Empowering Organizational Vision through Effective Risk Management

Empowering Organizational Vision through Effective Risk Management

Introduction

Risks are invariably present in all business operations evoking the risk professionals to implement Enterprise Risk Management (ERM). ERM is a detailed process that involves identifying and addressing prevalent events that can potentially result in threats. Such control measures make it possible to exploit the available opportunities and accomplish the organizational strategic goals. Upholding a transparent risk culture, philosophy, and strategy makes it convenient for a company to gain a competitive edge in the industry.

Some effective and validated measures of handling risk include acceptance, transfer, avoidance, or substitution. The management is obliged to develop risk architecture, management protocols, and follow-ups to ensure that an ERM attains its intended purpose. Risk management is inherently meant to evaluate threats and opportunities rather than creating bureaucracies. ERM has gradually replaced the traditional approach whereby risks would be viewed from a personal perspective. Therefore, it is imperative to consider the reasons for articulating ERM in a firm, the possible challenges and solutions, factors to consider ineffective ERM and an example of a real organization where it is applied.

Reasons for Implementing an ERM Application in an Organization

An ERM application plays a crucial role in enhancing the efficient use of resources in a company. It provides an effective platform that manages the day-to-day risks consistently. As such, it becomes easier to administer operational units with fewer individuals, unlike in the past. An ERM application further terminates the redundant processes making it more practical to allocate the right amount of resources in risk mitigation, thus eliminating wastage.

In addition, an ERM application facilitates strategic planning, which is coherently impactful in a business. It makes it possible to identify the external threats that would otherwise inhibit the functionality of an organization. This is attained through the development of strategic initiatives that address the threat. As already stated, the application aids in the exploitation of competitive opportunities necessary to a firm. This may include identifying and venturing into a new market segment of initiation of new products and services. In the long run, a firm gains increased sales and market share while achieving other objectives.

Kreiser (2016) notes that the ERM application is pertinent in creating a more risk-focused culture. This is because once risks are focused at the senior level, they are coherently discussed across all levels of management. Such a culture shift ensures that everyone is aware of the prevalent threats and opportunities and consequently addresses each component. Risk discussion and communication should not always be perceived as a way of informing the senior management but also as a strategic mode of enlightening employees. This approach helps in gathering insights and proposing decisions beneficial to a company. Eventually, the daily activities shift to a risk-focused environment.

Beasley (2020) suggests that an ERM application contributes to regulatory compliance within a firm. It’s typically monitoring and controlling of risks amounts to business compliance across various units. As such, less effort is channeled into ensuring that a company adheres to the standard rules and regulations. For this reason, it has become of great interest among financial statement auditors, bond rating agencies, and regulatory examiners. They refer to the monitoring and reporting data generated by the application to draw conclusions. This milestone is a momentous achievement as they do not have to spend excess time ensuring that an organization remains compliant.

Besides, ERP applications are preferred due to their ability to boost the effectiveness and efficiency of operations (McShane, 2018). The platforms are readily customizable, making them more fitting to any organization. Therefore, each enterprise ends up enjoying the benefits of real-time risk analytics and automated group-wide processes. Besides, its prowess to serve from a machine learning perspective makes it possible to handle a wide range of events. Businesses that incorporate ERP systems are more innovative and embed other digital business models. This approach ensures that the entire firm is automated and well-coordinated for effective and efficient operations.

The need to improve focus and perspective on risk is another factor that fuels the urge to implement an ERP application (Kreiser, 2016). It provides pivotal tools and indicators for detecting potential adverse events as a strategic way of developing a viable solution. The role of these metrics doubles up to analysis, reporting, and providing the likely variations in threat vulnerability. As a result, it becomes practical for an organization to modify its risk profile to adapt to evolving events. ERM applications have further changed the common notion whereby risks would be addressed through acceptance, mitigation, and avoidance. It enables the evaluation of a risk to achieve competitiveness in the long run. Therefore, it has turned out to be the best option for handling the recurring risks.

According to McShane (2018), an ERP application is essential in providing better customer services. This is because it leads to faster response time when dealing with clients and increases order accuracy. The potential of committing an error is minimized as all moves are well-calculated, making the business more productive. At the same time, a company gets in a better position to acquire customer information and gain on-time deliveries. Therefore, its use and relevance in modern firms keep increasing over time.

Challenges and Solutions to Implementing ERM

Even though ERM was coined in the 1990s, it is unfortunate that businesses still struggle with its implementation. The most dominating hurdle is risk definition, whereby firms fail to stipulate a consistent risk nomenclature (Webster, 2016). This issue makes it inconvenient to ensure successful incorporation of the program due to unclear expectations. It can be resolved by selecting a minimum of one representative from each business unit to establish a clear risk management framework. The groups should define the pertinent risks with elaborate guidelines and eventually come up with a risk inventory. Ranking the threats makes it possible to proceed further with the implementation process.

