What Is Enterprise Risk Management? Why You Care and How To Use It
Everyone knows that some risks are worth taking. Yet, how are you supposed to determine which risks to take and when so that your business keeps moving forward?
Look at Tesla. The electric car solar and clean energy company made $721 million in 2020. However, this was its first profitable year despite being a significant market player for most of the 21st century. Why? Their products were new. Groundbreaking. Risky. The company only took off after people saw the proven benefits of the products and realized that investing in Tesla was a risk worth taking.
This idea also translates to other industries, where a healthy amount of risk is necessary to see success. By defining risk management and improving your process part by part, you can better manage risk and keep controllable incidents from happening. In addition, effective risk management frees you to focus resources where they’re needed most while also avoiding the consequences of poor planning.
What Is Enterprise Risk Management?
It’s impossible to eliminate risk events entirely. Every company is likely to experience an incident or breach at some point. It’s risk management, or how your company prepares for that event, that makes sure you can respond to these occurrences well. Enterprise risk management, or ERM, provides a clear framework to manage potential threats and respond to incidents.
ERMs often fall under one of four frameworks. Each contains the same building blocks but highlights key differences to protect against a specific type of risk. How do you know which to choose? Each of the four frameworks has a different focus and goal, making it simple to find the best one for you. These frameworks are:
- The Casualty Actuarial Society (CAS) ERM Framework: Defines and unifies different aspects of risk and relies strongly on actuarial science
- The Committee of Sponsoring Organizations of the Treadway Commission (COSO) ERM Framework: Emphasizes the importance of risk consideration in the strategy-setting process
- The International Organization for Standardization (IOS) ERM Framework: Focuses on developing consensus-based, market-relevant standards to support innovation on a global scale
- The Risk Management Society (RIMS) ERM Framework: Combines strategic risk management (SRM) and enterprise risk management (ERM)
Understanding why it’s crucial to minimize risk and knowing the building blocks of risk management can help you choose (or build) the right ERM to best meet your needs.
The Importance of Protecting Against Risk
The more exposed your business is, the more likely that it will be attacked. Establishing solid risk management procedures reduces your vulnerabilities and keeps your business safer, faster. In addition, knowing what vulnerabilities leave your company most exposed helps better protect it even if you aren’t in a position to put an established ERM process in place.
Threats evolve quickly and result in new ways to target gaps in your risk management. The senior managing director of Accenture Digital Risk and Compliance, Steve Culp, says, “Maintaining business operations in an increasingly volatile and complex business environment calls for proactive, integrated solutions encompassing people, data, and infrastructure.” You need to shift from reacting to risk events to proactively planning to minimize anticipated damage. For example, would you rather implement a base standard for all firewalls after you experience a breach, or beforehand, so one never happens?
Adopting a proactive risk management mindset benefits your company by keeping it safer from risk events. Without this approach, you’re likely to experience more threat events and feel the aftershocks of that incident long after the initial breach. The bigger the incident, the larger its aftershock, and the more it affects your company as a whole.
Potential consequences of an inconsistent risk management mindset include:
- An unstable control environment and misuse of resources
- More loss of product, intellectual property (IP), or company information, and even employee trust
- Miscalculated risk tolerance and poor decision making that leads to more incidents
- A poor understanding of current risk management trends and how to use them to combat evolving threats
Thankfully, each of these consequences can be avoided by understanding the four building blocks of risk management that make ERM frameworks consistent and successful.
Four Building Blocks of Risk Management
Each ERM framework uses four distinct building blocks of risk management. Examining and improving each part on its own will undoubtedly enhance risk management. However, the goal should be to put all four pieces together to form a cohesive foundation for your ERM framework. This is how you’ll get the best protection.
1. Maintaining a Control Environment
A controlled environment outlines how operations, compliance, and conduct should be handled. It also explains how to enforce and update expectations to maintain whatever environment you create. Your controlled environment is the foundation of all other risk management efforts and determines how risk events are identified and addressed. If you don’t start with a clearly-defined foundation, all other ERM efforts will be less effective.
Perhaps you have a defined control environment but experience more protocol or employee violations than you should. These are obvious signs that employees either don’t understand or don’t respect your controlled environment. Making improvements to your controlled environment doesn’t require a complete overhaul of your current process. Instead, individual changes make a big difference. Clearly communicating expectations, conducting better risk assessments, trying a new strategy, and tracking the results of your changes work together to best support the other risk management efforts in your ERM framework.
