact.
- Develops plans to mitigate or transfer the identified risks.
- Monitors and reports on the status of identified risks over time.
Traditional risk management fails to do all of these things, leaving organisations at greater risk of not achieving their objectives.
8 ways enterprise risk management is better than traditional risk management.
Enterprise risk management (ERM) is a comprehensive approach to managing risk across an organisation. Unlike traditional risk management, which focuses on individual risks in silos, ERM takes a holistic view of risk and considers how different types of risks may interact with each other. This allows organisations to identify and manage both the risks themselves and the relationships between them.
There are many benefits to implementing an ERM framework. The most significant is that it can help organisations avoid potential disasters by identifying and addressing risks before they materialise. Additionally, ERM can improve decision-making by providing a more complete picture of an organisation’s risk profile. It can also help optimise performance by ensuring that resources are allocated to the areas of greatest risk. Finally, ERM can build stakeholder confidence by demonstrating that an organisation is proactively managing its risks.
ERM features include the following:
1. Enterprise risk management is based on the organisation’s strategy
Enterprise risk management does not focus on a single risk like traditional risk management.ERM always keeps the future goals of the organisation in place before it acts or mitigates the risks. Organisations that have a more risk-averse attitude would put more emphasis and weight on risk management, while those with a more entrepreneurial attitude would focus on growth and opportunities. The goal of enterprise risk management is to identify risks that could affect the achievement of an organisation's objectives, and then take steps to mitigate or minimise those risks.
2. ERM does not focus on mitigating specific risks
Organisations face many types of risks, including financial, operational, strategic, and reputational. An effective enterprise risk management (ERM) program helps organisations identify, assess, and manage these risks. Traditional risk management approaches focus on individual risks and siloed risk management functions. This can lead to a fragmented view of risk across the organisation. In contrast, enterprise risk management takes a holistic view of risk and considers how different types of risks impact the organisation as a whole.
Enterprise risk management solutions help organisations: -
- Understand the relationships between distinct types of risks.
- Identify potential risk events that could have a negative impact on the organisation
- Assess the likelihood and potential impact of these events.
- Develop strategies to mitigate or transfer these risks.
- Monitor and review the effectiveness of their ERM program over time
An effective ERM program can help organisations make informed decisions about how to allocate resources and manage risks in a way that supports the achievement of their strategic objectives.
3. ERM focuses on the interaction between all of an organisation's aspects.
ERM focuses on the interaction between all of an organisation's aspects, looking at how they affect each other and how they can be managed together to create value.
In this way, ERM is much broader than the traditional risk management function. It covers all aspects of an organisation's risk- strategic, financial ,and operational – and brings them together into one integrated approach.
The IIA's definition of enterprise risk management states that it is "a process, effected by an entity's board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity and manage risk to be within its risk appetite to provide reasonable assurance regarding the achievement of entity objectives."
4. ERM is a forward looking discipline that leads to proactive response
The risks can be managed before they occur with an enterprise risk management solution. In ERM, proactive measures are taken by anticipating outcomes before an event occurs. However, traditional risk management is reactive, meaning it only reacts after an event occurs.
ERM is a holistic approach to risk management that considers all types of risks, both internal and external, that could potentially impact an organisation. It goes beyond simply identifying and responding to risks; instead, it proactively seeks to minimise them. Additionally, ERM takes a long-term view of risk, looking beyond the immediate future and planning for how risks might evolve over time. Ultimately, ERM leads to better decision-making by helping organisations identify and assess risks, develop strategies to mitigate them, and track their progress over time. When done correctly, ERM can help organisations avoid potential disasters and realise significant opportunities.
5. ERM is focused on business continuity, not just financial stability
ERM always focuses on dealing with risk and maintaining a sustainable business environment. ERM is different from traditional risk management. TRM mostly deals with financial risks and other problems that can cause the company to fail. Enterprise Risk Management always has a broad perspective of the organisation as well as globally. The goal of ERM is to ensure that an organisation will survive any crisis. ERM always tries to identify all risks that could potentially affect the organisation and then creates plans to deal with those risks. Hence, a more informed decision could be made by all board members.
6. ERM tends to be risk-taking rather than risk-averse.
Risk is often regarded as a negative thing, and traditional risk management treats it that way. However, the fact remains that no business can succeed without taking risks. Opportunities and risks go hand-in-hand, and ERM determines which risks are worth taking and which ones should be avoided.
ERM programs assist business owners and the board of directors in making informed and intelligent decisions. Besides working closely with management teams, they also determine which risks are too great and which ones can result in significant gains. As a result of TRM, risks are only viewed as something that can cause the business to lose money rather than as opportunities for growth.
7. ERM is far more dynamic.
As TRM is quite common in business, it has become very standardised. Companies commonly refer to COSO and ISO 31000 when managing their risks. However, despite the fact that both of these standards have been updated to a certain extent, they remain heavily biased toward managing risks and avoiding them.
Due to the dynamic nature of ERM, it is much easier to adapt on a case-by-case basis. Every business is unique, and every business is run differently. While some business owners are more conservative, others are more spontaneous and willing to take risks. There is certainly a greater focus on the latter in an ERM program. Choosing between TRM and ERM does not have a right or wrong answer. The two methods serve different purposes, but there is no denying that ERM is preferred for its fluidity, adaptability, and dynamic nature.
8. ERM examines risks and how they relate to one another.
Traditionally, risks are managed on an individual basis in siloed environments. There isn't much communication between departmental heads within an organisation because each department looks at risks only within its own area. Using this approach can create new risks in other departments, as we discussed above. Managing risks one-by-one can also lead to additional headaches down the road, as it fails to reveal the cumulative effects of risks and how they interact. Without connecting the dots, companies may either expose themselves to much greater risk or miss opportunities to achieve their goals.
Regardless of the type of risk management function, ERM ties them all together and analyses them to locate connections, trends, and concentrations. Thus, senior management is able to prioritise risks that could negatively affect their core mission and business strategy.
ERM takes a broad view of risks and includes both strategic and operational risks. It looks at risks across the entire enterprise, rather than just individual business units. And it takes into account both external and internal factors that could affect the organisation's ability to achieve its objectives. While traditional risk management focuses on avoiding losses, ERM also seeks to create value. This means that ERM programs are not just about minimising losses; they're also about identifying and capitalising on opportunities. In other words, ERM is about taking calculated risks that will help an organisation grow and succeed.