Fraser and Simkins (2016) explain that assessing ERM’s value is an imminent challenge in the contemporary world. The implementation cost seems to be unjustifiable, unlike the traditional risk management models, which would be assessed through metrics such as Return on Assets (ROA), Return on Equity (ROI), and Risk-Adjusted Return on Capital (RAROC). The value drivers articulated in ERM are less prescriptive, creating a value proposition gap. The ultimate solution to this crisis is to include the traditional business case in evaluating ERM’s value. In addition, it is advisable to implement the program on a pilot basis for a gradual transition.

Webster (2016) adds that ownership issues are often unclear as they are disputed at audit committee, management, and council levels. The lack of clear possession constrains not only the implementation phase but also the long-run operation. This impediment can be overcome by assigning ownership to ERM administration with close supervision from supporting departments, including audit, legal, and treasury. The oversight function is quite essential and must be delegated by competent individuals in the risk management field.

The risk assessment method is a further hindrance that obscures the successful implementation of ERM. Enterprise risks are typically assessed using strategic mechanisms such as interviews, surveys, and historical analysis. However, each technique has its set of pros and cons that determine its suitability in specific situations. A company might find it hard to decide on the most effective method and thus fail to utilize an ERM as expected. The solution to this barrier is ensuring the used approach is founded on corporate culture, surveys, and organizational familiarity with risk handling. Face-to-face interviews should be encouraged to understand individual concerns, especially through group interviews.

Fraser and Simkins (2016) show how the challenge of time horizon impends the successful implementation of an ERM system. The authors suggest that varied organizations have diverse intents in the program, making it hard to develop a universal time horizon for implementation and assessment. Some companies use long-term time horizons while others employ short-term due to their different program objectives. This issue can be resolved by embracing a rolling time horizon such as 12-18 months to handle yearly evaluation imitations. Companies are advised to adopt hybrid/long-term solutions for the effective administration of the ERM plan.

Finally, it is unclear whether organizations should use quantitative or qualitative metrics to assess risks. The quantitative approach is preferred due to its prowess in providing specific scores and its efficacy in risk aggregation. On the other fold, the qualitative method is better in facilitating open interpretation and description. As such, firms are often at a crossroads on which metric to apply. The solution to this issue is by transiting to the quantitative risk measurement using a phased approach. It uses narrow risk ranges from low to medium to high, making it possible to categorize risk severity.

Effective ERM

An effective ERM is backed by several elements, as discussed in this section. Resolver (2021) proposes that adopting an ERM across all departments is important for its optimum performance. It is critical to keep all the stakeholders engaged and ensure that they buy into the idea of having an ERM system in place. Having everyone on board prepares all departments for the change such that people will not just dive into the idea without adequate enlightenment. There should be training and awareness to convince people why the system is important to the firm. Imposing the program within an organization without explicit consent from the employees and fellow executives leads to its failure.

Consistent improvement and evaluation are also vital for the smooth running of an ERM plan. Innovation is limitless and thus must be emphasized in the application’s lifetime as a strategic way of coping with the evolving technology. Those with significant ownership of the ERM must constantly seek new ways to do things differently for their firm to remain competitive. The failure to update the program is a sure way of creating its downfall in the short run.

Gaining support from the top management is a priceless action that deserves to be considered in all instances (Yazid et al., 2018). The appreciation of the system by the upper-tier management determines its emergent relevance and sustainability. It also provides confidence to engage a wide array of employees and lower-level managers. The management further determines the resources and effort channeled to the initiative. Therefore, gaining its support is an assurance that the system is aligned with organizational goals and objectives. Embedding the ERM into the fabric of a company should be a holistic process that acknowledges the executive’s support.

Measurement of results is also essential for the effective running of ERM. Resolver (2021) acknowledges that it is relatively impossible to manage what has not been measured. For this reason, it is recommended to measure the functionality and productivity of an ERM frequently. This is a sure way of confirming the program is operational and productive as intended. The measurement can be done by benchmarking against firms with mature ERM applications, leveraging technology, or monitoring the key metrics. This assessment helps compare what the software has been doing versus what it is supposed to do.

Budgeted resources are also critical in implementing and upholding an effective ERM application. Generally, it can barely survive without the adequacy of allocated resources. Some firms tend to perform risk assessments after the planning and budgeting phase is over. This is not advisable since there will be minimal or no resources to designate to the system. The best practice is to implant risk assessment concerns in the planning and budgeting stage for fair distribution of funds. The executive management team must serve in the best interest of risks as they can potentially paralyze a functional organization.

According to Yazid et al. (2018), the risk management policies in an organization are central determinants of ERM’s effectiveness. The application operates best where there are well-defined operational risk management processes, policies, and procedures. Supportive policies promote the relationship between the company’s strategy and employees’ involvement, commitment, and personal training. On the other hand, harsh policies suppress the smooth coordination among organizational stakeholders and practices. It is imperative to implement comprehensive practices that cater to daily risks and workplace interconnections.

