What is enterprise risk management?
Enterprise risk management is the process of identifying and addressing methodically the potential events that represent risks to the achievement of strategic objectives, or to opportunities to gain competitive advantage.
From the global COVID-19 pandemic and widespread civil unrest to rampant cybercrime and an active hurricane season, the risk to Houston businesses seems higher than ever.
Identifying and making business decisions based on that risk comes under the umbrella of enterprise risk management but are current risk management processes fit for purpose in today’s volatile world?
This article explores the potential value of a risk management framework in helping businesses to embed risk management into their culture. It also looks at how we can expect risk management to evolve with new technologies and business priorities to enable businesses to not just ward off threats but to seize future opportunities.
Establishing a Risk Management Framework
Why create a risk management framework rather than just setting up an enterprise risk management department?
Embedding a comprehensive risk management framework at the highest level of your business will help to change your culture and create a living document that grows as your organization develops.
The following prospective framework is divided into five areas: governance and culture; strategy and objective-setting; performance; review and revision and information, communication and reporting.
Governance and culture
In order for risk management to be fully integrated into a business, it has to become part of the business culture. This element of the framework is concerned with defining that culture and setting the tone of the messaging to reinforce the importance of risk management. It covers ethics, values, expected behaviors and understanding of risk in the context of the business entity.
The governance area also establishes board risk oversight and sets up operating structures. Attracting, developing and retaining skilled personnel to operate the systems is also covered.
Strategy and objective-setting
For successful risk management, there must be full integration between enterprise risk management and overall business strategy. This is a two way process with the entity evaluating different strategies in which enterprise risk management can play its part.
Every business will accept a different amount of risk and so this part of the framework includes establishing a risk appetite for the entity.
Once the overall strategy has been confirmed, objectives can be set. Objective-setting is where business strategy is put into practise, taking into account risk management procedures including identifying, assessing and responding to risk.
This area covers the nuts and bolts of risk assessment. Risks that may impact on objectives and overall business strategy are identified and assessed. They are then organized into priority order based on the severity of the risk in the context of the established risk appetite.
The business takes a portfolio view of all the risk it has assumed and, from this, risk responses are selected. The results of this process are reported to key stakeholders.
Review and revision
The performance of the risk framework has to be reviewed and evaluated to ensure it continually aligns with overall business strategy while taking into account changes in context. Where substantial changes have occurred to the business entity (e.g. it has changed overall strategy or organizational structure), these changes should be assessed and, where necessary, revision to the risk assessment process implemented.
The goal should be to continually improve enterprise risk management implementation in light of new information.
Information, communication and reporting
An effective risk assessment framework should be involved in a continual process of gathering and sharing information from both internal and external sources. Analytics and reporting technologies must be leveraged to provide comprehensive and accurate risk reports. Reports should also include the performance of risk management systems and the status of the organization’s culture with regards to risk management.
What does the Future of Risk Management Look Like?
The 2020 global coronavirus pandemic is the perfect illustration of the volatile context in which all businesses find themselves today. With only a few weeks’ notice, businesses have found themselves forced to adapt operations and structure in the face of serious risk to their survival.
Critical decisions over staff retention, health and safety provision, mobile IT investment, remote working procedures and more have had to be made under increasingly uncertain global economic conditions.
By embracing enterprise risk management, entities can approach the challenges of this new era head on. While the future remains cloudy, certain trends and predictions can be made as to how the relationship between strategy and risk management will develop over the coming years.
Increasing amounts of data
We are now firmly embedded in the era of Big Data and the amount of data available to businesses is likely to continue to proliferate. At the same time, as cloud service models and computer processing continue to evolve, the speed of data analysis is likely to increase.
It is therefore important that enterprise risk management processes keep up with this flow of data which will come from both inside and outside the business and be in various structured and unstructured forms.
Advanced analytics and data visualization tools will continue to develop to help risk management teams to understand and respond appropriately to new risks.
The evolution of AI and IT automation
Risk management reviews must take into account developments in technology including, but not limited to, artificial intelligence (AI), machine learning (ML) and robotic process automation (RPA). These will not only alter the risk landscape but will present opportunities for leveraging them in the risk management process itself.
Keeping business leaders and shareholders convinced of the need to invest in enterprise risk assessment will be an ongoing challenge going forward. As already mentioned, leveraging technologies such as analytics and visualization tools, AI and automation will be vital for accurately identifying, assessing and responding to risk. This is likely to require an initial investment which must be justified to the C-suite and the board.
The purpose of the governance component of a risk management framework is to ensure risk management is embedded in the very culture of the business and that effective organizational structures are in place to ensure clear and accurate communication.
Nevertheless, the pressure on the bottom line from adverse effects may prompt resistance to investment in enterprise risk management systems.
Building a stronger organization
Ultimately, effective enterprise risk management will strengthen a business entity’s ability to weather the storms of an increasingly volatile and uncertain business landscape. This requires tight and ongoing integration with business strategy and associated objectives. Only with a robust enterprise risk management framework can a business take the appropriate decisions based on its unique context and risk appetite.
These decisions will not only deflect potential problems but will also open up opportunities that can be exploited.
Effective enterprise risk management will be crucial if businesses are to successfully adapt to future conditions. A comprehensive enterprise risk management framework, as sketched out above, is key to optimizing risk management performance to deliver ongoing strategic benefits.
Successful implementation of such a framework will help ensure the benefits of enterprise risk management outweigh the necessary investments in new tools and technologies. This will give the organization steadily increasing confidence in its ability to handle the future.
Start integrating risk management into your business today
Risk identification and risk mitigation management is a core element of the PennComp strategic IT planning process. If you’re a Houston business looking to embed enterprise risk management into your culture and strategy, contact a PennComp strategic IT specialist today.