Enterprise Risk Management and Its Importance in Business

Enterprise Risk Management and Its Importance in Business


As a strategic management discipline, ERM is gaining widespread recognition in the fast-paced and consistently evolving modern business landscape. Check out this post to understand what ERM is and why it is important for businesses.

In the past, risk was seldom the topic of discussion in board rooms. But as the corporate landscape has evolved significantly in the last decade or so and competition is at an all-time high, risk exposure is turning into a strategy among organisations to become more competitive.

Due to this, businesses are now devoting more of their manpower and resources to risk management. This has made Enterprise Risk Management (ERM) a critical management discipline for modern businesses. What is ERM? Why the widespread adoption of ERM frameworks among global businesses? Take a look,-

What is ERM?

In simple words, Enterprise Risk Management or ERM is a strategic management discipline that can be used by businesses for building a common risk management framework. The same framework can be relied upon by a particular business for organisation-wide risk management.

While the framework varies between businesses, it generally involves the effective use of tools (technologies), rules (repeatable processes), and people (defined individual responsibilities) for managing and mitigating risks.

Importance of ERM

There are several reasons that make ERM essential for modern businesses, irrespective of their industry, size, or geographical location. Here are some of the top reasons-

Securing the First-Mover Advantage

Business fundamentals are changing, and they are changing fast. Organisations are experimenting with their business models, using technologies, expanding overseas, launching innovative products/services, etc., to benefit from the first-mover advantage.

But any move, be it in a new product category, technology, geographical location, or internal functioning, generally has known and unknown risks. It is with the help of an ERM framework that businesses can secure this first-mover advantage and prepare themselves for internal and external threats.

Pro-Active Risk Mitigation

The overall well-being of an organisation depends on its ability to prevent and mitigate risks. If the organisation is unable to prepare for such risks, it will not be able to respond effectively when a risk event occurs. ERM prepares you for such risks and provides detailed information about how to prevent and manage them.

For instance, if a company depends on a single high-risk supplier for its raw materials, an ERM framework will detect this risk and help the organisation develop other sources for the required raw materials to minimise the degree of risk.

Easier Access to Loans and Insurance

It has also been witnessed that organisations with a practical ERM framework find it easier to secure loans. The presence of an ERM strategy means that a business is prepared for eliminating and managing risks. This offers a certain level of confidence to the lender as the chances of that business running into financial problems and being unable to repay the loan is lower.

Similarly, ERM can also help reduce the premium of various insurance products that businesses generally purchase for financial security. However, insurance providers generally analyse the implementation and the effectiveness of the ERM framework in place before offering policies with a reduced premium.

Protection from Cyberattacks

Cybersecurity threats are now one of the biggest causes of concern for businesses. Organisations of every size need an effective strategy in place to prevent such attacks, which can have a severe impact on their financials and reputation.

Most Enterprise Risk Management (ERM) strategies emphasise on cyber risk management to mitigate such risks and help the organisation with an effective plan that can be brought into motion in case of a cyberattack.

ERM for Effective Risk Management

Improved awareness of the known and unknown risks an organisation faces and its ability to respond to them is now critical for corporate success. With the help of an effective ERM strategy, such risks can be mitigated, and an organisation can remain prepared for the unexpected.

While ERM has proved its worth over the years, many businesses struggle to identity risks, build a custom ERM strategy, and implement it effectively. The expert assistance of a professional ERM advisory firm can help eliminate these challenges.