An Introduction to Enterprise Risk Management

When we think of risk in our personal lives, we usually think of something that is negative or something that we should not do. When someone says they are doing something is risky, what they are saying is that we should not do that thing. However, things work differently in the corporate world. Businesses know that risk is inevitable, and risk does not necessarily have a negative connotation when talked about in business terms.  

There is an amazingly simple reason that businesses are much more confident when it comes to risks; businesses know that every action they take carries an inherent amount of risk. There is no such thing as an action that has no risk, but there are actions that carry a lower risk and can therefore be safer to take for organizations. This is the guiding principle and philosophy behind enterprise risk management software. The idea is not to avoid risks because avoiding risks is impossible for business. The idea is to be able to accurately understand the risks carried by different actions that the business can take, so the business will easily be able to choose the best possible solution.  

Another important thing to note is that businesses also need to take actions to minimize or mitigate the risks they know about. That is the major difference between the way we manage risk in our personal life and the way risks are managed at an enterprise level. Well, we need to worry about our own risk ourselves, most businesses have a dedicated team to manage the risks that the business faces. This team or department is responsible for helping the rest of the organization minimize and mitigate risks.  

How Enterprise Risks Are Managed  

The dedicated team or department that manages risk in an organization keeps an eye on the processes that are going on throughout the organization. The risk team is also responsible for detecting and assessing all the risks that affect the organization. Therefore, a lot of effort is put into risk discovery and assessments. Organizations work with stakeholders from different departments because stakeholders can provide insights into their department’s processes and operations. This makes it easier for businesses to detect the maximum number of risks possible.  

Once the risk team is identified the risks that affect the organization, the next step is to assess all the risks. Risks are assessed based on 2 main criteria: the probability of the risk and the severity of the risk. The probability of the risk factor describes the chances that the specified risks will actually affect organization. No one can predict the future, but businesses generally have an idea of how risky an operation is. For example, rain or stormy weather can impact the supply chain of many different organizations. While businesses cannot predict when it will rain, they do have a general idea of how often it rains in the area in which they operate. Therefore, they have an idea of the probability of rain happening in that defined time period.  

The severity of the risk factor describes the damage that will be caused if the risk is actualized. There are some risks which are very probable however their effect on the organization is not too large therefore these risks are not a priority for the risk management team. On the other hand, if a risk is so big that it can bankrupt organization then it will be given prioritization even if the chances of it happening are much lower.  

Once the risk team has prioritized the most important risks the next step is to keep a close watch on these risks. Businesses usually define limits for risks; they know their leverage and they understand the amount of risk their business can withstand. The risk management team make sure that the risks it has directed do not cross any of the limits defined by management. the risk management team also makes sure that it puts in the right controls to manage and mitigate all the risks that it has directed. A control in the field of risk management is a procedure or a process that is put in place to ensure that a defined risk is being effectively managed. for example, if we are headed out and we understand there are chances that it might rain, then we carry an umbrella with us. The umbrella is our control, it makes sure that if it does rain then we will be protected from being negatively affected by it.  

Andrew Hunt writes on topics of risk and compliance in banks and financial services. He is currently writing for 360factors.

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