Sunday, June 14, 2020

The Important Components of Enterprise Risk Management Framework

A contemporary organization's success is, in large part, driven by how wisely it takes risks and how effectively it manages the risks.

With rapid changes, the exponential growth of information, and fierce competitions, organizations across vertical sectors all face unprecedented levels of risks and opportunities. In fact, the risk is the unwanted subset of a set of uncertain outcomes, and risk-taking is an aspect of social behavior.

A contemporary organization's success is, in large part, driven by how wisely it takes risks and how effectively it manages the risks. Here is a set of important components of the enterprise risk management framework.

Risk taxonomy & identification: Risk taxonomy is a scheme for organizing and classifying information, objects, forms, and other items of risk management. The greatest risk in the organization will be a real business/reputation issue that is not being properly identified or managed. There are strategic risks, operational risks, and systemic risks, etc. Strategic risk is associated with specific long term goals or objectives, the possibility of risk being cascaded to all entities in a given industry, function, or partnership. It is broader involving many unknowns and unknowable because it is about the future. Systemic Risks are risks external to the organization, such as political or geographical environment, industry, etc. Operational risks could be the risks that are related to daily business activities, etc. To survive and thrive for the long term, organizations should deal with different types of risks skillfully and also grasp business opportunities timely.

In fact, risk identification is a crucial step in managing risks. But in practice, trying to identify all possible risks, the organization perhaps ends up in a huge list that may not be practical to assess. An important aspect of identifying and managing risks is to ensure that risks are identified, minimized, and controlled within acceptable "risk-appetite." As long as risks have been identified and agreed with stakeholders as per business needs, then you can take risk models that effectively predict, optimize, and consider a continual and sustainable approach with multi-faceted perspectives, and the specific threshold for justifying opportunities and business outcomes.

Quantification of risks: Uncertainty and ambiguity are the key challenges for business management today. Assuming that in any risk management program, all the known and potential risks would have been covered and managed, and over a period of time, you are also able to manage uncertainty and avoid the business pitfalls on the way. The difference between uncertainty and risk is that risk is quantifiable while uncertainty is not quantifiable or hasn’t yet to be quantified. Organizations with the right risk attitude and aptitude can use both quantitative and qualitative factors to assess risks under a valid risk evaluation model. The goal for risk management measurement is to build a solid understanding of decision support and manage risks effectively.

In a step-wise manner, to manage uncertainty and improve risk management effectiveness, first, you have to be able to visualize and identify uncertainty. Second, to identify that, it is necessary to convert uncertainty to risk through the application of quantification methods in order to be able to manage uncertainty as a risk. In practice, the enterprise risk management would be making continuous improvement based on the feedback from the risk management process and reaching the next level of risk management maturity.

Risk governance: Risk governance is the guiding force behind risk management, ensuring boundaries are appropriately set and adhered to achieve risk management effectiveness. There are downside risks or upside risks. The latter being the uncertainty about whether projects will succeed while the former may not have any positive gain but is simply about loss prevention. That risk review should reveal where or when the high-risk events might cause damages or whether the highest risks are operational risks that need mitigation urgently or there is a problem in governance.

The risk manager should make an objective assessment of their risk management systems and tools by asking: How robust is the organization's risk assurance system? What are the risk management blind spots and what are the root causes? Is it because your risk management program is immature and shortsighted? What to do with this in such circumstances? Governance and risk management must be integrated and aligned with the business culture and processes to improve the overall GRC maturity. The organizations with greater governance discipline usually result in significantly better performance than their competitors, and they are doing better in well-embedding risk management mechanisms into key business processes seamlessly.

The efforts on managing risk holistically or in a more integrated fashion are critical in the long run. Risk management, or at a higher level, risk intelligence becomes a strategic imperative for business execution. Because without good risk management, the opportunities which it creates cannot be properly transferred into value. As financial performance is highly correlated with the level of integration and coordination across GRC disciplines. With an effective risk management framework and a set of great tools, risk management can be integrated across departments and functions and operate in a complete cycle at all levels of the organization to realize high-performance business results.


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