Why Is Risk Management Important?

Enterprise risk management done correctly can mitigate different types or levels of risk. Depending on the industry and group, risk management should address the organization’s business needs and respond to any risk event.

At best, risk is challenging to handle at any business level. But enterprise risk management streamlines the company’s risk portfolio.

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What Is Enterprise Risk Management?

Enterprise Risk Management (ERM) is the core principles and practices to guide a company through uncertain events. It provides a response and strategy to help the business when an event occurs. Today, many Fortune 50 companies have a Chief Risk Officer (CRO) or equivalent. The role of a CRO is to establish an effective risk plan and response for the organization.

“To get started on an ERM plan, businesses must define their core operating objectives and then identify the risks that exist to these core operating objectives and strategies,” writes Matt Kunkel, CEO of LogicGate, in an article for Forbes. “An ERM plan should seek to mitigate these risks.”

Successful risk management practices should not be complex. Unfortunately, organizations tend to overreact every time a risk event happens. Rational, simple decision-making before, during, and after something occurs will help deliver a solution that works and keeps the business operating.

Risk Management Team

Over the past several years, the need for internal risk management teams has become vital to organizations’ success. Along the same lines, executive team buy-in is critical to the success of risk management. Executives should participate by asking the right questions to the core risk management team.

If the enterprise risk team is merely considered a project team, the enterprise effort will fail.

If the enterprise risk team is merely considered a project team, the enterprise effort will fail. Enterprise risk teams are not project teams; they need to be aligned and directed by the executive team and the board as a continuous function of the company.

Enterprise Risk Management Programs

Understanding risk management programs will help corporations execute better responses to multiple threats. The following are a few basic things needed for success.

Industry Requirements

Industry requirements assess the business area and then match the appropriate risk training or certifications. The risk management team should always consider sector-appropriate requirements when putting together a plan.

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Training

Risk training is essential for companies. Further, the training should be tiered to meet the requirements of each area. Follow-up training is key to keeping everyone aware of risks and mitigating them for each department.

Companies can escalate the risk training when an event occurs. A good rule of thumb is to assess the risk event and ask the right questions before reacting, especially if it is a new unknown risk.

Certifications

Risk certifications should be a requirement for individuals directly responsible for risk management. Be careful to balance the business needs to what’s required.

Maintain Focus

Remember, focus on the right things. Reactionary risk management causes chaos in the entire organization. If the staff senses something is wrong, they will react accordingly.

Communication

Have a simple, structured communication and response plan. When a risk trigger is determined, a direct response will generate a higher degree of success. Overcomplicating the message and response will cause more confusion.

Risk Management Consulting Firms

Be careful when contracting an external party to handle ERM. Outside firms should guide and continue to strengthen the businesses risk management for the company. Firms offering an end-to-end solution need evaluation and accreditation before providing any long-term solutions.

Landmines and Rabbit Holes

There are landmines and rabbit holes with every risk management effort. Stepping back to reassess a situation may take time away from the response, but will ultimately generate better results.

Landmines explode when something triggers the risk. Most risk teams spend too much time outlining the worst-case scenario. Avoiding risk landmines by focusing on the short-term cause and effect will simplify the process.

Rabbit Holes start as productive initiatives and end up as something else. If the risk discussion becomes circular, table it and move on. Surprisingly, looking at another subject may answer the response intended by the rabbit hole.

Implementing ERM

Filling a business’s need for enterprise risk management will provide an excellent roadmap to meet expected and uncommon threats. As such, ERM should be required practice for all organizations.

Have a team or a plan in place to meet the threats of the 21st century — don’t wait until an event occurs. By being prepared, any business can bounce back from a risk event.

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Kent Barnett
Kent Barnett has been an instrumental professional in the fields of business, technology, and entrepreneurship. He founded his first company creating an organization dedicated to believing that technology and business must align for success. Mr. Barnett now lives in the technology corridor of Northern Virginia, where he has continued to build his expertise while providing advisory services to many national and international companies.

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