Differences Between Traditional Risk Management and Enterprise Risk Management

There is no way around it; every business faces some level of risk. As such, the key to that business’s success stems from its ability to identify risks early and implement measures to mitigate or avoid them. Thankfully, both traditional and enterprise risk management services help businesses do just that.

Unsure which approach to opt for? Let’s weigh traditional risk management vs. enterprise risk management to determine which best fits your business.

Traditional Risk Management (TRM)

Traditional risk management focuses on identifying, evaluating, and mitigating risks at the department level. This means that every department is responsible for managing the unique risk it faces using tailored tools and methods.

Enterprise Risk Management (ERM)

Enterprise risk management offers a more holistic approach to managing risk by employing an organization-wide view, creating solutions that align with the business’s strategic objectives.

How Traditional Risk Management Differs From Enterprise Risk Management

Since a lot of the risks you face will be unique to your business, it is especially crucial to pick a risk management approach that works for you. Weighing traditional risk management vs. enterprise risk management and exploring the differences between these risk management strategies allows you to do that.

While they both play a vital role in helping you identify, assess, and manage risks, their approach and outcomes are quite different.

Scope

From their definition, the first difference that pops up concerns the scope. Traditional risk management only focuses on siloed departments. This means that its interests are in identifying and mitigating the risks that a specific department faces.

Alternatively, its counterpart offers organization-wide risk management tools. It takes a more comprehensive approach, helping you gain a better understanding of your business’ overall risk profile.

Leadership Involvement

Since enterprise risk management integrates into a business’s strategy and planning, it brings the business’s senior leadership team into the fray. They play an active role in assessing the risks they feel could impact the company’s long-term success.

Timing

Traditional risk management is more reactive, often coming into play once an incident has already occurred. The approach then tries to prevent that incident from reoccurring.

With enterprise risk management, however, companies can look into the future, identifying potential events and how best to react to them should they occur.

Risk Appetite

The reactiveness of these two strategies brings about another difference: risk appetite. Businesses that use a traditional risk management approach focus on risk avoidance. With enterprise risk management, though, the risk appetite is much higher.

This is because this approach focuses on identifying and assessing all the potential risks to determine the ones an organization can accept as it chases its objectives. Doing so allows organizations to take calculated risks, which creates an opportunity for better innovation and greater success.

Adaptability

Traditional risk management relies on standardized practices that make it less adaptable. In fact, the practices it uses have been around for years. You can apply them to your organization with little to no customization and still achieve your desired results.

On the other hand, enterprise risk management is a lot more fluid and agile, a crucial feature that facilitates its proactive approach. Sure, there are standards you can refer to, but you can’t simply copy and paste them.

Nature of Risk Assessment

When weighing traditional risk management vs. enterprise risk management, you’ll notice that there’s a difference in how these two approaches assess risk.

With traditional risk management, the assessment is one-dimensional. It is only concerned with one area: how bad will it be if a risk were to happen again? The alternative approach, however, is concerned with assessing more than just the severity of a certain risk.

In enterprise risk management, you’ll examine other factors, such as:

• What are the chances of a specific severity?
• How quickly will your organization feel the effects?
• How widespread will these effects be?
• How long will it take for the organization to recover?

Choosing the Right Approach for You

Understanding the differences between traditional and enterprise risk management will help you pick an approach that aligns with your organization’s nature and goals.

For instance, traditional risk management is often ideal for organizations looking to mitigate risks in a specific department, especially if the risks are predictable and clearly defined.

Unfortunately, this approach is quite limiting for complex organizations. The siloed risk registers create blind spots while the approach’s backward-looking analysis hinders their ability to anticipate changing conditions or emerging threats.

Since your ability to identify and manage risks directly impacts the level of sustainable success your business enjoys, it is vital to pick the right approach.

When Traditional Risk Management Is Best

A traditional risk management approach will make an ideal option if your business:

• Is in its early growth stages
• Has limited cross-functional dependencies
• Operates in a stable regulatory environment
• Mostly faces operational risks that do not need strategic, organization-wide alignment
• Does not require organization-wide reporting

When Enterprise Risk Management Is Ideal

There are moments, however, when opting for enterprise risk management will be more ideal. This is especially the case for organizations dealing with complex risks that cut across various departments. Such businesses can’t operate with siloed risk registers.

Thankfully, by choosing the ERM approach, these organizations can employ more strategic and integrated practices, aligning how they manage risk with their overall objectives. The holistic view this approach gives them goes a long way in helping them understand their risk profile and make more informed choices.

Your Innovative Solution to Managing Risk

Are you weighing traditional risk management vs. enterprise risk management, trying to decide which option will work best for you? While TRM does have its benefits, enterprise risk management offers most businesses the comprehensive solutions they need to cover a wide range of risks.

Here at Union Risk Services, we specialize in creating and implementing a tailored enterprise risk management approach, helping your business find effective ways to avoid risks.

Talk to us today at 718-370-3131 and get the tools you need to build a more stable, resilient business.