Difference Between Traditional Risk Management and Enterprise Risk Management

Every individual in an organization, ranging from the CEO to the janitor, is involved in the process of risk management. A few examples that demonstrate this are the janitor placing a ‘Wet Floor’, the company purchasing liability insurance in the event of a mistake or unhappy customers, or an IT director who looks out for vulnerabilities and takes steps to protect the organization’s data and systems. All these acts are extremely critical but we are going to discuss how the enterprise risk management overshadows these traditional risk management methods to provide a wholesome solution for preventive measures.

Difference Between Traditional Risk Management and Enterprise Risk Management

1.  Key is to observe their definitions to observe the distinctions:

Traditional risk management definition? The textbook definition of traditional risk management is the forecasting and evaluation of risks amalgamated with the identification of procedures to avoid or minimize their impact. Whereas enterprise risk management entails the process of planning, organizing, and controlling the activities of an organization to minimize the effects of risk on the company’s capitals and earnings. This considered as an extension of the traditional procedure incorporating all the possible types of risks or threats that the company faces and eliminating the aspects that hinder the company’s ability to meet its objectives.

2.  Enterprise Risk Management involves a holistic approach to the internal controls:

Usually, in a regular risk management service structure, the work is departmentalized and focused primarily on hazard risks. This approach rarely allows room for relative comparisons among its risks to determine how they interact with each other or evaluate their cumulative effect on the organization. Here, each department, business unit, or silo deals with its own risks and has little or no knowledge of the organizational risks. On the contrary, in an ERM environment, there is a senior executive or Cheif Risk Officer (CRO) who compares and all of the risks the company faces in a comprehensive manner. A well-designed and implemented Enterprise risk management network operated in a top-down fashion and with reliability engineering to its core and broad perspective of the overall organizational risks.

3.  The traditional method relies on tactical whereas ERM relies on a strategic approach:

As mentioned in the header, the age-old traditional method usually focuses on preventing loss within the business unit, albeit enterprise risk management focuses on lowering the risks, increasing sustainability, and providing savings/value across the entire organization. Since the ERM effort is enterprise-wide, it supersedes any departmental or functional autonomy to encourage continuous review and support of the company’s most value-based objectives. Enterprise risk management elevates the process to a strategic organizational level. According to some dignitaries, the rapid evolution of the threat actor tactics requires consistent evolution of control design and effectiveness and regulatory compliance is essential but insufficient to achieve enterprise resiliency.

4.   Enterprise risk management is a proactive and continuous process:

When compared to ERM, traditional risk management is reactive as well as sporadic approach. A rearview like the regular risk management does not take into account the risks to objectives and are bourne out of a particular event that management responds to. Usually, the executives, managers, and support staff go into a scramble mode when something comes up. This kind of reactive approach can often result in the failure of an organization. While taking a more proactive approach like enterprise risk management helps the company get out in front of the risk and seize the opportunity to achieve strategic objectives.

5.  Finally, enterprise risk management is new but getting deeply embedded in the mindset:

The traditional risk management helps every organization in some ways but s great disjointed or ad-hoc with no rhyme or reason per se. A mature ERM process provides a valuable tool for identifying and assessing risks. As seen in several cases this may even be an informal process where a manager stops for a minute and reflects on how their actions may create a reputation, talent, strategic, or some other kind of risk to the company.