When it comes to identifying, assessing and controlling risks in your organisation, there are two options to choose from. If the traditional risk management vs enterprise risk management debate is still going strong among your colleagues, discover the key differences between these recognised approaches and find out why ERM has the edge in today’s risk environment.
What is traditional risk management (TRM)?
Traditional risk management is primarily concerned with loss exposures generated by hazard risk. It excludes exposure attributed to business risk and instead prioritises managing health and safety, purchasing insurance and controlling financial recovery.
Because it emphasises negative scenarios and has a limited scope, many organisations have found TRM misleading or lacking in its ability to provide sufficient insight into the true and evolving nature of risk. This makes it a shaky foundation for informed decision-making.
What is enterprise risk management (ERM)?
Enterprise risk management (ERM) is a strategic, organisation-wide approach to identifying, assessing and managing all the risks that could affect an organisation’s ability to achieve its objectives, including strategic, financial, operational and hazard risks. Rather than leaving each department to manage risk on its own, ERM coordinates risk management across the whole business, with senior-level oversight, and looks at opportunities as well as threats.
ERM was developed as an extension of traditional risk management, to elevate it to a strategic organisational level in response to a rapidly changing risk climate. It assesses risk through a much wider lens and supports a more holistic approach to decision-making.
From regulatory compliance to digitalisation, ESG and a sharper focus on business continuity, there have been several key drivers of enterprise risk management in recent years, changing how businesses tackle the many risks of the modern world.
Traditional risk management and enterprise risk management compared
The two approaches share many similarities, as both are designed to minimise the adverse effects of risk on an organisation, but they differ in the following ways:
| Traditional risk management (TRM) | Enterprise risk management (ERM) |
| Focuses solely on risks that can be insured, for instance, if a member of staff has a fall at work that causes injury, or a flood damages part of an office | Accounts for insurable hazards along with any other risk an organisation faces that no amount of money can remedy, such as a cyber breach that causes the loss of highly sensitive data and possible damage to brand reputation |
| Reactive and sporadic risk management that takes place only after an incident has happened, to prevent it from reoccurring | Proactive and consistent risk management that attempts to predict potential events before they happen, while considering impact and probability |
| Risk-averse mindset, viewing risks only as something that can cause the organisation to lose money | Risk-taking mindset, where the downsides and upsides of risks are considered to determine which pose an opportunity for growth and expansion |
| Fragmented or siloed approach where each department manages risk independently with no communication outside of their respective business units | Integrated and holistic approach where risk management is coordinated throughout the business with senior-level oversight to help better allocate resources and prioritise risks |
| Risks are mitigated based on each silo’s expertise and decision-making skills, with a one-dimensional assessment | Risks are mitigated in line with a robust, multi-dimensional strategy at enterprise-wide level |
| Disjointed activity with no connection to strategic objectives and little awareness of risk across the organisation | Risk is embedded as a culture and ingrained as a valuable decision-making tool to ensure business success |
| Follows basic and limited standards that may stall operations and provide minimal value to an organisation | Follows modern standards such as the COSO framework and ISO 31000, which complement the technical and soft skills required to extend risk management beyond a compliance-oriented exercise |
Why implement ERM?
Organisations today face more risks than ever before. Those that take a best-practice approach to the strategic, financial, operational and hazard risks affecting their business are far more likely to build resilience and achieve success.
Although traditional risk management still goes some way to protecting an organisation, ERM arguably outshines it with its ability to safeguard the entire company from potential threats, while keeping it aligned with its strategies and future goals.
ERM can also help to enhance business value by:
- Establishing a sustainable competitive advantage
- Optimising the cost of managing risk
- Helping management to improve business performance
Getting started
Just as Rome wasn’t built in a day, it can take time to implement a successful ERM strategy. A good starting point is to create an enterprise risk structure where everyone in the business follows a consistent process and policy.
ERM software is a reliable way to do this. It promotes collaboration across the organisation and helps you quickly establish mature risk management procedures. An automated solution such as Ideagen Risk Management can also give senior management real-time visibility of all company risks, improving agility and increasing productivity in the long term.
Over time, as a top-down approach to risk is enforced, a cultural shift will begin to take place. The wider workforce will see the benefits of managing risk, and the value of doing so proactively.
Now that the traditional risk management vs enterprise risk management debate has been settled, discover our latest white paper: Who owns enterprise risk?
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