Additional benefits of Risk Management
Institutions do not operate in a risk-free environment, and no risk management process can guarantee such an environment.
Instead risk management assists the institution to:
· Avoid certain adverse outcomes through taking proactive steps (fraud risk prevention etc);
· Help institutions cope when actual incidents do occur (business continuity plans, insurance etc);
· To identify opportunities for continuous improvement.
Through the above, effective risk management therefore assists institutions to achieve its performance and service delivery targets, and to reduce the potential loss of resources. This results in effective responsibility and accountability structures, the improvement of the format used to report performance, and with the compliance with laws and regulations, thus avoiding damage to its reputation and other consequences. Additional key benefits include:
· Increasing probability of achieving objectives
As ERM is participatory and proactive it helps management achieve the institution's performance and financial targets and assists with the prevention of loss of resources. Controls and risk interventions will be chosen on the basis that they increase the likelihood that the institution will fulfil its intentions / commitments to its stakeholders.
For example, Management could decide to develop and implement a business continuity plan as a risk mitigation strategy to ensure that the institution achieves the service delivery excellence objective.
· Aligning risk appetite and strategy
Management considers their risk appetite in evaluating operational alternatives, setting related objectives and developing mechanisms to manage related risks. Risk Management thus assists management to take the right decisions in an uncertain environment. Focusing of risk analysis and responses improves the quality of strategic plans. It generates plans, which are comprehensive and analytical.
For example, an institution has a low risk tolerance for adverse publicity. Accordingly, the institution maintains extensive communication protocols to ensure that only positive communication is sent out by the institution.
· Enhancing risk response decisions
ERM provides the rigour for management to identify alternative risk responses, risk avoidance, reduction, sharing, and acceptance.
For example, Management of a local municipality recognises the inherent risks related to its public transport department (i.e. public liability and vehicle damage). Available risk response decisions could include either: outsourcing the public transport service, sending the drivers of the vehicles on advanced driver training courses or sharing the risk by taking out insurance policies.
· Reducing operational surprises and losses
The institution gains enhanced capability to identify potential events and establish responses thereby reducing surprises and associated costs or losses i.e. meeting targets and reducing over/under spending of the budget.
For example, a local coastal municipality could have taken into consideration historical and analytical information available to them regarding natural disasters (floods, large tidal waves) when compiling their integrated development plan as well as the service delivery and budget implementation plan.
· Identifying and managing multiple and cross-enterprise risks
The institution faces a myriad of risks affecting multiple parts of the institution. ERM facilitates coordinated responses to the interrelated impacts and enhances an integrated response to multiple risks.
For example, a public entity would have a myriad of legislation to comply with. An effective ERM process would ensure that the risk of non compliance to legislation has been aggregated across the institution and not just within the various departments of the public entity. This will allow the public entity to respond effectively to any movement in the risk profile.
· Seizing opportunities
By considering a full range of potential events, Management is positioned to identify and proactively realise opportunities.
For example, a local municipality during risk identification has identified that rate payers are becoming increasingly more technologically conscious. In determining its response, Management has identified ways to enable rate payers to pay their bills via internet banking.
· Ensuring proper financial and asset management
ERM contributes to ensuring that there is proper financial and asset management within in the institutions.
For example, when identifying possible risks at a Department, Management should take into consideration the effects of possible changes to the accounting standards. A risk response plan should be developed to understand and implement the changes on a timely basis.
· Ensuring compliance with laws and regulations
ERM contributes to effective reporting and monitoring of compliance with laws and regulations and assists with the limitation of damage to the institution's reputation and associated consequences.
For example, in any fully effective and implemented ERM process, compliance is one of the key elements. By reporting on incidents of non compliance to laws and regulations on a regular basis will ensure accountability and transparency within the institution
As can be seen from above, by being proactive and energetic in the embedding of the risk management process, there are many benefits to the institution.