ENTERPRISE RISK MANAGEMENT

Introduction

Enterprise risk management refers to a process that helps identify and address potential events to show the existing risks. It helps identify the strategic objectives and opportunities that help gain a competitive advantage across the business world. Due to this, enterprise risk management remains an essential strategic management tool for all organizations implementing the technology. It is because the technology enables easy monitoring of the ongoing business activities. There are various fundamental elements involved in enterprise risk management. The elements help ass the impacts or significance of the risks and results in the implementation of the best responses to risks.  During responding to a given response, it is essential to accept or tolerate the risk. It will help terminate or avoid the risks, share or transfer it through an insurance company or a joint venture.

Other methods such as internal control procedures can be used to mitigate the identified risks by implementing prevention activities. The process also includes the risk culture, risk strategy, and risk appetite in the enterprise risk management concepts. Through this, the organization will express its willingness towards taking a given risk (Olson & Wu, 2015). Also, enterprise risk management includes some essential elements used in governing its responsibilities. For example, the responsibilities of the management will consist of the identification of risk infrastructure, document the process in which it takes place, train team members, monitor and report all risk management activities. However, enterprise risk management has become effective since the year 2008 after the financial crisis incident. Thus, the technology works towards enhancing the profitability and success of the organization across various business institutions.

 

Why Should an Organization Implement an ERM Application?

The implementation of enterprise risk management application provides both qualitative and quantitative benefits for the business. The following are the reasons why an organization should implement the application of enterprise risk management strategy.

First, implementing enterprise risk management applications enhances the way organizations identify risks across their culture. The organizations implementing the technology always identify the increasing risks through great focus. Hence, this may result in increased risks levels which may involve all levels of discussions. The implementation of enterprise risk management has resulted in cultural risk management. By this, the risks can get considered more openly and creates a great risk management process. The risks discussions develop into a standard part where all required business processes and operating units help address a given risk. It is conducted in a formal way in which it helps manage the risk in a standard way (Bromiley, McShane, Nair & Rustambekov, 2015). Risk communication and discussion are also recognized as the process that offers information to the entire team. It also shares the risks that the organization experiences hence allowing better insights and decision making processes concerning all levels of management.

The second reason why an organization should implement the enterprise risk management application is its ability to standardize risk reporting. The technology supports the best structures used in reporting and analyzing risks. As a result, standardized reports help track enterprise risks, thus improving how the management department focuses. Thus, it becomes possible for the organization to develop the best ways to mitigate the risk by having the best solutions. Through a collection of various data, the organization's leaders understand different risks and the necessary actions. It is because the report aids in understanding the risk appetite, thresholds, and tolerance related to the risk. The primary value occurs when, the enterprise risk management is improved within the expected period, conciseness, and risk data flexibility. As a result, the required data to enhance the processes and improve decision-making capabilities get achieved. Therefore, enterprise risk management is said to assist the organizations' management in identifying and finding required results by sharing all data related to risks and evaluating them effectively.

The third benefit that an organization can gain from implementing the enterprise risk management application is the improved focus and perspective on risk. It means that the application of the technology will result in better ways of detecting potential risk events. As a result, they will provide a warning at the early stages before the risk occurs. Thus, it enhances the process of reporting and analyzing risks by offering the ability to monitor potential changes due to risk likelihood (Grace, Leverty, Phillips & Shimpi, 2015). It gives potential alerts to the organization whenever a risk is identified. During its operation, the enterprise risk management permits the complete methodology on which it views the risk. Unlike traditional risk practices, which focus only on acceptance, mitigation, and avoidance, enterprise risk management gives ways to enhance ways to prevent it before taking place. It means that the enterprise risk management process ensures that the management framework evaluates risks to increase competitive organizational positions. Therefore, it is an advantage to increase the positions to exploit and gain more outstanding market share.

The fourth reason organizations should implement enterprise risk management application is that it leads to efficient resource use. For example, organizations that don't implement the application face increased risks across their operational units. However, the implementation of enterprise risk management application helps enhance managing daily risks that an organization faces. It is achieved through improving the framework and tools used in risk management processes continuously. Through this, redundant processes enhance the efficiency of the organization. Furthermore, it is because they give the right and expected resources to help mitigate the risks.

On the other hand, implementing enterprise risk management leads to effective coordination of organizations policies and matter compliances. Different departments such as financial statement editors, regulatory examiners, and rating agencies use enterprise risk management applications to monitor and report risks incidents (Sweeting, 2017). The process involves the identification and controlling of data involved in risky activities. As a result, the information helps the organization reduce the efforts and costs of auditing and review processes. Thus, enterprise risk management enhances cost management as well as risk management related to activities in operation. In addition, the management of markets, economic conditions, competitiveness, and leverage conditions get enabled through risk management functions.

