A Comprehensive Guide to Enterprise Risk Management (ERM)

Gowsika

Gowsika

Mar 06, 2024

A Comprehensive Guide to Enterprise Risk Management (ERM)

Companies set themselves varying scalability goals. And as they grow, so do their operational complexity, customer bases, and the amount of data they process on a daily basis. These factors bring with them a greater level of risk—enterprises need to process a larger amount of data, disclose and uphold data subject rights, and keep all of this data safe from internal and external threats.

This also means their risk management and mitigation initiatives need to scale with the business. Enterprises need to take a more holistic, risk-first approach to tackle the more complex problems that traditional risk management strategies cannot cope with.

Enterprise risk management is different from traditional techniques—it brings much more to the table than just information security while equipping enterprises to grow without being crippled by the fear of risk.

But, what exactly is this holistic approach to dealing with “all” risks? Let’s dive deep to understand what it is, what it isn’t, how it is helpful, and how to get started.

What is Enterprise Risk Management (ERM)?

Enterprise risk management (ERM) is a robust technique adapted by organizations to identify and address all potential organizational risks strategically to achieve a company’s objectives. This helps in business continuity and gives a competitive edge.

Now, organizational risk sounds vague and is a broad term. It can encompass various concerns ranging from safeguarding clients’ sensitive data and ensuring employees’ safety to protecting the organization from financial fraud and meeting the security regulatory requirements. So, what is considered a risk varies from one entity to another.

In the ERM approach, organization-wide surveillance is important to manage risks across the enterprise. The framework helps bring together the responsibility of risk management into a single fold rather than delegating the responsibilities to different teams.

An effective ERM framework ensures business continuity, allowing businesses to meet their obligations to clients, employees, partners, and suppliers, even in case of incidents.

How is ERM different from Traditional Risk Management (TRM)?

Traditional risk management is a subjective assessment that focuses on individual risks within a specific business unit. While ERM takes a holistic approach in utilizing data-driven insights to assess risks across the organization.

Another key difference is that ERM is an enterprise-wide responsibility while TRM is a dispersed responsibility. So, ERM is not a substitute for TRM but a scaled-up version of it to manage risks in a much more organized and efficient manner.

Why is Enterprise Risk Management Important for Organizations?

An enterprise risk management approach helps businesses prepare efficiently for potential threats and risks in this digital landscape. Enterprises should adapt to an ERM framework to:

  • Deal with all types of risks: Businesses face a really diverse and wide range of risks and dangers, which can result in financial crises, exposure of sensitive data, reputational damage, and more. An ERM framework prepares you for all types of risks.
  • Respond to risks in a timely manner: With ERM, corporations can identify and address risks they face in a timely manner. As it is a systematic approach, it helps in managing and prioritizing different risks so they don’t become liabilities.
  • Increase business success rate: The primary focus of an ERM model is to increase the organization’s chance for success. Such a proactive approach is vital in the long run to always keep the business on track to meet its goals and objectives.

To add to this, as per IBM, it takes an organization 197 days to discover a breach and 69 more days to contain or mitigate it. Companies that were quick to react with an effective response plan and took less than 30 days to contain the breach saved over $1 million compared to ones that took more than 30 days. That’s why an efficient risk management plan is important as the company sees the bigger picture with an ERM framework in place.

How to Create and Implement an ERM Framework?

The ERM framework is not a one-size-fits-all model. The practices to create and implement the ERM framework varies based on the organization’s size, business goals/objectives, and risk preferences. However, organizations should keep the key principles of ERM in mind while devising a custom framework for their organization.

How to Create and Implement an ERM Framework?


In addition to the components discussed above, organizations can follow the steps/best practices below to create and implement ERM strategies.

1. Designate Your Team

Firstly, choose the team members to get started with your ERM framework and related strategies. This should comprise people from different departments and business segments of the organization, such as Legal, HR, Cyber Security, IT, and other executive professionals.

Once you create the team, you have to assign risk management tasks/areas to different people. The roles and responsibilities will differ for the board of directors, senior managers, risk management professionals, and other employees and the level of involvement will vary.

2. Define the Meaning of Risk 

Every company has different perceptions of risk as well. So, you need to define what the central perception is and align everyone with it. For this, have a strategic discussion with the board/management and put up your company’s risk profile, ensuring that teams are able to arrive at the risk profile.

3. Outline Your Action Plans 

This action plan will have steps for establishing different processes. Organizations need to have effective compartmentalization of the process. This includes having a strong and detailed plan of action along with proof-of-concept (POC) for different crucial components such as:  

  • Risk identification
  • Risk assessment
  • Incident management
  • Damage mitigation
  • Disaster management
  • Disaster recovery
  • Reporting and notification

This ensures that everyone understands their roles in the action plan (about what to do and when to do it). Once the designated team understands these challenges and roadblocks, the organization is ready with a response plan for different levels of risks. 

4. Communicate Priorities

Risk prioritization is one of the most important aspects of the ERM framework. To ensure business continuity, organizations need to bucket risks based on severity and then act on high-impact ones first. In case of incidents, for everyone to act collaboratively by staying on the same page, risk priorities should be appropriately communicated to the stakeholders and relevant employees.

