The Key to Efficient Enterprise Risk Management

Risk management is not just a technical process of actions according to formalized algorithms that allow making an unambiguous and deterministic risk decision. Risk management requires teamwork, which is carried out primarily in a communicative context. Communication and consultation between risk management participants are integral to this process and should always be in an open manner.  

The effectiveness of the risk management process directly depends on the extent to which all stakeholders understand each other’s points of view and, if necessary, actively participate in the decision-making process. Consulting is an essential prerequisite at each stage of risk management. Together with interaction, it implies a dialogue between participants in the risk management process, with a focus on consultation rather than a one-way flow of information from the decision-maker to other stakeholders. 

Creating Effective Risk Management Processes 

At the stage of modeling risk management processes, it is necessary to develop a plan for the interaction of its participants. This plan should address both the risks themselves and the processes for managing them. The engagement plan should reflect procedures for communication, risk discussion and consultation. 

Internal and external communications ensure understanding of the essence of the decisions made and the reasons for specific actions both on the part of the persons responsible for the implementation of risk management processes and all interested parties. The effectiveness of the processes of internal informing of the participants in risk management directly affects its effectiveness. 

Risk management participants usually judge risks based on their own perceptions and life experience. Perceptions of risks may differ for different parties, the reason for this lies in the different points of view on what is happening, in the different ideas, needs, problems and concerns of the parties concerned at the moment when they come into contact with the risk or the issues discussed. Since the parties can have a major influence on the decisions made, it is important that risk indicators are clearly defined, recorded in writing, and included in the decision-making process. 

Creating Risk Ownership 

Securing interest in risk management processes allows to “distribute” risks to individual managers, as well as to involve all participants in risk management in these processes. A consultative approach helps to assess the benefits of individual control methods and the need for approval and support for a risky decision. 

Depending on the specifics of risk management processes, the business culture of the organization, the importance and significance of risk situations, the need and degree of record keeping (data registration) at the stage of interaction and consultation is determined. 

Risk communication is an interactive process of exchange of information and expert assessments of the main parameters of risk and their management. It should be noted that this process should be carried out simultaneously and in parallel in two directions: (1) – directly within the company; (2) – between the firm and external participants in risk management. 

Inter company interaction should be carried out both along the vertical hierarchical structure of administrative management and through linear cross-functional links between the structural units of the firm. 

Involving Stakeholders 

The experience of participants in risk management in most cases is the determining basis for establishing the causes and factors of the occurrence of risk situations. Interaction and counseling help to increase the objectivity of risk assessment and excludes “stereotyped” thinking. For example, senior management determines the direction of investment in a number of projects based on their own understanding of the parameters of risks. At the same time, top managers of the organization assess the size of risk differently than top management. In a number of cases, company employees who operate at the operational level of production identify a number of risks that have “dropped” from the field of vision of their managers. Feedback is an essential element of intra-organizational interaction and allows the development of effective models and methods of risk management. 

Communication and consultation are an integral part of the overall risk management process and must be implemented at each stage of the process. In risk management, special attention is paid to the issues of adequate identification of risk management participants, determination of the degree and nature of their interest in a particular stage of the process. Based on the data obtained, an interaction plan is developed. This plan should establish the purpose of the interaction, who provides advice to whom, when it happens, how the process takes place and how it is evaluated. In an organization, effective communication is essential to developing a “culture of risk management” that distinguishes between positive and negative aspects of risk. Risk communication enables an organization to develop its own unique concept of acceptable risk. 

Involving other participants in the risk management process (for example, experts on specialized issues), or at least obtaining expert opinions, is an essential and decisive condition for effective risk management. Interaction with participants in risk management makes risk management more balanced, puts it on a qualitative basis and gives importance to the organization.