Understanding the Importance of Enterprise Risk Management
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Understanding the Importance of Enterprise Risk Management

By CIOReview | Monday, January 10, 2022

An enterprise risk management strategy can help a company stay one step ahead of the risks that could affect its current and future operations.

FREMONT, CA: For many, 2020 served as a wake-up call. Businesses discovered the hard way if they had the plans to survive the unknown due to the interruptions created by the Covid-19 outbreak. Businesses confronted numerous distinct obstacles in a year marked by disruption and uncertainty. And as firms dealt with these obstacles, the concept of resilience gained traction.

Resilience within an organization begins at the top with an enterprise risk management (ERM) plan. ERM is a plan-based business strategy that tries to detect, assess, and prepare for any dangers, hazards, and other potential sources of physical and metaphorical disasters that may impair an organization's operations and objectives.

By implementing an ERM strategy, a business may keep one step ahead of the risks that could jeopardize its operations in the future. This is a critical component of resilience, as the objective is to maintain corporate operations in times of hardship. Naturally, an ERM approach begins with a plan. An ERM approach consists of four primary activities: risk identification, risk assessment, risk management, and risk monitoring throughout time.

Constructing an ERM Plan

To begin developing an ERM strategy, firms must first define their primary operational objectives and then identify the risks to these objectives and strategies. For instance, one of the most significant hazards confronting firms today is a digital risk. A risk management strategy should aim to mitigate these hazards.

The pandemic heightened the need for digital change. Digital interactions are becoming the key mode of communication for organizations both internally and internationally. As the number of digital interactions increases, so do the associated risks. In 2022, digital business endeavors will not cease; rather, businesses will continue to invest in digital transformation. This means that basic operational objectives will continue to vary, as will risk exposure and priorities. An ERM approach should consider this and be adaptable and evolutionary.

Consider the Following Risks

Once a business has identified the risks that potentially jeopardize its primary operating objectives, it must analyze systemic or secondary risk drivers. These are not imminent dangers. Long-term planning is required for operational resilience and risk management. As the recent Covid-19 outbreak demonstrated, it's difficult to predict such a disruption. Still, there may be components of this disruption that firms may have anticipated, such as established work-from-home rules or expectations surrounding communication without in-person meetings.

Secondary risk factors for pandemics are not the only ones to consider. The environmental risk was a growing concern for businesses in the World Economic Forum's Global Risks Report 2020. Climate change is one of the most serious external dangers facing businesses. While climate change may not pose an immediate threat to an organization, as the temperature heats, a warehouse located in a more flood-prone area places a business at risk of supply chain disruptions, property loss, and more. Climate change risks must be thoroughly recognized for an enterprise to endure disruption.