5. Leverage Tools & Technologies

With modern-day technologies and tools, many ERM processes can be automated. Organizations can utilize modern tech and tools to understand their security posture and risk environment in a few clicks. You can also leverage tools to effectively implement internal controls and monitor the performance of your ERM framework.

As security and compliance are intertwined, you can utilize a smart compliance automation solution like Sprinto that helps you monitor your risk environment, implement security controls, and meet the various compliance requirements for a strong security posture.

Learn how Sprinto can help with ERM and compliance! – Talk to our experts now

6. Define Metrics, Monitor Framework, and Improvise

A set of metrics should be defined to effectively analyze the performance of your framework and understand whether the ERM objectives are being met. This is crucial for constantly adhering to the ERM strategies, as metrics help you monitor and track the progress of the framework’s efficiency. Doing so allows you to identify the areas of improvement.

Components of Enterprise Risk Management

COSO originally came up with an Enterprise Risk Management framework in 1992. The model establishes eight key ERM components that help organizations create ERM models. 

Components of Enterprise Risk Management


These components are as follows:

1. Internal Environment

The organization’s internal environment is the risk-conscious culture, general risk practices, and overall atmosphere set by employees and employers. This internal environment helps in understanding the organization’s risk appetite.

The environment and culture are generally set by the higher management and board and are communicated to employees during onboarding and training/awareness sessions. The same culture is reflected in the actions of employees. This is crucial as it impacts how risks will be perceived and addressed.

2. Objective Setting

Organizations have to set objectives before they start measuring risks. The objective should support the company’s goals and risk appetite. For instance, if a business plans to move to a more advanced cloud setup, they must be aware of the internal/external risks associated with such a move. By factoring these details within the ERM framework, they will be able to migrate to the new system while ensuring preparedness.

3. Event Identification

All events matter—internal and external, negative and positive. While positive events may have a good impact on the organization, negative events can present the greatest learning opportunities. So, based on the impacts and outcomes, the events can be categorized as risks or opportunities for the organization.

For this process, ERM guides businesses on identifying crucial business areas and lists down the possibilities of associated events. This helps in prioritizing the high-risk events (such as not meeting government regulations, database security breaches, etc.) that can impact daily business operations.

4. Risk Assessment

Risks are identified by listing out the events. Now, the ERM framework outlines the steps for assessing the identified risks to understand their likelihood and the financial impact. Note that the risk assessment should be done at all levels of the organization (like top management, executive level, departmental, etc.)

The assessment considers both direct and residual risks so the business can be ready for every potential scenario. This helps in categorizing the risks such as strategic risk, operational risk, financial risk, and so on. Now, based on their likelihood and impact, the company can prioritize different risks to deal with them in an organized manner.

5. Risk Response

When an incident occurs, organizations can respond to risks in four ways: avoiding risk, reducing risk, sharing risk, or accepting risk. The decision to act for different risks is made based on the organization’s risk appetite and risk tolerance.

For each action, the company needs to develop and implement risk response protocols that align with the company’s risk profile and objectives.

6. Control Activities

Once the risk response plan is initiated, the organization carries out control activities (i.e. internal controls), which encompasses risk mitigation measures. The control activities are categorized into two different processes: preventative and detective. Preventive control activities aim to stop an event from happening to mitigate risk, while detecting control activities aim to recognize when risky events occur so that the management follows up to minimize the impact.

Sprinto’s automation features allow you to seamlessly implement internal security controls from each entity in one place. You can even monitor the controls in real time to analyze and fix any security issues to avoid risky events.

7. Information Capture and Communication

Information and communication are crucial components of the ERM framework as this allows stakeholders and business leaders to stay on the same page. This process ensures that all the relevant information regarding the incident or event is captured, documented, and communicated to the appropriate parties in the organization. Furthermore, the relevant results of risk analysis needs to be communicated to all the employees to avoid recurrences.

8. Monitoring

For continual improvement of an ERM framework, it must be frequently monitored. This helps businesses identify risk trends, improve performance, implement changes, and monitor new systems for effective risk management.

A risk management monitoring system is developed and implemented to evaluate the effectiveness of the ERM strategies in place over time. Moreover, when changes are introduced, constant monitoring helps an organization keep tabs on crucial metrics for better risk management.

To efficiently monitor your risk management processes and their performance in real-time, you can utilize Sprinto’s intuitive dashboard. It gives you centralized risk visibility and continuously monitors your security and compliance posture.

See Sprinto’s real-time monitoring in action – Schedule a free demo now!

Types of ERM Risks 

ERM can help organizations plan for almost any type of business risk. To generalize, the ERM risks can be classified as follows.

