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Risk Management: How to Use ERM to Plan for the Worst

June 22, 2009

If you think risk management involves only insurance, it’s time to reconsider your stance. During this era of financial uncertainty, globalization and technological change, companies are being called on to manage an assortment of daunting risks.

Many companies have turned to Enterprise Risk Management (ERM), an integrated, companywide system of identifying and planning for risk. ERM presents the most viable solution to the numerous and varied risks that companies face.

Assessing the risks

Risk management takes many forms, and the number of strategies available to deal with risk may seem overwhelming. However, there are some best practices you can follow in building sound, companywide risk protection.

Start by making the decision to proactively manage your company’s risk. This isn’t a decision you can make by yourself: You’ll need to sell your colleagues on “risk religion,” from the top down. After you’ve gained commitment from key players, spend time assessing the risks your business may face.

The first task is to develop a comprehensive list of risks. Then determine the impact and likelihood of each one. Obvious risks may include: • Financial perils, • Information technology attacks or crashes, • Weather-related disasters, • Regulatory compliance debacles, and • Supplier/customer relationship mishaps.

And, because every business is different, you’ll likely need to add other risks unique to your business and industry.

Developing a plan

Recognizing risks is only the first phase. Citigroup spelled out a lengthy roster of risks in its 2007 10-K, but that didn’t keep its top managers from heading to Congress in search of a financial bailout in 2008.

To truly address the risks, clarify what your company’s appetite and capacity for each risk is, and develop a cohesive philosophy and plan for how they should be handled. Ivan Inventor, for example, would face a number of perils involved with a new high-tech product, such as: • Product liability, • Protecting intellectual property, • Shortage of raw materials, • Lack of manufacturing capacity, and • Safety regulations.

Before rolling out the product, Ivan’s team will need to spend time developing and analyzing worst case scenarios for each risk, and then craft a plan to survive each one.

The key to success in the planning stage is conducting a detailed analysis of your business. Gather as much information as possible from each department and employee. Depending on your company’s size, engage workers in brainstorming sessions and workshops to help you analyze how specific events could alter your company’s landscape.

In addition to developing strategies, assign someone to manage each of the various aspects of risk. In other words: Each risk should have an “owner.” If the list of risks seems overwhelming, manage the largest ones first and work your way down the list.

Bringing ERM into the culture

The ultimate goal is to embed ERM in your company culture, weaving it into every aspect of the business. Beware of top-down impositions during this phase. Squelching an otherwise innovative company culture through ERM is actually one of the risks you face!

ERM software (including company “dashboards”) can be helpful in the risk management process, though not a prerequisite to success. Frequent monitoring of important metrics is an integral part of successful ERM, however.

Making change happen

Implementing ERM, to the point where it’s part of your company DNA, won’t happen overnight. With persistence, however, you can train your team to perceive risk management not as a separate function, but as part of daily life. Even though this won’t guarantee success in today’s markets, it can enhance your chances.

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