Efficient Implementation of Enterprise Risk Management Systems
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Introduction
Enterprise risk management is a system that ensures that an organization understands the threats and possible losses, sanctions, or negative outcomes that would happen as it seeks to achieve its goals and objectives (Shad et al., 2019). It is a system that requires the management and the executive to understand the internal and external factors that can affect the ease and success of achieving the strategic and business goals. The research study below describes the behavior organizations have developed and can develop to ensure that they avoid the impacts of risks and eliminate the possibility of experiencing a risk.
The study would need to understand the need for implementing an enterprise risk management program. The possible challenges that an organization would face while implementing an enterprise risk management framework and the related solutions are some of the items discussed in the study. It also involves identifying an organization that has implemented enterprise risk management, its behavior and practices in achieving success in the presence of destructive threats.
Importance of Implementing an Enterprise Risk Management Application
An organization’s enterprise risk management application would cover the strategic, operational, compliance, environmental, financial, social, and cybersecurity features that a particular organization would alter in achieving profitability and competitive advantage. The organization would enact systems and procedures to address the related risks and ensure success over the factors that would destroy its reputation (Yang, Ishtiaq, & Anwar, 2018). Enterprise risk management (ERM) helps the organization achieve substantial profits from opportunity-related risks. Implementing the frameworks for ERM would increase the risk of success. The organization would enact ERM strategies against the risk to eliminate its impacts and achieve the benefits attached to the risk.
Enterprise risk management helps increase the value and importance of business in the market in competitors’ presence and increasing pricing pressures (Florio, & Leoni, 2017). The organization would also prevent the loss of intellectual property and useful trade secrets that would reduce the value of information that enables the organization to make effective and accurate decisions. The organization would also avoid the geopolitical barriers that affect business across boundaries because of political and governmental challenges. Enterprise risk management frameworks help an organization to understand the nature of the external and internal environment that would ensure public trust and maintenance of its reputation.
The organization would understand the legal constraints related to a given objective before developing a program to implement the objective frameworks. Companies would understand the compliance of the general laws and regulations that would guide them in maintaining the quality of products, ensuring safety, and improving the relationships between the company and its customers. Understanding the markets is important in understanding the demands of the customers, which enables the management to understand the factors that would create conflicts between the company and its potential customers (Wang et al., 2018).
Enterprise risk management applications would prevent unnecessary wastage of resources as the organization would identify the ways needed to optimize resources. The process would help understand and develop auditing demands for various business processes to ensure compliance with operation regulations. ERM involves monitoring and reporting of the progress of risk-aware operations that ensure compliance to effective business practices. It improves decision-making, planning, and understanding of the operational aspects to understand tasks’ prioritization. The organization would observe value-creating practices involving prompt, efficient, and effective response to events that comprise uncertainties to help avoid threats and capitalize on the opportunities.
Key Challenges and Solutions to Implementing Enterprise Risk Management
There may be a challenge in finding the best and most effective enterprise risk management framework. The organization needs to identify the various frameworks for risk management and understand its implementation requirements. The implementation department must understand the right technology and package needed to implement a particular ERM framework. The internal auditors should advise the executive and the implementation team of the appropriate risk framework for certain risks and their implementation (Fraser, & Simkins, 2016).
The inadequacy of the frameworks’ implementation tools would cause difficulties in the whole process. Sometimes, the human resource is not integrated into the ERM system, which would reduce its chance of implementation success. The achievement of the objects attached to the risk and conducting the ERM process would require an individual’s management plan. The organization would solve this by integrating the ERM process with the overall mission and vision. It enables the employees to consider the ERM demands in the overall goal to achieve its objectives.
The implementation of ERM systems would face the challenge of a complex environment characterized by volatility, uncertainty, complexity, and ambiguity. The predictability of events for a given event’s business outcomes is little because of the continuous change that would be experienced at quick instances. This impact makes measuring and evaluating risks a difficult task for the risk management departments. The organization would therefore face unexpected occurrences triggered by nature and change of policies. Companies should develop flexible frameworks that would be adjusted to cater to sudden occurrences.
There is insufficient knowledge of identifying the appropriate technique or the most efficient combination of techniques to identify and evaluate all the possible risks (Bohnert et al., 2019). Undetected risks would create harmful and destructive impacts on the organizations as they would not develop preventive and corrective measures. The company would risk losing valuable and reputation resources in the market. The risk-management team needs to develop scientific and systematic procedures to collect information about the various sectors of its operational structure to discover and uncover all possible risks. The team needs to have a deep understanding of the techniques for identifying risks using processes such as conducting prior internal audit reports, risk questionnaires, brainstorming ideas, business evaluation, or scenario analysis.
Human errors would cause harmful impacts to the organization as it implements an ERM framework. The risk management implementation personnel would not work on a unified understanding and objective towards achieving an effective risk management system (Saeidi et al., 2019). The organization would find it difficult to achieve substantial risk management developments with disorganized processes where team members would not know how their actions complement the other risk management activities.
