What is enterprise risk management?
Enterprise risk management (ERM) is a business term used to describe methods that help businesses manage, minimize, and sometimes eliminate risks. ERM takes a holistic approach to risk management by looking at individual business units and understanding where risks interact and overlap with other departments.
ERM helps minimize firmwide risk. If integrated correctly, it can result in substantial cost savings for the company.
Companies use GRC platforms, also known as enterprise risk management software, to define, implement, and monitor company-wide strategies for risk management. Operations teams within an organization use GRC platforms to maintain the integrity of their company and avoid scenarios such as lawsuits, investigations, and injuries.
Why is enterprise risk management important?
Enterprise risk management is applicable across all industries, from finance to healthcare, construction to marketing, and everything in between. ERM helps both public and private companies approach risk management with confidence. Companies that map out a comprehensive ERM framework can identify potential key risks, manage risks, and add the proper controls to reduce or eliminate the threat.
ERM also has financial benefits. Using enterprise risk management software helps companies weigh financial risks versus opportunities. When used well, the software can save businesses money by avoiding disruptions, leading to growth.
Types of risks enterprise risk management software manages
Using ERM software allows a company to ensure it's positioned to make informed decisions and meet business objectives. Below are some types of risks to consider when creating and executing an enterprise risk management plan.
- Financial risks are risks that directly relate to money. They’re often understood to include only downside risk or the potential for financial loss (increase in costs or decrease in revenue). All organizations must consider financial risks, as business goals can’t be achieved without sound financial management.
- Hazard risks refer to general health and safety risks that pose a level of threat to life, health, property, or the environment. Workplaces should identify hazards that could occur (biological, chemical, physical, and ergonomic), assess all risks, and implement appropriate measures to ensure employees feel safe and to keep hazards at a minimum.
- Strategic risks are risks that may affect the strategic direction of a business for better or worse. For example, factors like competitive pressure, consumer demand shift, and regulatory changes are all categorized as strategic risks.
- Operational risks are losses resulting from flawed or failed internal processes, human behavior, systems, or external events. Operational risks include a global crisis, data breach, or fraud.
Core components of enterprise risk management
An effective enterprise risk management process allows management to deal with challenges head-on and reassess strategy to ensure financial security for businesses. The ERM process includes six main components:
- Strategy/objective setting: Using an ERM framework helps ensure that a company’s risk management strategies align with the mission, vision, and core values.
- Risk identification: Anything potentially affecting business goals can be considered a risk. No matter the size of the risk, all should be identified and documented.
- Risk assessment: This step involves identifying each risk's likelihood and impact and analyzing current security controls.
- Risk response: Before developing a risk strategy, management must carefully review each risk's associated costs and benefits. Once a company establishes which risks could potentially affect the organization, it must determine how to respond. Four categories of risk response include avoidance, reduction, sharing, and acceptance.
- Communication: Educating and training employees about risks increases awareness throughout the organization. Additionally, communicating this information across all departmental levels helps reduce a company’s risk exposure.
- Risk monitoring: The ERM landscape is constantly changing. Therefore, monitoring is a continuous process. Constantly performing internal and external audits and monitoring data lets a company identify which risks are more significant than others.