Small enterprises are unique in multiple ways. Unlike multimillion-dollar companies that boast financial prowess and extensive market knowledge, SMEs have limited resources. Although small and large businesses might encounter similar threats, the magnitude of these risks might be more severe in smaller enterprises than in their larger counterparts.
The unique vulnerability to risks necessitates the implementation of solid mitigation strategies. That means any small business that wants to remain relevant in the market must invest in enterprise risk management.
What is Enterprise Risk Management (ERM)?
Enterprise risk management entails planning, organizing, directing and controlling organizational events to reduce or avert the damaging effects of various risks on business continuity. ERM program focuses on all the potential risks a business can face, including financial, operational, strategic, security and reputational risks.
ERM is becoming more crucial in business operations as regulatory requirements tighten. In some industries, the board of directors must review and report on the effectiveness of the business’ risk mitigation strategies. Potential investors also evaluate an enterprise’s risk management procedures and policies before committing their resources to reduce the likelihood of losses. So, why is enterprise risk management essential for a small business?
Importance of Enterprise Risk Management
A robust risk management program is essential for enterprise continuity as it increases risk awareness across the organization and enhances compliance with regulatory standards. Again, applying consistent procedures and controls envisaged in the ERM promotes better performance by instilling confidence in the business’s strategic objectives and improving operational efficiency.
With the pure brick-and-mortar business model being a thing of the past, companies have focused primarily on meeting IT compliance obligations to evade the security risks associated with cyberattacks. However, a good risk management culture should target risk reduction in all business aspects. ERM helps the organization to target risk reduction in all areas leading to more profitability and overall security.
Requisites for Building an ERM Program
For an enterprise risk management program to be successful, the following practices and procedures are necessary:
- Inclusive leadership and governance. Instead of leaving risk managers solely to such a massive task of risk monitoring and reduction, the governance model should encompass all the critical business areas. This should include senior management and top organizational elements such as security, IT operations, and legal compliance.
- Risk and performance assessment. Risks vary in severity as some can interfere with your company’s ability to achieve its goals while others have a negligible impact on business operations. ERM requires you to identify the risks that put your organization’s relevance in the market at stake. Then you can assess each risk level, labeling them as low, medium or high. After evaluating the risks, determine the appropriate response to every threat, whether transfer, avoidance, or acceptance, depending on the company’s risk appetite. Remember to share the risk portfolio with all the concerned parties.
- Comprehensive strategy. The strategy needs to focus on the internal controls and policies for all potential risks, including security and operational foci like system configuration.
- Seamless communication and reporting protocol. ERM requires collaboration like any other management role. Therefore, the organization must establish a culture of information sharing on risks and risk management among all the relevant stakeholders. You should communicate risks as soon as they emerge, providing management strategies.
- Lastly, strategic ERM requires a procedure covering internal and external vulnerability evaluation and management. This allows monitoring of adversaries and other risk exposure factors that can affect the enterprise or stakeholders.
Note: Enterprise risk management is a continuous undertaking that needs to grow and evolve as the risks change over time. Therefore, you should be ready to review, revise and update different elements of your ERM program as the situation demands.
How Does ERM Impact Risk?
While risk reduction is a major focus of an ERM program, it is not the ultimate goal. The definitive target of any enterprise risk management strategy is value addition, in which risk reduction plays an important role. But sometimes, the organization has to embrace ‘good’ risks instead of avoiding all threats to achieve this goal of adding value.
For instance, any business that aims to thrive in the current market must maintain a reputable cloud presence. However, the cloud increases your vulnerability to cyberattacks. Instead of avoiding cloud services because of the associated risks, ERM dictates that you develop and implement an agile cloud security program.
According to the company’s objectives and risk appetite, ERM provides a strategic and harmonized approach to risk, allowing the business to take advantage of particular opportunities when available. Instead of ruining the company, ERM turns the threat into a recipe for success.
Thus, ERM mitigates potential bad risks and the losses that might ensue while leveraging on ‘good’ risks for business success.
Enterprise Risk Management Frameworks
Like large businesses, small enterprises need an ERM framework to manage their risks effectively. The framework outlines ERM strategy and processes, easing the mitigation of internal and external risks. As an organization, you can design your ERM framework that uniquely suits the company risk landscape following this guideline.