Why Risk Assessment is the Mainstay of an Effective ERM Program

All too often organizations have considered risk assessment as a necessary evil for complying with authorities, rather than as a strategy that will contribute to the financial success. Unprecedented levels of business complexity, due to the constantly changing global socioeconomic landscape and regulatory requirements, are forcing firms to manage enterprise risk in a consistent and efficient manner. An effective Enterprise Risk Management (ERM) program significantly improves efficiency, resiliency, opportunities, business performance and stakeholder value.

The success of an ERM program depends on a robust risk assessment process, with a primary goal of risk identification, followed by implementation of mitigating controls to suppress identified internal and external threats to the organization. Internal risks originate from factors within a firm, such as people, processes and infrastructure. External threats may comprise geopolitical and economic threats, changes in regulations and legislation, and competition. Further, risks can also be divided into two types: strategic risk and operational risk. Strategic risks could adversely impact the achievement of entire organizational objectives, whereas operational risks cripple the growth planned for individual programs or project management objectives.

In risk assessment, which evolves and matures over time, the process is as important as the outcome that can be stretched indefinitely. Because it is cyclical in nature, the facilitation of timely and relevant risk information is a constant objective for the enterprise. For the risk analysis to be an ongoing process, it must be rooted within the business sequence that starts with planning and ends in evaluation before going through the levels of process and execution. When efficiently embedded into an organization’s business process, risk management helps in: Identifying, Analysis, Control and Monitoring – broadly the four key steps in the risk assessment process. Once a risk is identified, the likelihood and severity are analyzed. The results enable the initiation of countermeasures followed by formation of future prevention strategies and contingencies in the case of an event. Risk assessment is the mainstay of an effective ERM program.

Businesses that proactively analyze the outcome of their risk assessment process set a foundation for building an effective ERM program. These businesses gain competitive advantage of capitalizing on opportunities that risks often throw, resulting in measurable success. On the other hand, the absence of an ERM program exposes businesses to easily avoidable events where the cost of failures outweighs the investment for implementation.

Steps to an Effective ERM Program

ERM ensures that the business has a process in place to define objectives, and provides insights into overcoming obstacles that come on the way of achieving the goals. Here are some vital steps to an effective enterprise risk management:

• Involvement of management
• Context
• Categorize
• Prioritize
• Efficient tools
• Assessment and opportunity

A diverse management team among the organizations leaders, should actively participate in qualitative assessment to foresee emerging risks, while collectively embracing the ERM as a critical element of the sustained success of the enterprise. Then an initial evaluation of the level of risk to the organizations assets should be followed by detailed quantitative analysis from the risk management team. Thereafter, context – objectives, risk appetite, and tolerance – of the risk process should be established to enable the creation of a strategy and assess risk on its current and potential significance. Determining the business entity for the scope of the context may encompass the organization as a whole, a specific location, critical process, a business unit or all of the above. Now the potential list of threats should be categorized into areas which may include the sub categories of internal and external risks (mentioned above). Then the risks should be prioritized on the basis of potential levels of harm each of them can inflict.

Utilization of efficient and strategic tools may include the use of predetermined checklists, risk register or risk management software that includes all the steps in one solution. It could also include the use of different techniques of identification which range from running workshops to studies of previous events. Both quantitative and qualitative risk tools should be used. Assessment in this context means identification of areas where systems and processes are necessary to support the fulfillment of business objectives. While most of the risks will portray threats, a diligent analysis will reveal opportunity for growth and investments. Understanding and maximizing the connections of the ERM to the enterprise’s overall GRC (Governance, Risk and Compliance) through managing the information produced and acting, when necessary, within the guidelines set forth by management or the local governments and international standards will reinforce the controls and standards established.

Despite being highlighted as an indispensable task, disappointing enterprise risk management practices are more common than quality execution. There are businesses that avoid failure and succeed in adverse circumstances. Be the catalyst in allowing your organization to become one of them.