Risk Management in Organizations
Introduction
Enterprise risk management (ERM) is referred to as a process and method that an organization uses to manage risks and opportunities that relate to the success of its objectives. Also, it is a business strategy that aims at identifying, assessing, and preparing for any threats, hazards, dangers, and potential risks either physical or figurative that are likely to interfere with the objectives and operations. The process of ERM involves understanding, evaluating and addressing risks to ensure organizations accomplish their set objectives and goals. The process also involves assessing threats to identify the market opportunities and risks for the welfare of the company
Why Organizations Implement ERM
As the risks in businesses continue to increase, many organizations have seen the necessity to implement a formal system of risk management (Sprcic, Kozul, & Pecina, 2015). ERM is an effective program that organizations use to manage their risks as well as maximize their opportunities. Both private and public firms have greatly improved through the risk management program. Implementing ERM in organizations helps to manage risks in the entire organization by using a collective framework of risk management (Ibrahim & Esa, 2017). The framework usually involves rules, people, and tools. Notably, employees with defined duties use established rules and tools to mitigate the risks.
Challenges and Solutions to Implementing ERM
Many organizations experience a lot of challenges while implementing ERM. promoting a healthy threat management culture is the main challenge in ERM implementation. The objective of the ERM is to ensure everyone is responsible for risk management (Negus, 2010). Implementation challenges are likely to occur due to its anticipatory nature of decision making (Karnes, 2017). ERM involves strong leadership, timeous reporting, insightful real-time data, and commitment of time and resources. The absence of these requirements leads to implementation challenges that alter the success of ERM. Some implementation challenges and their solutions include;
Defining Risk Consistently:
A risk may be considered differently by the vendor management department and the IT department. Consistent risk definition is imperative for the success of the ERM program. A noble automated ERM solution helps to build the framework of the enterprise risks that involves terminology and definitions
Accessing ERM Value
Many companies encounter the challenge of evaluating the potential value of implementing the program. However, some companies manage risks due to the implementation of ERM programs that involve risk assessment processes, governance concerns, as well as business integration.
privilege:
The program of ERM allows the management to determine the value of the organization’s risks. As the risk data becomes dollar-based and event-driven, the lawyer of the company raises issues of risk circulation to external auditors, regulators and constituents. To solve this problem, the organization should be able to protect sensitive information by reporting risk data without providing products or legal cases.
Importance of Effective ERM to Organizations
An ERM framework guarantees security for the organization and it minimizes threats hence help achieve the objectives of the organization. An effective ERM ensures that the firm is equipped with the appropriate requirements that help to identify and eradicate risks that are likely to compromise the operations of the business ( Mohammed & Knapkovaa, 2016). Additionally, an effective ERM helps in handling all risks and uncertainties that are likely to arise and affect the normal operations of the business. In today’s business, managers should be able to identify the value provided by the ERM and how it ensures better perception and management of opportunities and risks. Organizations that incorporate ERM programs find both quantitative and qualitative benefits such as improved data quality, improved risk reporting, cost-effective method, systematic risk management, and regulatory compliance (Mohamad, 2013). Other benefits of an effective ERM to the organization include; increased access to capital: an effective ERM helps a business to acquire the ability to pay their financial obligations. Moreover, reduced insurance premiums: it helps companies that require a lot of insurance by reducing the premiums. The company also benefits from reduced manual reporting time.
GMS (Gemini Motor Sports) is one of the organizations that has become successful with the implementation of the ERM program. GMS is a public company whose headquarters are located in Brazil that manufactures off-road and on-road recreational vehicles that they sell through a merchant network in Canada and Brazil. The chief financial officer of GSM was accused of overseeing the progress of the ERM framework in the company. After implementation, the ERM team identified and prioritized the crucial risks disrupting the company. After focusing on potential events and implementing the ERM program, the company has emerged as one of the successful companies worldwide.
Conclusion
Enterprise risk assessment can be referred to as a business strategy whose aim is to assess, identify, and prepare for any threats and potential disaster that is likely to interfere with the objectives and operations of an organization. The ERM process involves evaluating, understanding and analyzing threats that may interfere with the smooth running of the business as well as hindering the achievements of the organization’s objectives. Organizations should, therefore, consider using ERM to be able to manage their risks and maximize their opportunities. Further, organizations should implement an enterprise risk assessment for its various benefits. Despite the many benefits the ERM has on organizations, implementing the program has several challenges. However, organizations should be able to tackle these challenges and look for ways to solve them. Additionally, an effective ERM plays a critical role since it helps organizations to handle uncertainties and risks that are likely to emerge and affect the normal running of the firm.
References
Mohammed, H., & Knapkovaa, A. (2016). The Impact of Total Risk Management on Company’s Performance. 19th International Conference Enterprise and Competitive Environment 2016, ECE 2016, 10–11, 10-11.
Ibrahim, F., & Esa, M. (2017). A STUDY ON ENTERPRISE RISK MANAGEMENT AND ORGANIZATIONAL PERFORMANCE: DEVELOPER’S PERSPECTIVE. 184-196.
Karnes, G. (2017, July 26). The 3 Common Challenges of ERM. Retrieved from https://www.corporatecomplianceinsights.com/3-common-challenges-erm/
Mohamad, B. (2013, April 24). Enterprise risk management application implementation case study. Retrieved from https://www.pmi.org/learning/library/enterprise-risk-management-application-implementation-5831
Negus, J. (2010). 10 Common ERM Challenges. Risk Management.
Sprcic, D., Kozul, A., & Pecina, E. (2015). State and Perspectives of Enterprise Risk Management System Development – The Case of Croatian Companies. Procedia Economics and Finance, 30, 768-779.