During the past several years a great quantity of external factors increased overall interest in such an important organizational ability as ERM, which stands for an enterprise risk management. Although ERM has a huge impact on the complete process of managing, there are still a lot of CEOs and other managers who have a vague image of this aspect. That’s why we decided to explain what is enterprise risk management, how you can identify, calculate risks and come up with an appropriate decision of their mitigation and also which benefits it can bring into the whole managing process.
Enterprise risk management definition
Different research works offer us a bunch of complicated and twisted definitions. However, in simple terms ERM can be described as an efficient way of handling risks across the enterprise using for that purpose a risk management framework. The framework can alter from organization to organization, but basically it requires people with defined duties use entrenched processes and convenient technologies to minify risk.
Enterprise risk management process
Enterprise risk management for dummies approach will help you understand the basic principles of ERM and the way it actually works.
First, you should be acquainted with core components of risk enterprise management analysis, which are:
- Identification of the company assets
- Designation of assets financial worth
- Identification of asset’s vulnerabilities and associated menaces
- Calculation of risks for each of assets
Once all indicated things were done, risk analysis team can start considering mitigation measures, possible benefits and losses in order to finally come up with the decision that they will offer to the senior manager as the best way to manage this particular risk. As soon as senior manager obtains all required data he can make his decision about this specific risk. He may choose among following options:
- Diminish the risk by applying appropriate measures
- Accept the risk
- Avoid the risk
Although senior manager has their own authority to make decisions upon risks, they usually follow solution offered by the risk analysis team and provide necessary financial support for the performance countermeasures. Still manager should remember that countermeasures don’t provide an opportunity for total risk elimination; they just diminish it to an appropriate risk level. That’s a simplified image of the enterprise risk management process.
Benefits of enterprise risk management
Risk management for enterprise is spreading slowly through the business-world. This slow-motion tendency is affected by the fact that a lot of companies just can’t fully imagine possible future benefits of enterprise risk management use. In order to change this situation we want to present you a list of main perks your company obtains thanks to the enterprise risk management implementation:
- Increase of resources use efficiency: ERM use on the everyday basis improves frameworks and tools of the day to day risk management. This amelioration leads to avoidance of managing the same risks over and over again and therefore to more efficient use of required resources.
- Improvement of credit ratings: ERM implementation raises overall confidence of risk assessment agencies which results in lower capital requirements. Agencies confidence also has a positive influence on the enterprise position in credit ratings.
- Increasing of shareholders value: ERM has not only influence on the credit ratings and therefore on the organization borrowing ability. It also determines capital cost and as a result shareholders value.
- Standardized risk approach: In major part of companies managers and board can have different view on risk approaching. ERM allows standardizing risk approach and as a result improving risk management and its feedback.
- Early risk identification: ERM helps predict future possible risks and diminish them with fewer resources due to the early identification. ERM also allows monitoring vulnerabilities pattern and predicting possible changes of already existing risks.