Many companies have an ERM (Enterprise Risk Management) program that is stuck in the compliance zone, meaning, they are simply aware of their risks and monitor and mitigate them. This approach works, but adds no tangible value. However, there is a growing group of companies that are leading the way by going beyond simply being risk aware. They use risk management to create value, and to improve strategic decision-making. They are evolving to become Risk Intelligent.
Our session at ABGR in September this year, focused on this evolution in ERM and the steps a company should take to get there. “Companies should no longer be using ERM only to comply with external requirements, but focus on using risk management to enhance the strategic planning process.”, said Corey Gooch, leader of Brokerslink’s global ERM practice. Most companies have a strategic planning process, and some are good at it. However, many companies are not good at executing their strategy and never realize the full results that were included in the strategic plan. The difference between what was planned and the actual outcome is called the Strategy Execution Gap. We believe a missing critical link to help companies close this gap is ERM. By including ERM in the strategic planning process, a company is focusing on the risks forces (internal and external) that may impact their ability to achieve their objectives.
When considering the risks that impact strategy, it is no only the traditional risk classification (i.e. financial, operational, legal, human capital, technology) that matters. In order to close the gap, companies also need to focus on the emerging risks. Those risks that they know about, but also require much further investigation to understand the potential impact on the business. A key ingredient that is missing in many ERM programs is communication. The Board and senior leadership may be independently aware of the strategy and the risks, but this is never filtered down to the division or functional levels of management. Without a comprehensive vision of where the company is going, these managers cannot possibly understand how their actions impact the company’s course.
This evolution doesn’t happen overnight. But small simple steps can be made now to affect the value of ERM within companies. “By closing the Strategy Execution Gap with a strategic approach to ERM, a company can reduce earnings volatility, improve operational performance, and create a competitive advantage.” says Gooch.