A Real Organization that Has Been Effective in Implementing ERM

ERP has been applied in various sectors such as banking to protect operations and finances from potential hazards. TD Bank is one of the firms firmly founded on the idea of ERP in its basic functions (Smartsheet, 2021). The bank’s ERP is based on two pillars, namely risk appetite statement and risk management framework. The risk appetite statement ensures that the organization is ready to engage in risky ventures, provided it attains its growth goals and objectives. On the other fold, the enterprise risk framework acknowledges the prevalent risks of developing aversive risk procedures in return.

However, the ERM system in the US-based organization is inclined only to handle risks that adhere to specific conditions. First, the risk must not expose the bank to major loss from a single threat. In addition, the risk to be addressed should comply with the stipulated organizational strategy. This implies that the bank can comprehend and manage the risk without much strain. Third, TD indulges in risks that do not harm its reputation and brand in the long run. The three criteria set the pace on various risks, including credit, strategic, insurance, regulatory market, and liquidity. The implementation of ERM has enhanced the company’s stand and competitiveness over the years.

Mars Inc. is a multinational consumer packaged goods company that has immensely invested in ERM systems (McShane, 2018). It began and completed the piloting and deployment of the process from 2003 to 2012. Participants were requested to identify and rank the potential risks based on their probability to aid in ERP development. They were then urged to present their proposed mitigation measures, and color code them according to their likelihood. By doing so, Mars developed an application that would manage the current and future risks in the best way possible.

The organization’s ERM dashboard is color-coded with green indicating low risk, yellow meaning medium risk, and red illustrating high risk. Any unit that portrays the red theme is supposed to be communicated upwards upon its detection. The successful implementation and running of the ERM is attributed to several factors. For instance, the ERM developers were extremely objective and never overpromised on what they could deliver. As such, there was no pressure and over-expectations from the stakeholders. Besides, the program keeps evolving as the business changes for continuous improvements. The establishment of the system is also oriented toward gaining strategic and operational objectives instead of compliance. This motive made it convenient to have a focused and strategic application. During the development, the team engaged and surveyed management teams, business units, and board advisers. To date, Mars Inc. continues to enjoy the benefits of an effective and sustainable ERM.

Conclusion

ERM is exceedingly crucial in achieving organizational objectives by seizing opportunities and managing risks. Its relevance and application in modern organizations have grown tremendously. It promotes the efficient utilization of resources, promotes strategic planning, embeds a risk-focused culture, and increases regulatory compliance. However, the system is confronted with challenges and solutions in equal measures. This is because some companies find it hard to define risks, assess ERM’s value, agree on ownership issues, and determine the most effective risk assessment method. An effective ERM is usually adopted by all departments, subjected to improvements, supported by top management, and well-budgeted. Prominent firms such as TD Bank and Mars Inc. have effectively conformed to ERM applications. The systems are steadily dominating most companies, and their supremacy is expected to increase in the future.

References

Beasley, M. (2020). What is Enterprise Risk Management (ERM)? Enterprise Risk Management

Initiative. Retrieved from: https://erm.ncsu.edu/library/article/what-is-enterprise-risk-management

Fraser, J. R., & Simkins, B. J. (2016). The challenges of and solutions for implementing

enterprise risk management. Business Horizons, 59(6), 689-698.

Kreiser, J. (2016). Five Benefits of Enterprise Risk Management. Reducing Risks. Retrieved

from: https://www.claconnect.com/resources/articles/five-benefits-of-enterprise-risk-management

McShane, M. (2018). Enterprise risk management: history and a design science proposal. The

Journal of Risk Finance.

Resolver, (2021). How to Develop an Effective ERM Program and Prove the ROI. Governance,

Risk and Compliance. Retrieved from: https://www.resolver.com/blog/develop-effective-erm-prove-roi/

Smartsheet, (2021). Enterprise Risk Management Case Studies: Heroes and Zeroes. Retrieved

from: https://www.smartsheet.com/content/enterprise-risk-management-examples

Webster, E. (2016). Common Challenges and Solutions in ERM Implementation to Improve

Municipal Clean and Administration Process. Presentation of Themes. Retrieved from: https://slideplayer.com/slide/6598108/

Yazid, A. S., Hassan, M. F., Mahmood, S., Rashid, N., Salleh, F., Ghazali, P. L., & Sadad, M.

(2018). Organizational Factors in Enterprise Risk Management Effectiveness: A Conceptual Framework. Journal of Academic Research in Business and Social Sciences, 8(11), 1437-1446.

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Risk management is one of the most important components in empowering an organization to achieve its ultimate vision. With proper risk management culture and knowledge, team members will be “speaking” the same language, and they will leverage common analytical abilities to identify and mitigate potential risks as well as exploit opportunities in a timely fashion. In order to consolidate efforts, the existence of an integrated framework is crucial.

This is why an ERM is necessary for the fulfillment of any organization’s goals and objectives. In your final research project for the course, your task is to write a 7-10 page paper discussing the following concepts:

Introduction – What is an ERM?

Why Should an Organization Implement an ERM Application?

What are some Key Challenges and Solutions to Implementing an ERM?

What is Important for an Effective ERM?

Discuss at least one real organization that has been effective in implementing an ERM framework/application.
Conclusion – Final thoughts/future research/recommendation