Enterprise Risk Management: Frameworks, Implementation, Cost

Every business choice you make has some inherent risk to it—some very small, such as setting your password policy right, while others are much bigger, like entering a new market. Just think about it—what if the supplier doesn’t deliver? Or what if the compliance requirements in a new geography are vastly different from what you have in place?

That’s where enterprise risk management comes in. ERM checks all sides of those risks for you to make sure your business stays resilient no matter what challenges arise.

TL;DR ERM enhances decision-making, improves operational efficiency, supports business continuity, and promotes a risk-aware culture within the organization. Implementing ERM can be costly, but combining it with compliance automation tools can reduce costs while providing real-time insights. Widely used frameworks such as ISO 31000, COBIT 2019, COSO 2017, and NIST RMF help organizations structure and manage risks effectively.

What is Enterprise Risk Management (ERM)?

Enterprise Risk Management (ERM) is a structured approach to managing all kinds of risks that can potentially disrupt an organization’s ability to achieve its objectives. It includes identifying, assessing, mitigating, and monitoring risks across various business units.

James Lam, in his book about ERM (From Incentives to Control), defined it as: 

Unlike traditional risk management, which often addresses risks in isolation, ERM takes a holistic view. It integrates the risk management practices across all departments and levels of your organization and aligns risk tolerance and strategic goals.

Here’s a table highlighting the different types of risks addressed by ERM:

Type of Risk	Description
Operational Risks	Risks due to internal processes, systems, and human errors.
Financial Risks	Risks affecting financial performance, including market and credit risks.
Compliance Risks	Legal or regulatory risks that may lead to penalties for non-compliance with laws and regulations.
Strategic Risks	Risks associated with the organization’s failure to achieve strategic objectives.
Reputational Risks	Risks that harm the organization’s reputation and stakeholder confidence.
Cyber Risks	Risks involving digital security, information breaches, and technology failures.
Environmental Risks	Risks related to environmental issues that could impact operations or reputation.

How important is ERM for your business?

Enterprise risk management lets your stakeholders have a holistic view of all the battles your business is going through or will go through in the future. It acts as a proactive approach to being prepared to navigate uncertainties.

On a similar note, here are four more reasons why ERM is absolutely essential for your business:

1. It enhances decision-making: By understanding potential risks, leadership can make more informed decisions and allocate resources effectively.
2. It Improves operational efficiency: Risk identification and mitigation would lead to smooth processes with minimal waste.
3. It supports business continuity: ERM helps keep people, finances, and physical assets safe and ensures the organization can withstand any calamity and remain sustainable.
4. It promotes a risk-aware culture: A well-implemented ERM framework fosters an organizational culture that encourages employees to recognize and report risks. 

If you’re still unconvinced, here are more benefits as stated by James Lam in his book. 

Key components of Enterprise Risk Management as per COSO

In 2004, the COSO (Committee of Sponsoring Organizations of the Treadway Commission) published an Enterprise Risk Management— Integrated Framework. It was updated in 2017 with some of the key elements of ERM. Aligning with it, here are the five key components of ERM:

1. Governance and culture

Governance and culture are the foundational elements of enterprise risk management. Governance sets the tone in your organization as to why risk management matters and defines clear responsibilities and roles.

Culture, on the other hand, shows up in your decision-making and how your team approaches risks daily.