What makes enterprise risk management different from traditional risk management?
There are differences between traditional risk management and ERM. Conventional risk management has a modular focus. It seeks to define risks for specific divisions or processes and then deal with each threat separately.
ERM brings a holistic risk management approach to the company or organization. This methodology requires decision-makers and stakeholders to consider all risks at once and assess how they affect one another as well as whether dangers will impact the company’s big-picture plans.
The ultimate goal of ERM is to manage the dangers that could affect the long-term growth and prosperity of the entire company — not just a specific department or business process. This allows a company to address both existing and potential risks proactively. Also, the emphasis on overall goals makes it easier to plan strategically so that problems, when they do arise, don’t negatively impact progress.
Finally, while conventional risk management strategies for corporations tend to integrate insurance coverage, enterprise risk management includes uninsurable risks. For example, ERM strategies can include plans for dealing with bad PR from a data breach or defective product. Though insurance can provide compensation for any damage claims, it does not cover damage to the company’s reputation, which could suffer significantly from negative press coverage.
Why is risk management important?
Risk management allows a company to plan for unexpected events and identify potential problems before they stop a project or process.
Problems are inevitable, especially in a large enterprise with many moving parts. These simultaneous operations depend on one another. For example, a manufacturing department can’t function at full capacity unless the logistics department can deliver the proper materials.
The sales department, in turn, can’t deliver products on time if the manufacturing is delayed. Meanwhile, the corporation will have to pay operational costs and employee wages even though everything has slowed or even stopped in these departments.
Enterprise risk management focuses on proactively dealing with these vital operational issues so they don’t cause a complete shutdown.
For example, one solution for the manufacturing supply shortage could be keeping a backstock of inventory. Or the company might consider working with multiple suppliers or trucking companies in case one can’t deliver on time.
ERM also helps companies deal with the unforeseen. Some disasters, such as the COVID-19 pandemic, are difficult to predict. Even companies that saw the virus coming had no way of knowing how severe it would be or how governments would respond.
In such cases, ERM requires a disaster recovery plan, which outlines steps to get operations back online and limit downtime. While problems like COVID-19 are rare, natural disasters like storms, earthquakes, fires and floods happen more frequently.