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vol. XV no. 2
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How does a firm set off along the path of more enlightened risk management? Though businesses vary in the specific risks they face,
best practices in ERM follow the same general steps:
- Establish the context. Examine the company's business environment, goals, management style and capacity for risk (e.g., banks normally operate with lower risk, software developers with higher).
- Identify risk areas, including customer satisfaction risk (poor consumer response to products), trade war risk (from price cutting or other competitive practices), product quality risk, brand equity risk (affecting a company's brand or reputation), catastrophic risk (political situations, natural disasters), regulatory risk (political changes affecting the industry) and others.
- Analyze risks. Rank each specific risk area in importance. A company will often accept higher risk in nonvital areas.
- Strategize. Once a company knows its risk, it can respond accordingly:
- Avoid. If a risk is too costly, the opportunity can be shelved.
- Share. Shift risk to third parties by using financial instruments, creating strategic partnerships, buying insurance or outsourcing certain functions.
- Mitigate. Monitor performance to determine if the strategy is working and take appropriate steps if it isn't.
- Accept when profit opportunities outweigh risk.
- Implement and integrate. Establish objectives and performance criteria as well as procedures for the risk management function and foster communication and education on risk management throughout the enterprise.
- Measure and monitor. A company needs to know how well it is managing risk: how it responds to losses, what actions are planned for priority risks, whether appropriate procedures are in place, if results are being achieved.
Return to Managing Risk in Today's World
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