How Enterprise Risk Management contributes to business resilience
In an increasingly interconnected and volatile business environment, business resilience has emerged as a crucial aspect for organisations.
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It enables companies to survive and thrive amid disruption, adapting and responding to threats and changes in the landscape. A pivotal element contributing to this resilience is a robust Enterprise Risk Management (ERM) framework.
This article aims to unpack how ERM contributes to enhancing business resilience.
Understanding Enterprise Risk Management and Business Resilience ERM is a holistic, organisation-wide approach to risk management.
Unlike traditional risk management practices that focus on isolated threats, ERM assesses the collective impact of risks across the organisation, linking them to strategic objectives and ensuring a proactive, coordinated response.
Business resilience, on the other hand, is an organisation's ability to absorb and adapt to shocks and disruptions while maintaining operational functionality.
It is about bouncing back quickly from setbacks and ensuring continuous delivery of products or services under all conditions.
ERM & building business resilience
An effective ERM system enables businesses to predict, prepare for, and respond to a wide range of risks, which is fundamental to enhancing resilience. Here's how ERM contributes to business resilience:
1. Proactive risk identification and assessment
ERM facilitates the identification and assessment of risks across all aspects of the business – financial, operational, strategic and reputational. This proactive approach allows organisations to foresee potential disruptions and be prepared, enhancing their resilience in the face of unforeseen events.
2. Integration of risk management
ERM integrates risk management into strategic planning and day-to-day operations, creating a risk-aware culture across the organisation. This integration ensures that everyone in the organisation understands their role in risk management, fostering collective responsibility and enhancing the organisation's capacity to respond quickly and effectively to disruptions.
3. Scenario Planning
ERM involves scenario planning, which involves developing strategic responses for various risk scenarios. This process provides organisations with ready-to-execute contingency plans, ensuring they can respond quickly and effectively to unexpected events, thereby bolstering their resilience.
4. Risk appetite and tolerance definition
ERM involves defining the organisation's risk appetite and tolerance, i.e., the level of risk the the organisation is willing to accept in pursuit of its objectives. This helps align risk management with strategic goals, ensuring that the organisation remains focused on its objectives even when disruptions occur.
5. Continuous monitoring and improvement
ERM is not a one-time project but an ongoing process of risk identification, assessment, response, and monitoring. This continuous approach enables organisations to adapt their risk management strategies as their environment changes, ensuring that they remain resilient in the face of evolving threats and challenges.
Case Study: ERM and business resilience
To further illuminate the contribution of ERM to business resilience, let us consider a hypothetical case study. Imagine a global manufacturing company, Company X, operating in a highly competitive and rapidly changing industry.
The company has a well-established ERM system, integrating risk management into its strategic planning and daily operations.
During an annual risk assessment, the ERM team identifies a potential strategic risk: geopolitical tensions could lead to increased tariffs and disrupt their supply chain.
This risk is assessed as having a high likelihood due to ongoing political instability and a high impact because the company relied on overseas suppliers.
In response to this risk, the company has developed several risk management strategies. First, they diversify their supplier base to reduce reliance on any one country or region.
They also invest in technology to improve supply chain visibility and create a contingency plan for rapid sourcing.
When geopolitical tensions escalate the following year, many of Company X's competitors will be caught off-guard, facing increased costs and supply chain disruptions.
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But thanks to its ERM-driven strategy, Company X will be able to navigate this disruption smoothly.
Their diversified suppliers and enhanced supply chain visibility allow them to adjust their sourcing rapidly, and they continue to meet customer demand without significant cost increases or delays.
This case study demonstrates how an effective ERM system can enhance business resilience.
By identifying and assessing the risk of geopolitical disruption in advance, Company X was able to develop and implement strategies to manage this risk.
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This allowed them to adapt to a major disruption that impacted their industry and maintained their operational and strategic performance, demonstrating strong business resilience.
ERM and Resilience: The Future Outlook
As the business environment continues to become more volatile and complex, the importance of both ERM and business resilience will only increase.
Organisations that can foresee, adapt to, and leverage disruptions will have a competitive advantage in this landscape.
In the face of this uncertainty, it is more crucial than ever for organisations to invest in robust ERM systems.
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The upfront investment in ERM can deliver significant returns in terms of enhanced resilience, reduced losses and even new opportunities.
Conclusion
Aligning Enterprise Risk Management with business strategy is essential in today's volatile and complex business landscape.
This alignment not only guards against potential threats but also enables organisations to uncover and capitalise on opportunities.
By integrating ERM into strategic planning, organisations can drive value creation, enhance resilience and achieve their strategic objectives.
The writer is an independent Internal Audit Advisor, Enterprise Risk Management Consultant, and professional trainer.
He is the founder and Chief Operating Officer of Redric Consulting (RC). RC is focused on empowering internal audit, risk and control professionals through offering training and conferences to equip them with relevant skills, knowledge and attitudes that position them as value adding professionals.
You may reach out to Frederick on [email protected]