Perhaps the most fundamental way that enterprise risk management (ERM) creates value is by improving the decision-making process, infusing it with a keener understanding of the risks involved in, say, a decision to enter a new product market or shift manufacturing to a new geographical region. But ERM also enhances the company’s brand and its standing with stakeholders by raising its reputation for strategic adeptness and ability to respond successfully to new opportunities in the market.
In the recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts, we identified three levels of proficiency: Beginners, Transitionals, and Trendsetters (see part three for more information about these levels). How do companies join the ranks of the Trendsetters, the most proficient level? The profile of Transitional companies that emerged from our survey suggests a top-down pattern that starts with incorporating the risk management function into strategic planning (58% of Transitionals say they have done so) and the budgeting process (59%). Transitionals cite increased competition as the most important trend they face (42%), suggesting this is often what spurs them to make risk management a part of their decision-making.
Almost two-thirds (65%) use ERM to facilitate alignment between people, processes, and infrastructure—more than either Trendsetters or Beginners—but far fewer are implementing it consistently across units or monitoring and updating the function frequently. Quantitative and qualitative risk assessments, which can play a role in strategic and budgetary decisions, are the analytic tools that Transitionals are most likely to use—33% and 36%, respectively—but they use other, more cutting-edge tools, such as horizon scanning and predictive methodologies such as scenario planning, much more rarely. Collectively, these attributes suggest that closer attention to implementation and adoption of a fuller spectrum of the tools and techniques ERM makes available are a key difference between Trendsetters and Transitionals.
In Part 5 of this blog series, we will look at ERM best practices commonly used by Trendsetters.
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For more information, please contact Mark Stephens.