2. Developing Loss Control
Loss control is the risk management practice of keeping your assets safe if a breach or incident puts your control environment at risk. It also cuts down the number of events that do happen by anticipating areas of weakness. Having an ERM framework without a loss control strategy is like installing a fence with a gate but never closing it. Backing-up essential company data and safeguarding classified information offer control over who can interact with your data, when they can use it, and how they use it.
Understanding loss control and how it fits into an ERM framework isn’t helpful unless you know the steps to build one and better protect your business. Using a step-by-step approach to develop it lets you thoroughly examine all product aspects and address them thoughtfully.
Start by telling your team how to find and report potential risks. This takes minimal effort and is highly effective. Building the foundation for loss control changes through clear communication ensures all other ERM measures are set up for success.
Next, assess your current risk level. With a little digging, past security incidents (and how they were handled) can help you learn from the past mistakes and identify current areas of weakness that pose the highest risk.
Then, gather a few key team members and start thinking of ways to solve the problems identified during risk assessment. Once you have a plan in place, you need to implement it. Share it with your employees, so everyone knows the rules and procedures they need to follow.
Finally, use the success metrics established during planning to see when your loss control strategies are effective and when they’re not. Good and bad results are helpful: they provide valuable information that improves your evolving process.
3. Using Risk Intelligence
You’ve established a defined, controlled environment and created safeguards to protect it from known risk — but what about unknown risk? This is when risk intelligence comes into play. Helping track, collect, and sort risk-related information, risk intelligence lets you know which risk events can be prevented. For the events you can’t stop, risk intelligence helps you know which to respond to first. For example, a firewall breach and potentially lost data would be immediately reported and tagged as an urgent ticket so your team knows a qualified technician should immediately respond.
The more you know about a potential threat before it happens, the more accurately you can build a plan and assemble the right team to respond. This saves time and money you would otherwise spend with a more reactive response. All these advantages work together to offer a clear picture of current and future risk so you can accurately embed relevant risk management procedures throughout your greater company and ERM framework.
4. Looking to Future Threat Solutions
Risk management trends — and the advice of the experts using them — let you alter your ERM framework to cover new threats before they even occur. However, one building block is useless without the other. A strong intelligence arsenal works hand-in-hand with predicting and optimizing industry trends because it’s often risk intelligence that forces the innovation of new risk management approaches.
Watching industry leaders use these new trends lets you see their effect in a risk-free environment and gauge how a similar approach might best fit into your ERM framework. Experts agree these are some upcoming trends to keep an eye on over the next few months:
Using automation and AI to combat risk
Technology like artificial intelligence and automation help detect and address risk better by identifying and following risk events to reveal weaknesses and why attacks were possible in the first place. Its ability to take on mundane tasks also frees up internal employees to spend time on high-value tasks where their productivity is more valuable.
Incorporating behavioral monitoring software to detect risky behavior
As global circumstances change, people’s responses to these changes do, too. You can gauge the effectiveness of your evolving workforce’s attitudes with new software based on behavioral science. The more you know how people think about and respond to change, the better you can predict risky behavior and keep risk events from taking place.
Collecting around-the-clock risk intelligence to stay informed of current risks
24/7 data streams keep you from questioning the most recent intelligence collection (which could be weeks or even months old). Instead, each search is guaranteed to return current results and that moment’s risks.
Focusing on incident preparation instead of post-breach response
Thanks to new technologies like automated ticketing, response services, and better activity monitoring, risk management has shifted from reactive to proactive, preventing incidents along the way.
Translating risk tolerance into healthy boundaries instead of red flags
Better incident detection and prevention mean risk can tell you how well your preparation and response efforts are working and how much risk they’ll allow you to take safely.
Whatever your goal, looking to future threat solutions and how the experts use them as the final build block of ERM development lets you add new risk management efforts to your framework more confidently.
Taking the First Steps Toward Better ERM
Maybe you’re not in a position to overhaul your ERM framework and hire an experienced risk officer to guide the process. On the other hand, perhaps you’re developing the first risk management process for your company. Or you recently experienced a risk event and know that something needs to change to prevent a worse one. Whatever your reason for implementing an ERM framework or improving the building blocks you have, you’ve already taken the first step toward change by reading this article.
The second step is realizing you can’t make this change alone. Expertise from risk officers and security managers is more available than ever before with easy-to-use risk management solutions. Resolver’s enterprise security risk management software connects incident data to risks, so you can uncover risk intelligence and deliver business value to your organization.