Traditional risk management vs enterprise risk management: Which approach is best?
08 June 2021
When it comes to identifying, assessing and controlling risks in your organisation, there are two options to choose from. Though if the traditional risk management vs enterprise risk management debate is still going strong amongst your fellow 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)?
The traditional risk management practice is primarily concerned with loss exposures generated by hazard risk. This method excludes from its remit all exposure attributed to business risk and instead prioritises managing health and safety, purchasing insurance and controlling financial recovery.
Due to its predilection towards emphasising negative scenarios - not to mention its somewhat limited scope - many organisations have found TRM to be misleading or lacking in its ability to provide sufficient insights about the true and evolving nature of risk. Thus, making it a shaky foundation on which to make informed decisions.
What is enterprise risk management (ERM)?
ERM, however, has been developed as an extension of traditional risk management to elevate it to a strategic organisational level in response to a rapidly changing risk climate.
Not only does it assess risk through a much wider lens but it also facilitates a more holistic approach that looks at opportunities as well as threats.
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 - a practice that has revolutionised how businesses tackle the many risks of the modern world.
Traditional risk management and enterprise risk management compared
Although the two paradigms share many similarities in that they are both methods designed to minimise the adverse effects of risk on an organisation, 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, whilst 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 an ironclad multi-dimensional strategy on an 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?
Without a doubt, organisations today are faced with more risks than ever before. Yet those who employ the best practice approach to addressing the strategic, financial, operational and hazard risks impacting their business are far more likely to build resilience and achieve success in the modern world.
Though traditional risk management still goes some way to protecting an organisation, ERM arguably outshines this model with its ability to safeguard the entire company from any potential threat, whilst ensuring that it stays aligned with its strategies and future goals.
If that were not enough, 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
Just as Rome wasn’t built in a day, it can take time to implement a successful ERM strategy. A good starting point would be to create an enterprise risk structure where everyone in the business follows a consistent process and policy.
The sure way to facilitate this is through ERM software, which can not only help to promote easy collaboration across the organisation but also quickly instil mature risk management procedures. In addition, an automated solution can provide real-time visibility to senior management 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. This will enable the wider workforce to see the benefits of managing risk as well as the value of doing so proactively. A feat that can only be achieved through ERM.
Now that the traditional risk management vs enterprise risk management debate has been settled once and for all, discover our latest white paper: Who owns enterprise risk?
Who owns enterprise risk?
Discover ERM insights and experiences from our customer interactions & make recommendations for good practice for auditors and risk managers.Find out more