The Perils of Inefficient Enterprise Risk Management

Enterprise risk management isn’t something a lot of us think about. It isn’t really a glamorized job role or department, which is why most people do not know how essential it is for businesses. If a risk management department does its job well the business operates smoothly, without facing any bumps. However, if a risk management department fails to do its job it has severe consequences for the business and can even result in the business shutting down. This means that most people only hear about risk management if there is something wrong, which is why the value of it isn’t visible to most people. 

What happens when businesses do not manage risks properly? 

Risk management is the process of identifying, predicting, and mitigating risks. Let’s see what happens if any of these important tasks are not done properly. 

What happens when businesses fail to identify risks  

Identifying risks is the process of detecting all the risks that affect the business. Think of risks as the potholes on a road. If the pothole is small your vehicle will travel over it with just a small bump. If the pothole is huge it can take your whole car down with it. Think of running a business as driving on such a road.  

If you have identified all the potholes, you know all the risk that lay on your organization’s path. You know where the worst potholes are, and you make sure that you change lanes when the pothole arrives, so your vehicle isn’t destroyed. You also know which potholes are so shallow that they will not affect your vehicle at all, and you just drive over them without stopping. Now think what will happen if you did not know about the potholes.  

The obvious issue is that there is a chance you will drive straight into a pothole that is so deep that it will damage your vehicle and you will not be able to drive it. This is why it is important for businesses to identify risks as well as their severity. Businesses can only avoid risks big enough to tank the business if they know where the big potholes are. The less obvious issue is that you will be needlessly stopping at the shallow potholes, not knowing that you could have driven over it. This also happens with businesses – they become overly cautious, letting go of great opportunities, because they do not know that the risk is so small that it will barely affect the business. 

What happens when businesses fail to predict risks  

Businesses don’t just need to know about the risks which are affecting the organization right now – they also need to know about the risks which will be affecting the business in the future. Most businesses are following a long-term strategy towards growth. This means that most business have, at the very least, the whole year planned out. This is important because large enterprises are not agile – it is important to choose the right path for the business and stick to it, because pivoting to another path takes a lot of time and resources.  

When businesses fail to identify risks, they end up investing heavily in strategies which end up being useless. There are lots of examples of businesses not understanding the risks they were truly under. Kodak never realized that digital cameras would end up destroying its photographic film business, even though the indicators were all there. It is important to look at the way markets are moving to get an idea of the risks a business will face in the future.  

What happens when businesses fail to mitigate risks  

Simply identifying current and predicting future risks isn’t enough – the business also needs to take measures that help it mitigate a business. If a business fails to mitigate the risk, it may have as well as never bothered to identify the risk in the first place. There are many strategies for risk mitigation. Businesses can make sure that they have a backup plan for business continuity if a risk is actualized. Businesses can also opt to not pursue an opportunity which may expose it to a large degree of risk. 

Enterprises need to do all they can if they want to succeed in the face of risks. This is why enterprise risk management software is becoming an increasingly common sight in officers. ERM software can help identify, predict, and mitigate risks with higher efficiency, which gives business more insights about its future operating environment. Risk management software is now available for businesses of all sized and can even be accessed via the cloud, which makes it easy to use for any business across the globe. Some of the most successful businesses in the world got to where they are today because they focused more on risk management which allowed them to avoid the obstacles which their competition faced.  

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