Enterprise Risk Management – Benefits

At what level should ERM be integrated with business processes – this is a dilemma that many organizations face when implementing an ERM.

People on the ground often have some understanding of risks that their departments face; and the quantifiable benefits that a separate ERM program might bring into the enterprise is often debated.
 
Let us start with the basics: What is ERM or Enterprise Risk Management?
The Wikipedia definition is: Enterprise risk management (ERM) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives.
 
Value is a function of risk and return. Every decision either increases, preserves, or erodes value. Given that risk is integral to the pursuit of value, strategic-minded enterprises do not strive to eliminate risk or even to minimize it, a perspective that represents a critical change from the traditional view of risk as something to avoid. Rather, these enterprises seek to manage risk exposures
across all parts of their organizations so that, at any given time, they incur just enough of the right kinds of risk—no more, no less—to effectively pursue strategic goals. This is the “sweet spot,” or optimal risk-taking zone, referred to in exhibit 1.
 

 
That’s why risk assessment is important. It’s the way in which enterprises get a handle on how significant each risk is to the achievement of their overall goals. To accomplish this, enterprises require a risk assessment process that is practical, sustainable, and easy to understand. The process must proceed in a structured and disciplined fashion. It must be correctly sized to the enterprise’s size, complexity, and geographic reach.
 
Within the COSO ERM framework, risk assessment follows event identification and precedes risk response. Its purpose is to assess how big the risks are, both individually and collectively, in order to focus management’s attention on the most important threats and opportunities, and to lay the groundwork for risk response.
 

 
Risk assessment is all about measuring and prioritizing risks so that risk levels are
managed within defined tolerance thresholds without being over controlled or forgoing desirable opportunities.
 
Some of the benefits that an organization can expect to gain out of an ERM framework include:
1. Increased competitiveness
2. Matured decision making process based on clearer understanding of risks and new opportunities
3. Better handling of uncertainties, shocks and unpleasant surprises – the risk assessment process involves mapping of risks.
4. Supports strategic business plans
5. Promotes efficient use of resources
6. Helps management in re-assuring stakeholders
 

References:
1. COSO.org
2. Wikipedia

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