Modern organizations have a lot to contend with—cybersecurity, data permissions handling, privacy protocols, and maintaining compliance with various regulatory bodies. An effective integrated risk management (IRM) system can mitigate a wide range of risks, safeguarding your organization, employees, and clients. This post will focus on the essential elements of integrated risk management.
What’s Integrated Risk Management (IRM)?
Gartner defines integrated risk management as a set of practices and processes supported by a risk-aware culture and enabling technologies that enhance performance and decision-making through an integrated view of how well an organization manages its unique set of risks. Simply put, IRM is an organization-wide approach to addressing risks that require efforts from all team members and treats risk as a fundamental part of business strategy.
Generally, all business activities have inherent risks, so IRM integrates risk assessment and mitigation strategies into every aspect of an organization. IRM combines three risk management program areas: operational risk, cyber risk, and strategic/enterprise risk. An IRM framework involves stakeholders both within and outside an organization, requires ongoing support from organizational leaders, and relies on effective communication between teams to be successful.
That said, to implement an effective integrated risk management system, leaders must understand the following attributes of IRM:
- Strategy: Your IRM strategy should link inherent risks to overreaching organizational goals so everyone can see how risk management is intrinsically connected to their tasks.
- Assessment: A comprehensive assessment of risks should include identification, evaluation, and prioritization of all risks an organization faces.
- Response: This entails implementing measures and mechanisms to mitigate all identified risks.
- Process: Having sound processes—risk policies, framework, procedures, strategy, standards, and regulatory requirements—is crucial for risk preparedness.
- Communication and reporting: Establish effective communication channels and a sound escalation plan for informing various stakeholders on risk tracking and response.
- Monitoring: Identify and implement processes for tracking governance goals, accountability, risk ownership, and compliance.
- Technology: An IRM solution should be supported by robust technology capable of providing real-time insights and integrating seamlessly with all areas of the organization.
It’s important to understand that integrated risk management isn’t the same as enterprise risk management (ERM). While IRM integrates organization-wide risk activities to drive better decision-making, ERM focuses on the planning, organizing, and controlling of your risk activities.
Benefits of Creating an IRM System
An IRM framework applied to daily business operations can significantly impact your organization’s ability to operate efficiently while reducing the chances of falling victim to risks not yet identified. By taking a holistic IRM strategy, an organization can more effectively protect itself from various risks. Moreover, integrated risk management can help streamline communication and collaboration with regard to risk management activities. Other benefits of IRM include:
- Better risk identification and assessment
- Improved organizational resilience and business outcomes
- Better decision-making around risk
- Costs savings through improving risk profile
- A more effective response to risks and threats
- Effective risk control strategies
How to Create an Effective Integrated Risk Management Plan
Given the above benefits, you are probably convinced of the importance of integrated risk management. Here are the five steps for creating an effective integrated risk management plan:
Define Your Business Objectives
The first step for creating an IRM plan is to define your organization’s objectives. Unfortunately, most organizations fail to integrate risk and don’t recognize it when defining their objectives. Needless to say, it’s important to not only outline the risks that may threaten your organization but also to integrate those risks when defining your business objectives. You can accomplish this by using SWOT analysis.
Identify Strategic Risks
As your organization attempts to achieve its strategic goals, internal and external factors can hinder or prevent it from realizing them. This is referred to as a strategic risk. The first step to managing strategic risks is to identify them. Create a list of the strategic risks that your organization faces to understand them better and determine how to respond to them. Strategic risks often arise from various sources, including the following:
- Industry or market changes
- Changes in demand or customers
- Acquisition, mergers, and other competition
- Equipment failure and IT disaster
- Reputation damage
- Human resource or staffing issues
- Financial issues such as cost pressures
Where there are chances of any of the above strategic risks occurring, you should prepare a robust response.
Allocate Resources at the Operational Level
Upon identifying your strategic risks and deciding on a strategy, you will need to align all teams and people with it. To ensure that your strategy succeeds, you should allocate your resources accordingly. This means channeling more resources to more risk-averse areas to help prevent those risks from happening. You should, however, be ready for any consequences: some organizations may have to make do with fewer resources at the expense of those contributing most to your strategic objectives. How well you allocate resources will determine how effective your integrated risk management plan will be.
Align Your Incentive Structure
Your people will be more motivated to implement your IRM strategy when you incentivize them. You need to redefine your incentive structure by ensuring that the incentive for senior managers and middle management aligns with the risks they own. This is vital in effectively executing your strategy since it eliminates any internal conflicts.
Measure Your Risks and Develop Plans for Monitoring and Reviewing Them
You can measure your risks based on the money needed to cover unforeseen losses. Alternatively, you could use the risk-adjusted return on the capital metric. You should also develop measures for monitoring and reviewing the various risks that your organization faces. This way, you can respond to those risks before they occur.
Modern organizations have solutions for detecting threats, risks, operational vulnerabilities, and compliance failures. One such tool is an integrated risk management plan. By creating and implementing a sound integrated risk management plan, organizations can better position themselves to face unforeseen events. An effective IRM plan can allow an organization to standardize risk management activities, gain insights into risks and how they affect business performance, cut the time spent managing risks, and improve the effectiveness with which various risks are mitigated.