The organization needs to have a combined understanding and agreement on risk definition, risk evaluation, risk management, likelihood, and ERM significance. This understanding ensures that the team has a collective purpose and direction towards achieving the company’s goals. The team needs to monitor the process to ensure that the agreed framework remains the implemented one. The monitoring roles should be defined correctly for the internal auditing, individual business managers, and the board. A risk-aware culture helps in institutionalizing the risk management process within the given company.
Importance of an Effective Enterprise Risk Management
An effective enterprise risk management process helps an organization achieve substantial profits from risk-related opportunities (Etges et al., 2019). The organization would understand the threats associated with a given opportunity and formulate a strategy to guide the risk-management team in conducting the risk management process. Effective risk management would enable the organization to succeed in achieving its objectives. It would enable the organization to avoid the possible barriers to delivering quality service and capturing the market’s attention to its commodities. It would therefore enhance its command in the harsh markets characterized by competitiveness and ever-changing market conditions.
The organization would avoid the possible breakdowns related to operation challenges related to a given supply and delivery system. It would improve the quality of service delivery to consumers using effective technologies and equipment. Operational risks would affect the transportation, manufacturing, and implementation of production processes, affecting business continuity resilience. Effective ERM frameworks would ensure that the organization provides an effective service delivery framework characterized by consumer satisfaction and quality service that observes the set schedules and product safety (Callahan, & Soileau, 2017). Effective ERM processes ensure the availability of key business and operation facilities like materials and labor by safeguarding the procurement and supply of resources and equipment. It increases the efficient use of resources and reduces the cost of production.
Effective ERM frameworks help observe the regulatory requirements for clinical safety and the health of employees. It ensures that the production process complies with the safety and effectiveness standards that improve product quality. Effective ERM frameworks help ensure that the products meet the set qualities that comply with the regulatory authorities’ set standards. It would improve the economic performance of the company and the achievement of exemplary financial results.
Financial risk-aware processes enable the organization to avoid additional tax liabilities and huge impacts from changing tax laws (Agarwal, & Ansell, 2016). The organization would also have efficient control of their credit risks that would ensure financial effectiveness. Efficient ERM frameworks would ensure that the organization avoids challenges related to inflation and fluctuating currency rates. It would also help them achieve substantial profits and protection in unexpected weather conditions and seasonal variations, especially for agricultural organizations.
Computer-related risks would involve the threats related to implementing information technology aspects and frameworks using software and smart systems to enhance service delivery (Khan, & Ali, 2017). The organization would need to set up computer infrastructure for a complex or emerging technology. An effective risk management framework for computer systems would ensure that the firm avoids the possible cybersecurity concerns related to technology while achieving huge profits and customer attraction. The information systems would be available without data breaches or fraud. They would understand the impact of third parties in business operation and control outsourcing facilities’ adoption towards profitability and market control.
Enterprise Risk Management in Netflix Company
Netflix company has experienced the impacts of implementing an effective and ineffective ERM program. The company grew from the identification and capitalization of providing video services and an assessment of market features. Netflix studied its competitors and developed a strategy to compete effectively using strategic adjustment of prices, analytics, and goals. It understood its market share and decided to shift to a streaming video delivery system. This risk management framework enabled the company to achieve unprecedented levels of profitability.
However, the company failed to implement an efficient ERM framework by spending three quarters of the year, buying back stock from its investors. This move is quite unnecessary in the industry, which threatened its cash position. It also failed to observe an effective ERM strategy by shifting its DVD rental branch to a separate entity called Qwickster that caused financial damage. This action forced them to resell the stock they had bought at a loss. The company learned from its mistakes and has recently undertaken more risk-aware moves and observed risk management in their business operations.
The company has shown huge success in its behavior to take operational risks to manage the rising cost of content to help compete effectively in the increased rivalry in the market. The ERM strategy aims to attract new customers by providing original content, increasing its subscriber growth and increased stock prices. The company needs to assess its realization of risk success from original content delivery that still needs time to develop. Netflix has a great tendency to take risks as they have a large risk capacity that enables them to take huge risks to manage the resultant damage.
Conclusion
Enterprise risk management is a significant advancement that organizations develop to manage the risks they face and risk management teams need to identify governance mechanisms that consider risk management. Organizations and business institutions need to conduct research on the subject and provide guidelines to enterprises on the concept’s best practices. The organizations would involve their various personnel in implementing ERM frameworks that includes a chief risk officer, the executive, and the auditors. Organizations such as Netflix would face challenges from failed ERM programs and failure to observe the concept in making business decisions.
References
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Etges, A. P. B. D. S., de Souza, J. S., Kliemann Neto, F. J., & Felix, E. A. (2019). A proposed enterprise risk management model for health organizations. Journal of Risk Research, 22(4), 513-531.
Florio, C., & Leoni, G. (2017). Enterprise risk management and firm performance: The Italian case. The British Accounting Review, 49(1), 56-74.
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