Types of ERM Risks 

  • Compliance Risk: Compliance risk means any violation of rules and regulations that the company must follow. This can be the inability to produce timely audit reports or implement misconfigured controls for different security frameworks such as ISO 27001, SOC 2, GDPR, PCI DSS, etc.
  • Legal Risk: Legal risk covers different legal consequences that an organization can face, such as a third-party lawsuit or complaint from a customer. ERM helps you get prepared for such risks to reduce their exposure through risk acceptance and mitigation. 
  • Strategic Risk: Strategic risk can impact the organization’s long-term plans. This covers risks of various levels that impact the strategy, growth prospects, or long-term goals of the organization.
  • Operational Risk: Operational risk covers any risk or disruption that can impact daily operations or business function. This can be anything from a server failure to operational disruptions that can result in reputational damage.
  • Security Risk: Security risk covers damages that any threat actor can cause to the organization’s digital assets through malware or other techniques. Infrastructural complexity can compound the scope of security risks. Organizations will need to establish measures such as access control to safeguard themselves from such risk.
  • Financial Risk: Financial risk is very common and can impact the organization’s financial standing. It can be a bad investment or taking too much debt and more. Financial risk could affect/halt operations and even lead to a shutdown.

Benefits of ERM 

The best thing about an Enterprise Risk Management program is that it helps organizations prepare for instances that are not immediately in their control. The framework helps you tackle new challenges confidently with a proactive, systematic, and precautionary approach to risk. 

Benefits of ERM 

Improved operational efficiency

ERM provides a greater sense of planning and creates an awareness of handling the organization’s risks while boosting the ability to respond. An ERM framework will enable you to get real-time actionable insights that will help you neutralize threats efficiently. It not only helps in being compliant with the regulations but also helps organizations assess the risks associated with any new initiatives without disrupting business operations.

Inculcates a risk-aware culture

Enabling ERM promotes discussion of risk at all levels. A risk-aware culture fosters a better understanding of risks and their potential impact on various business activities. With transparent communication, risk management becomes a collective and collaborative responsibility rather than just being limited to a single department. The cultural shift allows all employees to evaluate potential risks to take informed and balanced decisions.

Standardized ERM reporting

ERM promotes better structure, reporting, and analysis of risks. It provides insightful data such as key indicators, emerging threats, and mitigation strategies. It enables organizations to define and track crucial security metrics such as impact level, cost of event control, and so on. This standardized reporting helps leaders get an overview of the organization’s risk appetite, thresholds, and tolerances.

Improved decision-making

One of the significant benefits of ERM is the timeliness and flexibility of the data. This acts as a better framework for assessing risks and provides the data needed for improved decision-making capabilities across every layer of management. It also simplifies compliance-related tasks by integrating the learnings from the larger risk management activity into the exercise of fulfilling compliance requirements.

Strategic alignment

Having an ERM program helps align risk management activities and enables organizations to pinpoint potential threats and risks that are likely to impact their strategic objectives. Also, ERM helps organizations develop strategies for long-term sustainability. Focusing on these objectives allows companies to allocate resources effectively and also helps them address risks proactively.

Regulatory compliance

Since organizations are subjected to various compliance requirements, an ERM program is a comprehensive framework that helps you navigate the complexities of different regulations. It helps in effectively mitigating risks and creating a security-confident environment. This ensures that your system is protected against potential cyber-attacks and threats. So, choosing an ERM framework with automated controls will help you monitor your compliance status to capture real-time compliance evidence, which will accelerate and streamline the audit process.

Final thoughts

ERM helps organizations identify, assess, and respond to risks in a more holistic approach. Companies that have a defined ERM framework in place are able to drive sharper risk analysis and reporting, and improve their decision-making.

Integrating your ERM framework and compliance program can strategically improve your organization’s resilience and security posture. 

An automation platform like Sprinto puts your compliance program on auto-pilot. The comprehensive platform helps you identify risk at a granular, entity-level in real-time and shorten the time to value. We support a wide variety of compliance frameworks such as SOC 2, ISO 27001, HIPAA, GDPR, PCI DSS, etc. and significantly reduce the time you need to get audit ready. Sprinto is truly a game-changer. Let’s show you how it’s done.

Connect with our experts or book a free demo to learn more.

FAQs

How is ERM different from traditional risk management?

Traditional risk management is a subjective assessment that focuses on individual risks within a specific business unit. While ERM takes a holistic approach in utilizing data-driven insights to assess risks across the organization. TRM is a reactive practice that doesn’t focus on emerging risks, while ERM aligns your risk management with strategic objectives and can create a more detailed picture of an organization’s risk profile.

What are the 8 components of ERM?

The 8 components of an ERM framework, as defined by the COSO framework, are the internal environment, objective setting, event identification, risk assessment, risk response, control activities, information & communication, and monitoring.

Is ERM better than traditional risk management?

Yes, ERM is better than traditional risk management for most organizations. ERM takes a more dynamic and agile approach which makes it more adaptable, fluid, and efficient than the traditional risk management approach.

Gowsika

Gowsika

Gowsika is an avid reader and storyteller who untangles the knotty world of compliance and cybersecurity with a dash of charming wit! While she’s not decoding cryptic compliance jargon, she’s oceanside, melody in ears, pondering life’s big (and small) questions. Your guide through cyber jungles, with a serene soul and a sharp pen!

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