What Is Enterprise Risk Management?

The senior leadership team at an organization is often responsible for developing a long-term strategy that leads to growth and development. This is where the essential, strategic approach of enterprise risk management enters the picture.

Enterprise risk management, or ERM, is an organizational strategy that allows leadership to direct business activities in a way that identifies significant risks and reduces potential harm to the organization. It’s a vital tool for identifying, assessing, and managing risks.

The Importance of Enterprise Risk Management

Considered a holistic and comprehensive approach to risk management, enterprise risk management is key to organizational success. The ERM process enables leaders to take an organizational approach to risk management, rather than allowing each individual department or business unit to identify potential risks and develop mitigation strategies. Ultimately, ERM contributes to improved decision-making and resource allocation, plus proactive risk management.

Key Components of Enterprise Risk Management

While the enterprise risk management process can be adapted and tailored to meet the needs of an individual organization, the core elements involved in ERM anchor the process. The primary stages involved include risk identification, assessment, and mitigation — allowing leadership teams across all industries to engage in strategic planning and develop a proactive approach to risk management.

Risk Identification

Defined by the Global Association of Risk Professionals (GARP) as the backbone of the ERM process, risk identification enables an organization to become aware of any possible risk or loss that may have a detrimental impact on the company. Organizational leaders can use a variety of risk identification methods (such as brainstorming, interviews, or data analysis) in order to uncover both internal and external sources of risk. Internal risks typically arise as a result of company structure or personnel, whereas external risks occur outside the organization’s control.

Risk Assessment and Evaluation

After risks have been identified during the ERM process, organizations can then assess risks in terms of likelihood and impact. Per GARP, risk assessment probability and rating scales, along with consequence scales, help quantify potential risks and identify prospective consequences. Risk matrices, scenario analysis, and risk mapping are also frequently used when evaluating these risks.

Risk Response and Mitigation

Once potential threats have been identified and evaluated, it’s time to begin determining which type of risk response strategy would work best for the individual risk. By exploring risk response and mitigation strategies in advance, organizational leaders can take a proactive approach to risk management.

According to Six Sigma, the most common risk response strategies include:

Mitigation – Even when potential risks are identified and proactive steps are taken to avoid them, some risks still occur. In that case, risk mitigation plans and steps may entail quality assurance testing, developing contingency plans, or increasing the frequency of employee training.
Transfer – Through risk transfer, organizational leaders pass the responsibility of managing the risk to an outside source. Common examples of risk transfer include purchasing insurance, hiring contractors for specialized work, or utilizing bonds or guarantees.
Acceptance – In some cases, organizations simply have to assume the risk. There are two main types of risk acceptance approaches. When taking an active approach, management works to develop a proactive plan that will be implemented if or when the risk occurs. In the passive or reactive approach, business leaders manage the risk at the time that it happens.
Avoidance – Risk avoidance is a common strategy, as many business leaders feel that circumventing the risk entirely is the best approach. Some examples of risk avoidance include adapting the scope or outline of the project, reducing ambiguities within the project plan, or investing further resources to avoid potential risks.

Steps in the Enterprise Risk Management Process

Comprehensive risk management requires organizations to implement the ERM process according to the specified steps. Leveraging the power of ERM, organizational leaders are better equipped to create a risk-focused culture in which all members of the team actively work to identify and mitigate risks accordingly.

Below are the general steps in the ERM process:

Step 1: Risk Identification

Resting at the core of the ERM process, risk identification is the first step for organizational leaders to take. Identification often calls for a collaborative approach where management teams work closely with key stakeholders to identify internal and external risks that may jeopardize the organization’s ability to achieve its strategic objectives.

Some of the tools and methods used during risk identi f ication include:

Brainstorming – This simple yet essential process allows company leaders and central stakeholders to work together to discuss and brainstorm potential risks — which may include operational, financial, environmental, or reputational risks.
SWOT Analysis – Referring to the process of identifying strengths, weaknesses, opportunities, or threats, SWOT analysis is performed in order to analyze all aspects of a new business project or strategic plan.
Scenario Planning – Scenario planning entails organizational leaders reviewing anecdotal scenarios, identifying possible risks, and developing proactive mitigation strategies.