Finally, an organization should implement enterprise risk management to improve its ability to focus and manage risk. The reason why it is important is that the strategy develops leading indicators. The role of the indicators is to detect any potential and improve reporting and analysis process. During operation, the enterprise risk management tools help track potential changes and their likelihood to take place. As a result, the organization gets alert about any changes taking place and how to overcome risks. The enterprise risk management strategy makes a cost-effective method to deal with risks due to its ability to manage and terminate the risks before they fully impact the organization's system.

 

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

During its applications, enterprise risk management experiences the following challenges.

The first one is the risk consistently. It means that risks are different across various departments or from vendor to vendor. For instance, the vendor may face a risk that the information technology department doesn’t recognize as a risk. The challenge experienced is to maintain the consistency and application of the required risk terminologies. Therefore, it is challenging to identify the risk that comes across the different department. This risk can be solved by having each risk baked with correct instructions. It also requires the organization to have clear guidance on the existing law and regulations governing the organization. Thus, it defines a given risk through regulatory support.  

The second challenge is the qualitative and quantitative metrics. When assessing enterprise risk management, both qualitative and quantitative metrics get categorized as a challenge. It is because the qualitative method only generalizes the indicators of the risk. It means that it does not give the specific measure of a given risk (Pagach & Warr, 2015). Therefore, this makes them less preferred and the quantitative methods, which only help quantify risks. The quantitative metrics deal with the most priority risks and focus on achieving the desired cost. For the organization to overcome this challenge, it should assess all enterprise risk management preferred.

The third challenge that an organization may experience implementing enterprise risk management is managing the risk across the department. In implementing the technology, the organization can only evaluate and identify the risks but with limited capability. The software makes it possible for the management to understand and visualize the risk. It means that they will understand the type of risk expected, sharing it with auditors, regulators, and organizations directors. However, for the organization to overcome the challenges, it is essential to implement an automated system.

The other challenge that an organization experiences are risk reporting. It is quite challenging for an organization to manage two different types of challenges (Fraser & Simkins, 2016). That is, it is challenging to understand the kind of information that needs external and internal management. For example, it is difficult to deal with vendor and information department risks at the same period. On the other hand, it is easier for an organization to manage or handle external risks since there is no limitation of information sharing. They include financial statements, annual meetings, quarterly announcements, and also public presentations. Therefore, the challenge of communicating the risk is required to take part only during audit committee, management meetings, and reports received from a risk management database.

The other challenge is time constraint. In enterprise risk management, the time constraint only depends upon the organizations' willingness. That is, the organization should express its will to invest in risk management plans. It, therefore, means that for the organization to overcome the challenge, it must remain willing to make shifts to long term goals of risk mitigation.

What is Important for an Effective ERM?

During the process of implementing the enterprise risk management, the following elements are worth considering since they make it effective;

The business goals and strategy: During operations, the risk management department functions well with business strategies and goals. It means that the business strategy must integrate with enterprise management. Through this, it becomes possible for the organization to achieve the set goals. For example, the goals of an organization may include earnings stability, market share, investor returns, stakeholder services, and the value of the target market (Gatzert & Martin, 2015). In this, the organization can implement a strategy and determine the expected strategy to mitigate risks. Also, the firm must have indicators of its capability towards managing risks. With this element, the output of various strategies can get measured and calculated. Thus, it becomes more effective to use enterprise risk management when the risks are known. It is also true that enterprise risk management and strategic management play different roles and contribute to the entire business.

Risk appetite: The direction of risk in any organization is defined by risk appetite, and it shows the amount of risk the organization accepts to save. The risk appetite statement helps connect various business plans, strategies, risks and capital. It also helps in identifying the risk management process that influences the organizational culture. The operating style of any organization is also identified and analyzed considering the firms existing profile. Risk management through this element becomes effective since both risk capacity and tolerance get known during the development process of risk appetite. The risk appetite statement should therefore work under the management desires (Brustbauer, 2016). It should also get written into tangible tools such as books. Through a broad risk statement, the management team should communicate all risks and express various levels of organization risks. Therefore, organizations should avoid mixing various financial risks since there are different ways to solve the challenges.  

It, therefore, means that an effective risk appetite statement should communicate and give the best solution to a decision making process. The organization's management requires the breakdown of various metrics. Through this, the monitoring process on various risks such as credit and debts are well achieved. It means that the metrics must remain effective, and the organizations using them achieve the desired standards. An organization is required to embed the risk appetite and continuously monitor its operation strategies.

