No two ways about it: investment always carries risk. No one knows what tomorrow will bring. This is why probability theory lies at the heart of good strategic investment and business decisions.
Predicting possible outcomes and having a prepared plan of action for each of those outcomes has been the traditional approach to risk management. But businesses, asset managers, and pension fund managers need something more both to avert financial disaster and maximize returns on investment.
They need workable risk management solutions. Integrated Risk Management is a formal framework and an iterative process with the key objective of delivering improved outcomes. Let’s look at the bare bones of what IRM entails.
What’s the Latest in IRM?
The “integrated” part of Integrated Risk Management (IRM) means that managing risks does not occur in isolation. Forget silo thinking here: think instead of how all types of risks interrelate. Think, too, about all the cost-reducing and risk-reducing business decisions you can make if you have a clear end-to-end view of risks to your business.
We’re talking about using a cloud-based platform to help you see the big picture. Software that integrates non-insurable and insurable risk and the strategic and operational risks inherent in your business plan makes easy work of a complex set of data and steps to follow in the process.
Steps in the IRM Process
Any IRM process will begin with a documented set of objectives and the rationale behind them. The next step will be to identify risks, and produce a heat map, also called a risk matrix. The risk matrix shows:
- The perceived risk and likely impact
- What is likely to be gained from taking the risk (the reward)
- Details as to who in the organization is responsible for monitoring and managing the mitigation of that risk.
Risk analysis enables you to determine acceptable outcomes and unacceptable outcomes. Both types of outcomes need to be monitored. For acceptable outcomes, monitoring metrics such as the net debt to EBITDA ratio are useful.
For unacceptable outcomes, key drivers of those outcomes need to be identified, and strategy reviews are done to reduce their probability. Risk mitigation carries with it a cost, such as insuring against that risk, liability management, hedging, and security guarantees.
IRM can be applied to any type of activity, and not just investments:
- Cyber and IT Risk Management
- Vendor Risk Management
- Audit Management
- Corporate Compliance & Oversight
- Cybersecurity Governance
Unlike traditional GRC platforms (governance, risk, and compliance), IRM goes one step further and deals with all these elements within the same integrated framework. It also shows how the different elements interrelate and what impacts those interrelations have.
What Can You Expect from Integrated Risk Management Solutions?
You can expect a clear overview of risk in all areas of your business:
IRM software and platforms offer graphic representations for risk projections when the team is contemplating investment. By way of explanation, think of a cash flow forecast, except for risk factors.
Real-time reporting (itself a risk mitigation plus) and the ability for all members of different teams to collaborate on actions to take to mitigate unfavorable outcomes streamline your organization. IRM helps you achieve a type of agile management that will likely place you ahead of your competitors.
Better Bottom Line
Digital transformation has made it necessary for businesses in all sectors to up their game. Greater online visibility means that competition is factoring more and more as a driver for growth, making risk management solutions essential for survival.
Integrated Risk Management offers fresh perspectives on risk. Speak to your management consultants or accounting firm today about implementing IRM and organizational structure to deal with risk governance, a risk management advisory team, and risk management processes. And feel free to read our other articles on financial growth.