Step 2: Risk Assessment

After extensively reviewing possible internal and external risks and identifying all threats to organizational success, the next step of the ERM process begins. Risk assessment refers to the process of evaluating risks in terms of probability and impact. A risk assessment matrix is often used to evaluate risks, and this matrix can easily be created by:

Listing all possible risks in order of significance.
Determining the probability of the risk occurring.
Analyzing the impact that the risk would have if it were to occur.
Plotting the risks on the matrix to visualize the impact.

Step 3: Risk Evaluation and Prioritization

After the risk assessment process is complete, business leaders evaluate the risks and determine which risks need to be addressed as quickly as possible. During this step, cost-benefit analysis plays a crucial role; it allows organizational leaders to compare the benefits of mitigating the risk versus the costs.

Step 4: Risk Mitigation and Response

In addition to prioritizing risks and addressing them accordingly, those involved in the ERM process must develop risk mitigation and response strategies for each individual risk. These strategies help organizational leaders avoid, reduce, or eliminate risks and ultimately expedite the path toward achieving organizational goals. Policies, procedures, and controls should be implemented to mitigate high-priority risks.

Step 5: Continuous Monitoring and Review

The ERM process is not a static experience that occurs once in a while. Rather, it’s an ongoing commitment to risk assessment and evaluation through which businesses implement continuous monitoring so that they can update their risk management strategies accordingly as the risk landscape evolves. Regular audits and reviews are widely relied upon to ensure ERM effectiveness.

The Role of Technology in Enterprise Risk Management

In contemporary business operations, technology assumes an important role in enterprise risk management. Tools such as risk management software, data analytics, and artificial intelligence (AI) technology are leveraged to help streamline risk identification, monitoring, and response. Though advanced AI tools offer benefits — such as increasing the speed and reducing the tedium of ongoing risk management — they also present challenges. For one, AI technology is prone to inaccuracies, bias, compliance issues, and dependence on the data that is input. This calls for organizational leaders to use it carefully and responsibly.

Enterprise Risk Management Frameworks

While the core elements and clearly defined steps can be used to implement the ERM process in an organization, some business leaders rely on proven ERM frameworks to create a culture that supports ongoing risk assessment. Among the most common frameworks for implementing ERM are the COSO ERM, ISO 3100, and ISO 27005 frameworks.

COSO ERM Framework

The Committee of Sponsoring Organizations (COSO) created the COSO ERM framework in 1992 for organizations to establish internal controls that allow them to operate transparently, ethically, and in accordance with industry standards and guidelines. The COSO ERM framework integrates risk management into organizational culture, making it a preferred choice among many business leaders.

ISO 31000 Standard

As the leading international standard and one of the easiest to rely on, the ISO 31000 standard provides organizations with a framework for implementing risk management into organizational culture. Organizations can use this versatile framework regardless of their size or country of origin.

ISO 27005 for Information Security Risk Management

ISO 27005 is a complementary framework focused specifically on managing information security risks. It aligns with the ISO 31000 standard, enabling organizations to prioritize cybersecurity within their broader ERM strategy.

The Benefits of Enterprise Risk Management

Enterprise risk management processes require organizational leaders to be intentional and committed, but the investment is worthwhile. ERM supports business continuity and allows key stakeholders to identify risks that may threaten the health or vitality of the organization. Notable benefits of enterprise risk management processes include enhanced:

Resource allocation
Strategic decision-making
Compliance and legal protection
Organizational resilience
Financial performance
Reputation and trust

Final Thoughts

No matter a business’s industry or size, ERM plays a pivotal part in risk management. By implementing the ERM process into an organization and embedding risk management into its culture, business leaders can ensure that their organization stays on the path toward long-term success.