Moving ahead with ERM, Part 7: ERM action items
By Mark Stephens
07 October 2014
In the recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the current state of their enterprise risk management (ERM) efforts, it was clear that few if any companies have reached perfection in ERM value creation--at least, so far. Even Trendsetters have significant weaknesses to address, and Transitionals and Beginners must improve their executions of basic ERM functions (see part 3 of this blog series for information about the Beginners, Transitionals, and Trendsetters levels).
To achieve ERM that is fully embedded in their operating plans, budgeting and capital requests, and strategic processes, companies need to look at the following action items:
- Go back to basics: Most companies still need to improve ERM processes and corporate-wide execution, and sharpen their ability to anticipate the cost of key risk events. Companies should consider enhancing collection of top-down and bottom-up data on risk exposure and improve risk-related communication between divisions and the corporate level. Those that have not done so should create and implement an ERM procedures guide, and explore ways to make workflow for ERM governance more efficient. Doing so will also improve companies' ability to measure ERM value.
- Get the ERM metrics right: Creating value from ERM hinges on translating the analysis of risk exposures into financial and operational goals. This requires developing formulas, calculations, and structures that relate to the key performance indicators the company applies to each of its divisions. It can also include establishing a process for rapid scenario development/
- Upgrade quantitative tools for analyzing and managing risk: Companies must be able to make far more rapid decisions about how to address specific risks and combinations of risks, based on more reliable and comprehensive analysis. To do so, they must transition from qualitative to quantitative risk assessment methods, including a high-quality risk metrics framework, risk correlation mapping, economic capital modeling, risk reporting and dashboards, and early-warning systems.
- Give ERM a stronger role in budgeting and capital allocation: High-return activities are usually associated with high risk exposure or potential downside impact. Risk-adjusted analysis and ERM collaboration in budgeting and capital allocation assure the soundness of highest-level decisions.
- Integrate ERM with performance management: ERM activities support the company's current business goals, help executives understand any potential variation from objectives, and help link risk-taking activities to risk appetites and tolerance ranges.
- Make third-party and supply-chain risk a priority: Even Trendsetters are lagging in these two areas, which are both increasingly critical in a more interconnected, global economy. Global companies in particular must extend their ERM processes to their broader networks of partners and suppliers.
The payoff from these efforts is an ERM framework that creates measurable value while making enterprise-wide risk management much more effective at responding to a rapidly changing risk environment.
To download a copy of the full report, click here.
To achieve ERM that is fully embedded in their operating plans, budgeting and capital requests, and strategic processes, companies need to look at the following action items:
- Go back to basics: Most companies still need to improve ERM processes and corporate-wide execution, and sharpen their ability to anticipate the cost of key risk events. Companies should consider enhancing collection of top-down and bottom-up data on risk exposure and improve risk-related communication between divisions and the corporate level. Those that have not done so should create and implement an ERM procedures guide, and explore ways to make workflow for ERM governance more efficient. Doing so will also improve companies' ability to measure ERM value.
- Get the ERM metrics right: Creating value from ERM hinges on translating the analysis of risk exposures into financial and operational goals. This requires developing formulas, calculations, and structures that relate to the key performance indicators the company applies to each of its divisions. It can also include establishing a process for rapid scenario development/
- Upgrade quantitative tools for analyzing and managing risk: Companies must be able to make far more rapid decisions about how to address specific risks and combinations of risks, based on more reliable and comprehensive analysis. To do so, they must transition from qualitative to quantitative risk assessment methods, including a high-quality risk metrics framework, risk correlation mapping, economic capital modeling, risk reporting and dashboards, and early-warning systems.
- Give ERM a stronger role in budgeting and capital allocation: High-return activities are usually associated with high risk exposure or potential downside impact. Risk-adjusted analysis and ERM collaboration in budgeting and capital allocation assure the soundness of highest-level decisions.
- Integrate ERM with performance management: ERM activities support the company's current business goals, help executives understand any potential variation from objectives, and help link risk-taking activities to risk appetites and tolerance ranges.
- Make third-party and supply-chain risk a priority: Even Trendsetters are lagging in these two areas, which are both increasingly critical in a more interconnected, global economy. Global companies in particular must extend their ERM processes to their broader networks of partners and suppliers.
The payoff from these efforts is an ERM framework that creates measurable value while making enterprise-wide risk management much more effective at responding to a rapidly changing risk environment.
To download a copy of the full report, click here.