Enterprise Risk Management: Why is it Crucial?

Enterprise risk management is a crucial factor in the successful operation of organisations of all sizes, types, and across all industries.

And the conditions affecting today’s commercial environment call for greater attention to enterprise risk management. From natural disasters to COVID, cyber threats to fraud, the risks surrounding organisations today are fraught.

As a result, investors, governments, industry bodies and regulators are increasingly scrutinising the risk management approach and the risk profiles of organisations.

Today we’ll look at what is enterprise risk management; why risk management is so important; and the types and various components of risk management so your business is in a state of preparedness for the inevitable risks it will face.

What is Enterprise Risk Management?

But first, let’s look at the definition of enterprise risk management.

Put simply, enterprise risk management is the process of planning, organising, controlling, and managing all the activities undertaken by an organisation, to minimise the potentially damaging effects of risk.

And these risks could be associated with any part of the business operations:

  • Earnings
  • Capital
  • Stock
  • Technology infrastructure
  • Investments
  • Talent
  • Amongst others…

Enterprise risk management is a strategic approach to understanding, analysing, and addressing risk, so that organisations can maintain productivity, and achieve business objectives.

In today’s business landscape, things change quickly. And often. So, enterprise risk management requires frequent, periodical assessment of financial, strategic, and operational risks. It also requires keeping a continual lens on the future of the business, and potential or accidental losses.

[Enterprise Risk Management is the process of]… identifying and managing key business risks to help minimise loss and maximise shareholder value.

Executives are under relentless pressure to identify the various risks facing their organisations. They need to understand how these risks influence commercial decisions and the formulation of business strategy.

KPMG

Why is Enterprise Risk Management Important?

A robust enterprise risk management program will enable your organisation to build awareness of risk, across the entire business. As a result, your operation can make informed decisions and take strategic steps, with surety.

The key reasons enterprise risk management is important for your business include:

  • It helps to engender confidence in strategic business decision-making and objective setting
  • It improves the organisation’s compliance standards, be they statutory or internal mandates
  • It improves your operational efficiency. This is achieved through the instilling of agreed risk mitigation processes and controls

What are the Four Types of Business Risk?

There are four major types of business risk.

  1. People risks
  2. Facility risks
  3. Process risks
  4. Technology risks

Each of these risks has, of itself, multiple layers of associated risk. And the knock-on effect of each, if left unmanaged, can be catastrophic.

As you can see from the diagram below, the ripple effect of risk is multi-layered:

enterprise risk mitigation

The best way to mitigate any risk catastrophe is preparedness. This might include:

  • An all-of-business governance protocol that includes the major business stakeholders such as:
    • senior management
    • security
    • risk assessment team
    • business management
    • compliance team
    • IT operations
    • legal
    • finance
    • procurement
  • A business strategy that incorporates internal policies and standards for all security and risk elements as well as operational areas like IT systems configuration
  • Established internal procedures that factor in both internal and external risk threats and vulnerabilities. The monitoring of risk exposure factors can influence and mitigate the risks to the organisation and its assets.

What are the Components of Enterprise Risk Management?

We’ve identified six key components of enterprise risk management which your organisation needs to be across:

  • Risk appetite: To maintain business continuity, the organisation must regularly assess its tolerance of risk in pursuit of strategic goals.
  • Culture and governance: Some industries (and hence organisations) are, overall, risk-averse. Others, instil and encourage riskier business cultures. The other factor to consider here is this: depending on the organisational structure, internal governance protocols and ability to collaborate across teams, risk management can be seen as either a cultural norm or an added pressure. This will inevitably affect the way decisions are made and risk controls are implemented across the business.
  • Compliance: Internal mandates and external regulatory and statutory compliance necessities must be factored into risk and control decisions.
  • Business objectives: An organisation’s strategic initiatives must be included in all risk analysis and decision-making.
  • IT structures: Most industries today are migrating to cloud services. In addition, with workforces still being encouraged to work from home amid rising pandemic infections in Australia, multiple changes to IT programs and controls call for a reassessment of risk programs.
  • Measurement and reporting: Enterprise risk management programs need to provide timely and consistent output to a cross-section of business stakeholders to ensure ongoing effectiveness, target setting and KPI assessments. What metrics are used, how progress is measured, reporting structures and timings are all important considerations. Typically, stakeholders involved in reporting and measurement include C-suite executives, operations, IT management and middle management.

And Finally…

Risk is a part of everyday life for everyone.

As a society, risk is an inherent factor of life that allows us to grow, prosper, and evolve. Risk is associated with everything around us. From energy supply to infrastructure; from supply chains to imports; from border controls to airport security; from hospitals to housing. What’s important to remember is that well-managed risk, provides the opportunity for threats to be minimised and societies and organisations to thrive. There’s also the opportunity to optimise the potential of risk – whereby the learnings of taking well-managed risks lead to better outcomes, better lives, and more prosperous organisations.

 

As one of the world’s leading providers of contingent worker management solutionsCXC is well positioned to optimise all elements of your contingent workforce strategy. With operations in more than 50 countries across five continents and decades of experience, we can assist with every aspect of your program.

If you are interested in discussing total talent solutions for your business and would like to find out more about how we can work together, please contact us.

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