Enterprise risk management process
In order to be able to comprehensively discuss the implementation of Enterprise Risk Management, we want to go through the process in detail, step by step. We divided it into four stages:
- Risk identification
- Risk analysis and measurement
- Risk control
- Monitoring and controlling risks
Risk identification
Every company is exposed to risk factors, but they vary dramatically depending on the size of the company, as well as the industry in which it operates. In order to see what risks your company is most exposed to, it is first necessary to be aware of the types of risks (legal, environmental, market risks, etc.) and to identify the possible risks associated with each risk.
In other words, there are three questions to be answered:
- What could be the consequences of the risks taken?
- What areas of business can they affect?
- What other entities may be affected by risk effects?
Risk analysis and measurement
Once you know what kind of risk you face, you need to measure how much it threatens your business – what are the chances of it occurring and what losses it could cause if a negative scenario comes true. At this stage, the company should decide whether a given risk is so serious (and likely) that measures should be taken to safeguard against its occurrence or consequences. Few companies can afford to respond to all potential risks – risk analysis and measurement allow them to focus on the most significant ones.
Risk control
At this stage, the company takes specific measures to prevent risks or minimize the effects of risk. We will tell you more about the action plan later in the article.
Monitoring and controlling risks
Once corrective actions have been implemented, regular and detailed monitoring of risks is necessary. It is necessary to check whether the activated safeguards are fulfilling their functions and whether the probability of risk realization is increasing or rather decreasing.
Examples of sources and risk factors
Each enterprise faces its own problems, and the risks it faces often depend on what industry it operates in and how many personnel it employs. However, there are some examples of risks to which many companies may be exposed, regardless of these factors.
Security issues are a big risk. Today, primarily digital. Companies are vulnerable to fraud, the source of which is sometimes employees or co-workers themselves. Serious consequences threaten not only the theft of company property (including documents), but also data and sensitive information. However, it doesn’t always have to be about industrial espionage – data loss due to company server failure or hardware damage is also a problem for companies. There is a reason why there is now a strong emphasis on data security, including regular password changes, two-step verification or the use of virtual private networks (VPNs).
In addition to security, financial factors, such as the need to wait a long time for counterparties to pay their debts, can be a source of risk. This can lead to a loss of liquidity for the company. Many financial operations are also risky – for example, due to unpredictable behavior in the currency market or the risk of changing cash flows (e.g., as a consequence of changes in interest rates).
Companies should also consider the risks associated with human resource management – for example, the risk of workplace accidents or the exodus of specialists needed for a given position. The latter may involve emigration, but also the retirement of experienced workers.
How to implement effective risk management in a company?
A lot depends on how big a business we manage and what types of risks we deal with on a daily basis. The following are universal best practices to help your company manage risk.
In the initial phase, it is crucial to select those risks that are the greatest threat to the company. It is worth prioritizing them so that the most significant ones are addressed first, and risks at an acceptable level are discarded or postponed. Only with this division in place will it be possible to address problem solving and risk minimization in a systemic way.
The next step should be to create an action plan. We are still moving here in the area of the four steps we described above, but it is ideal to prepare a template – a plan that will be helpful in dealing with many, or even all, types of risks after possible minor adjustments and adaptation to the specific situation.
Clear communication plays an important role in the implementation of ERM. There are risks that the company simply cannot afford, those with the highest priority for the company. In order to minimize them, it is essential that these priorities are known to everyone in the company, and certainly to everyone involved in the process affected by these risks.
The next step should be the division of responsibilities. The launch of a previously prepared action plan should not rest on the shoulders of a single person or be dispersed throughout the organization. Assigning people responsible for the various elements of the plan will allow the operation to be carried out efficiently and within the stipulated time.
Once implemented, the risk management system should be monitored, measured and adapted to new challenges and risks. It is necessary to regularly check how effective the implemented solutions have been and what else can be done better. Over time, there will be more risky ventures and difficult decisions that may cause undesirable consequences, so the action plan should be regularly reviewed and improved as necessary.
What are the benefits of implementing a risk management system?
A properly implemented ERM system in a company brings benefits to the company, although not always visible to the naked eye and not always easy to measure. What can you gain by managing risk?
Tighter company finances
The first two steps of the risk management process: risk identification and risk analysis and measurement already detect sensitive areas in the company’s operations. Recognizing these makes it possible to pay closer attention to the internal processes within these areas, thereby reducing the risk of losing funds.
Countering unnecessary risk-taking helps expose problems that generate unnecessary costs. Optimization of business processes involving these troublesome elements of a company’s operations leads to tangible savings.
Ability to prepare for negative consequences of actions
Actions taken by an entrepreneur are often risky – to a greater or lesser degree. If you run your own business, you certainly know that negative consequences of actions taken by you or your employees sometimes occur, and this is perfectly normal. However, this does not change the fact that there should be as few as possible. Putting a risk management system in place allows you to prepare for what might happen and develop schemes to respond skillfully in such situations.
Better cooperation within the company
While the introduction of risk management processes may initially be met with a not-so-warm reception from employees and even middle management (who are often responsible for implementing and enforcing the new guidelines), in the long run it can result in better communication between departments, teams and individual employees.
Solutions to reduce the level of risk often include the implementation of internal controls, efforts to build organizational culture, and a focus on the fair and effective distribution of responsibilities. All of these elements – if implemented correctly – will positively affect cooperation within the team and can even reduce employee turnover.
Summary
Enterprise risk management systems are solutions that detect, analyze and then remedy the risks faced by a company. Properly implemented ERM saves a company’s resources and improves business processes – all through an orderly approach to potential risks and risky decisions.
