Traditional vs. ERM – Going Beyond Managing Risks One at a Time

When I first began my blog, the first big topic I explored was the difference between traditional and enterprise risk management. In the traditional vs. ERM article (one of the most popular articles of all time), I outlined eight ways that separate each of these concepts.

Today, I want to dive a bit deeper on the actual management of risks and how they differ in these two environments.

In the article, I explained how traditional risk management looks at risks one-by-one and handles them on an as-needed basis. This process occurs at the department-level and rarely, if ever, includes coordination with other parts of the company.

While many organizations simply focus on risks one-by-one, handling risk management this way can cause much bigger problems down the road. The traditional approach doesn’t show the cumulative effects varying risks can have on the organization nor does it look at how risks relate to one another.

Instead of looking at risks one-by-one as is done in a traditional siloed environment, ERM combines the various departments’ risk management activities together to look at the big picture of risks the organization faces. Risks are analyzed to determine any connections, trends, or concentrations.

Some common questions to ask are:

  • Why does the risk exist?
  • What type of events could trigger the risk? Why would the event occur?
  • Can the risk be linked to another risk we already know about?
  • Does this risk exist because of a mitigation activity of another risk?

Discovering connections between risks isn’t an open and shut case…doing so involves more than just comparing descriptions.

The first place to look for connections is to analyze the impacts of risks to find commonality. If two or more risks will have the same impact should they occur, actions can be taken to either reduce or eliminate that impact.

Another place to discover connections is to determine the root cause of risks and then see if there is any overlap in the root causes. If the root cause is A, B, and C for risk #1, B and D for risk #2, and A and E for risk #3, we can see that addressing root cause A will affect risks #1 and #3 while addressing root case B will affect risks #1 and #2. Comparing root causes of risks can help management understand the most beneficial places to invest resources.

Earlier, I explained how traditional risk management doesn’t consider the cumulative effects of risks. This can be defined as multiple instances of the risk occurring or the possibility of multiple risks happening at once.

Determining cumulative effects in a precise way requires the use of modeling and data. To be transparent, I have little experience in modeling since it involves statistics to determine confidence intervals of certain events (i.e. 90% chance of this happening but a 10% chance of a different impact). Models like this are developed by actuaries like Milliman or a similar company.

Many organizations will use 1-5 scales for assessments based on the knowledge and expertise of those closest to the risk. Basic risk assessments will only consider one instance of the risk occurring. Also, the risk analysis phase typically looks at the risk by itself without looking at the impacts of risks triggering another risk.

What I’m trying to say here is that understanding the true cumulative effect of a risk can get really complicated, especially if you don’t have any actuary expertise in your organization.

Generally speaking, it can take several years before an organization has a robust enough ERM process to determine cumulative effects. So, if you aren’t there yet, don’t feel like your organization’s ERM is woefully inadequate. If what you are doing is working for you and the executives, great!

My experience has shown that it’s common for executives to want to see results like this soon after launching an ERM program. However, it’s imperative they understand that it’s usually not possible in the near-term, which is why managing expectations of your ERM program with executives is so important. Take this opportunity to check in with your executives and board about their expectations. Do they want the more in-depth insights into risk? Do you need to start moving ERM in a more complex direction?

Although understanding cumulative effects and discovering connections between risks are advanced concepts, being able to do so will ensure your organization reaps the most benefits from its ERM process.

Is your organization looking at the big picture of risks or managing them one-by-one? Has your ERM process advanced enough to consider the cumulative effect of risks?

I want to hear from you regarding this important distinction between traditional vs. ERM. Please leave a comment or join the conversation on LinkedIn to share your thoughts.

And if your organization is trying to better understand the connections between risks or is just embarking on the ERM journey, contact me to discuss your organization’s needs and goals today.

Posted in

Sign Up For Our Newsletter

Sign Up For Our Newsletter

SDS-Logo
about-sidebar-v2

Meet Carol

Helping companies achieve their vision and strategy, and succeeding in today's turbulent world, is something I'm honored to be a part of. Whether you're an occasional blog visitor or a long-term client, thank you for letting us be a part of your journey.

Most Recent Posts

The 12 Days of ERM Christmas

Without a doubt, one of my family’s favorite holidays is Christmas. Part of the fun, especially for our son, is seeing what “Santa” brought, but most importantly, we treasure the spirit of peace and goodwill the season brings. And after what seemed to be a never-ending warm spell, the weather is expected to be good…

Read More

Don’t Let Goals and Initiatives Be Blindsided by External Events

As the end of the year draws near, I think we’d all agree that while it wasn’t without its challenges, this year also wasn’t quite as turbulent as the previous two. While a lot of people are juggling company parties, shopping for friends and family, and special activities for the kids, most companies are putting…

Read More

Going the Distance: Ensuring Successful Execution of Strategic and Annual Initiatives

Strategic planning is a challenge – of all people, I understand… After all the meetings, risk and data analysis, and brainstorming of the preceding months, it’s tempting to think this is the end of the road and you can relax. Contrary to this common perception though, this is exactly not the time to relax, but…

Read More

Avoid Rookie Mistakes and Protect your Internal Reputation

Be honest – have you ever done something that you soon realized was a real rookie mistake? Me raising my hand… Considering the nature of ERM’s role to ask questions and challenge assumptions (often during conversations with executives), it can be argued that, in at least some cases, the expectations bar for risk professionals is…

Read More

ERM at Thanksgiving – An Illustration of Risk Management in Action

On occasion, I like to take some of the concepts we risk professionals think about in our jobs and apply them to different personal situations…take some of the same concepts we use when working with executives to develop corporate strategy and manage risks or uncertainty around that strategy. It’s Thanksgiving week in the U.S. –…

Read More

Why Quantitative Risk Assessment is Not Just the Best But the Only Option – A Conversation

Periodically, I have the pleasure of speaking one-on-one with Hans Læssøe on a variety of topics around ERM, strategic risk, and other issues and trends. As you know from my previous conversations (here, here) and posts featuring his work, Hans was formerly a practitioner at the iconic LEGO Company, but even more notably, is a…

Read More

The Three Lines Model – 3 Reasons Why I Don’t Like It

Everyone likes a clear-cut template that offers an easy way to create or manage something…I mean what’s not to like about a step-by-step process for accomplishing what you want? Sometimes this can work without any issues, such as the case with the Project Management Book of Knowledge (PMBOK), ISO 9001 standard, or a new cooking…

Read More

5 Avenues for Expanding your ERM Knowledge

One thing I was taught to appreciate from a young age was the value of education and knowledge. It didn’t necessarily matter what the subject was, just that I always maintain a learning or growth mindset regardless of my current status in life. This mindset has served me well over the years, and it’s a…

Read More

Storytelling and Risk Management – Developing Skills that Technology Cannot Replace

It’s amazing how technology has developed and changed our working world over time. Imagine trying to run my risk and strategy consulting firm without tools like Zoom, Box, Slack, and other ERM-specific technology tools. There is no way we would be able to serve our clients the way that we do. Just consider how the…

Read More

3 Phases to Creating and Launching an ERM Program Focused on Organizational Success

If you’ve been handed the task of creating an ERM program for your organization, let me first offer my congratulations quickly followed by my empathy for the task ahead of you. I don’t say that to scare you but to provide a small dose of reality. Building, launching, and refining an ERM program that is…

Read More