The other element for effective enterprise risk management is culture, governance and taxonomy. In this case, the risk appetite statement also plays a significant role in conveying culture, taxonomy, and governance. With these three factors, it becomes possible for an organization to plan for various ways to mitigate the activities related to risks. The risk management culture helps define various roles and responsibilities played by different individuals in the organization. The utilization of clear protocols within the organization leads to a successful implementation of enterprise risk management. Strong and organized protocols enhance the principles of risk management that govern both the management and team members. The evidence of the strong culture results in an open communication process thus assists in solving the problems. It allows decision making processes to manage in either way. That is, either from top to bottom or from bottom to top. On the other hand, governance results in a health enterprise risk management strategy because it focuses on operations and risky areas. From this point of view, the organization will effectively engage in training and support programs. As a result, the organization will have improved outcomes because its strategy enhances accountability and transparency. Good enterprise management helps understand the expected change resulting from a risk. Thus, it must help find and assess the impact brought by any risk.

Risk data and delivery: It is essential to understand this element because it helps implement enterprise risk management effectively. It deals with all types of data specifications, collections, distribution and aggregation. Therefore, it is expected to be strong to measure because it helps analyze, integrate, and translate data effectively. Having the internal controls will also assist the top management in reducing the inheritable risks at any level (Callahan & Soileau, 2017). Here, the managers can decide to use the undoubted tool to manage the risks before affecting the organization. The only risks that remain after implementing the internal controls are realist and can be managed using internal workings only.

Discuss at least one entire organization that has been effective in implementing an ERM framework/application.

One entire organization that has been effective in implementing an enterprise risk management application is Lego. LEGO is an organization that sells toys across different regions and countries. Since the organization does not operate equally across different nations, the enterprise risk management application is essential to implement. By implementing the strategy, the organization can solve various risks that occur in different organizations. For example, enterprise risk management keeps great awareness of external and internal risks that the organization faces. In this case, the organization builds and develops better methods to respond effectively.

On the other hand, the organization has been implementing the enterprise risk management framework to enhance its confidence towards achieving its goals. Before the implementation of the strategy, an organization must first identify and set its strategic goals (Bogodistov & Wohlgemuth, 2017). It means that enterprise risk management ensures that the organization operates under the set policies to meet strategic objectives. Since the organization operates in different countries, it requires enterprise risk management application. It will help enhance legal, regulatory, and reporting compliance across the organization. Hence, there is increased effectiveness and efficiency in how the organization operates.

Conclusion 

In conclusion, enterprise risk management helps businesses and organization in making better plans. The plans help them focus on identification, assessment, and preparation towards overcoming hazards, dangers, and potential disasters related to risks. Various types of risks may fall under physical or symbolic disasters and are experienced during organizational operations. Therefore, the enterprise risk management will play the following roles upon implementation;

First, it helps the organization understand the risks before responding to them. In this case, the organization will use the best way to handle and mitigate the risk. As a result, an organization will use the most effective process to enhance the protection system and its value. Second, it means that enterprise risk management positively manages the organizational goals. Some of the areas where the application of the strategy are essential to include organizational infrastructures, marketplaces, financial institutions and helps improve organizational reputation.

The enterprise risk management strategy is essential since it focuses on both the upside and downside of the risk. It means that risk management can focus on currency movement across financial markets, resulting in increased losses across supply chain distribution processes. It may at times focuses on damages resulting from human error where the top managers will evaluate and analyze ways to overcome the problem. However, the upside consequences that an organization achieves from implementing enterprise risk management include the following. First, it benefits from competitive advantages and opportunities related to risk management processes. It is because enterprise risk management application helps analyze both economic and political risks that an organization faces. Therefore, it ensures increased safety and protects an organization against the impacts of potential risks.  

Recommendations

Recommendation 1: The organization should determine the board risk oversight duties. During this process, the management will allocate duties to all members. Thus, it will be easy to understand and determine who can handle the risk. Therefore, it is a requirement that the management monitors and mitigates risks whenever possible. The committee will always ensure that they oversee all risks related to safety, health, and environmental issues. Therefore, the recommendation is to have the board develop and define their primary roles towards risk management.

Recommendation 2: Risk intelligence should get enhanced because it shows how organizations manage and respond to potential risks. The organization committee should therefore manage and provide transparent ways to manage risks. Thus, it will enhance the decision making processes based on the strategic goals. In this case, the board should develop a good relationship with the employees, resulting in improved communication. Effective communication across an organization results in improved output.

Recommendation 3: The organization must determine the risk appetite because it expresses the risk of the organization. Thus, the board should develop the risk appetite for the entire firm and understand all assumptions. After defining the appetite, the management team monitors and manages all emerging risks. Then, it helps evaluate the impact of the risks and changes required. It means that the management control plans should match the organization's risk appetite. As a result, the management will get prevented from taking excessive risks.

OUTLINE

Enterprise Risk Management

Thesis statement: Enterprise risk management remains an essential strategic management tool for all organizations implementing the technology

• Introduction
• 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 entire organization that has been effective in implementing an ERM framework/application.
• Conclusion 
• Recommendations