Both Traditional Risk Management (TRM) and Enterprise Risk Management (ERM) aim to minimize risk on a business through identification and analysis. They have their differences but ultimately have the same end goal.
Traditional Risk Management significantly differs from Enterprise Risk Management. Before examining these differences we must first understand both types.
What is Traditional Risk Management?
TRM focuses on the following:
- Hazard risk due to loss exposures
- Managing safety
- Purchasing insurance
- Controlling financial recovery from losses generated by hazard risk.
TRM’s main focus is hazards. It does not focus on solving many problems simultaneously. The hazards are usually simple solutions like getting insurance cover.
TRM is considered a reactive model that is either a managerial, administrative, or decision-making process. There are four functions associated with TRM – planning, organizing, leading, and controlling. All four functions are used to minimize accidental and business losses of an organization at a reasonable cost.
Each individual department within an organization is managed separately through TRM. TRM Management is concerned about the process of insurable natural hazards and has five components:
- Risk control- Retrospective actions and prospective actions.
- Risk identification- The type of risk classification, identification, and measurement.
- Risk administration- Monitoring the flow of information and databases through specific risk management activities.
- Risk analysis- Done through a qualitative assessment with classification of exposures. Examples include frequency and potential loss assessment, identification of organization assumptions, contractual and compliance vulnerabilities, etc).
- Risk financing- Keeping track of small and medium risks. Programs for losses or budget allotment, transfer of severe risks with low frequency, and calling for insurers’ services.
What is Enterprise Risk Management?
ERM ultimately elevates TRM. This means it offers a broader view that focuses on both hazard and business risk.
ERM addresses all risks faced by the company at the same time. Instead of fixing risks one at a time through various departments, ERM integrates all risk management activities so the process occurs at the enterprise level.
Most companies’ objectives focus on their vision, mission and strategic development. ERM process creates goals to have a broad focus on numerous aspects of the company risk management. It starts with a company’s strategy, such as the strategic objectives that relate to the decision-making process, work organization, resource allocation and management, protection of the company as a whole, a robust organization culture, and efficient operating optimization.
The Difference Between TRM and ERM
At a quick glance, there are differences between TRM and ERM. The first is standardized, reactive and sporadic, manages risk one by one, is insurable, risk-averse, and occurs within one business department. On the other hand, ERM is dynamic, proactive and continuous, analyzes material risk and how they relate, non-insurable, risk-taking, and occurs throughout many business departments.
ERM is considered an advancement to TRM because it deals with specific hazards that are throughout different departments, not just one. ERM also focuses on the entire enterprise as a whole throughout financial, operational, and strategic risks. Some people think these two are similar, however, there are major differences, especially in the following areas:
If your company views the solution to risk is insurance, then TRM may be for you. However, TRM fails to take into account the overall view and how the company as a whole can be protected.
ERM goes a step further to view the solution to risk, rather than just seeing the immediate problem. It considers the company as an entire unit working together, not just viewing individual departments. ERM additionally protects on top of the insurance. This is done by protecting the company from threats, and monitoring to help reduce the chance of threats occurring.
Mode Of Risk Treatment
The TRM approach views the risk of different business departments separately. Each risk that occurs within these separate departments may leak into other departments, and if there is no proper communication across all departments, the issue could become serious. Since the traditional process focuses on one department, issues may get overlooked and not fully attended to.
ERM solves the above issue. It connects the risks and deals with all effects throughout every department, looking at the whole picture. ERM sees the company as a whole, whereas TRM lacks this vision. ERM also understands the needs of the company and it tries to fulfill the company’s strategic goals. It helps by observing trends and connections, then analyzing both to find risks and put a stop to them.
Reactive Versus Proactive Decision Making
Think of ERM as a preventative asset against threats. It prepares a company for future risks, instead of waiting for an issue to occur. Large organizations can not risk a cyber attack without establishing some form of prior protection. It’s important that all enterprises are ready if a disaster occurs.
TRM protects an organization, but it is limited to specific departments. ERM ensures the company’s entire business operations are protected from any future threats. ERM minimizes the chances of risks happening while at the same time ensuring the business continues to focus on its strategic goals.
Implementing an ERM process into any organization helps to strengthen the safety against potential risks by identifying them early on. ERM establishes a disaster recovery procedure before a risk happens. The advantage to that is, restoring IT systems will be much quicker. It could possibly even prevent the attack from occurring altogether.
ERM Has The Edge
There’s no doubt that ERM has the edge in today’s risk environment versus TRM. ERM can also help to increase business value by:
- Optimizing the cost of managing risk
- Helping management to improve business performance
- Establishing a sustainable competitive advantage
ERM is considered to be an extension of TRM. It goes multiple steps forward of protecting a company as a whole. For example:
- Strategic application: A business will integrate the ERM process into every business decision. This approach focuses on the company as a whole. Each department is encouraged to continuously review and support the organization’s highest value objectives.
- Risks considered: ERM manages every risk that could negatively impact an organization’s goals. This approach differs from the traditional risk management approach because it allows a company to remain focused on the important areas to thrive as a business.
- Performance metrics: ERM keeps track of results-based performance measures throughout the organization. For example, specific results show how risk management helps to complete a business goal, like returns on investments or assets. ERM not only helps with minimizing the expected losses, but its main advantage is maximizing the possible potential for growth. Growth opportunities include increasing the expected income and asset value, and minimizing residual uncertainty.
K2 Partnering Solutions Can Help Your Enterprise Manage Risk
Regardless of what your enterprise does, nothing comes without risk. Maybe it’s bad actors, software bugs, hacks, or fraud – whatever you’re worried about, you need to know how to mitigate and handle risk. Especially when you’ve got stakeholders and customers watching you closely.
As a company, you need to manage your risk oversight without fail, regardless of circumstances. It’s complex but doable. With our Managed Services Teams and specialist technical and functional enterprise applications consultants, K2 Partnering Solutions is here to help. It’s our mission to help you protect your company by assessing, evaluating, and developing responses to your risks.
K2 Partnering Solutions will work with you as your trusted risk management provider. We will be there for you at every stage, meeting your enterprise needs, and helping you maintain compliance and business continuity.