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Enterprise risk management (ERM) programs succeed when they effectively manage strategic risks across an organization, enabling it to identify and manage emerging threats, evaluate trends, and drive meaningful enhancements to the business’ resiliency. But simply having a risk management program in place does not necessarily drive optimal value from ERM.
A mature ERM program is intrinsically connected to business strategy and can deliver a sustainable competitive advantage by enhancing decision making and intelligent risk taking. MNP has established an ERM Maturity Continuum to achieving and sustaining ERM maturity in a cost-effective manner. Most organizations achieve the first two levels without significant challenge:
However, many enterprises struggle with the next three levels of maturity:
In assessing ERM maturity on this five-point scale, we consider the following eight key components of a leading ERM program:
The assessment must consider the organization’s culture, values and operations – recognizing that each ERM program must be truly customized to reflect the unique operations and business environment within which the organization operates. The evaluation focuses on whether the ERM program is truly driving improved results through enhanced corporate value and business resiliency; rather than how well documented or designed the ERM process and supporting tools are.
Hitting the Wall
Often organizations’ risk management programs plateau at ERM maturity level three, after all aspects of the ERM Program have been designed and implemented at a strategic, entity level. But to truly optimize value, ERM programs need to transition to the next level, where ERM is embedded and evolving throughout the organization. To do so often requires a substantial shift in the organization’s risk culture and awareness, both at board and executive level, while integrating risk management thinking throughout the organization.
A first step is to make risk management a core skill set and discipline for all members of the leadership team is to ensure they understand how ERM programs leverage strategic risk-based decision making to become a competitive advantage. This can be aided by building ERM roles and responsibilities into job descriptions and ERM metrics into executive compensation programs.
Rev Up Your ERM Program – Here’s How:
Know Your Limits
Enterprises can miscalculate their risk appetite with potentially negative outcomes by failing to:
A global manufacturing company, that had a comprehensive ERM program took on more risk than it could support and this had a negative impact on the value of the company. Why? The executives did not fully embed risk management in all key decisions or consider risk appetite and tolerance in key decisions. Formalizing risk management establishes transparency and a common understanding of the risks and associated management strategies that will deliver better corporate performance.
At a level 4 ERM maturity, companies incorporate proactive risk-based decision making into all strategy discussions. Executives need to consider related risks when assessing every strategic opportunity and implement proactive risk mitigation strategies to avoid the impact of unmitigated risk.
Intelligent risk taking for the global manufacturing company would have seen its ERM program consciously build up scalable risk mitigation capability. The company originally took on only one new innovation project a year because it lacked confidence to manage more. A mature ERM program could determine if their risk mitigation strategies could be scaled to take on several new innovation projects at the same time, then manage the increased strategic risk effectively.
Gain a Competitive Edge
The ability to measure strategic risk and embed risk-based decision making in strategic planning and discussions grants an organization more assurance to innovate and take intelligent risk. This can lead to outperforming peers – and increasing your risk appetite over time.
Innovative companies take more well-calculated risks to create new products and services that the competition lack. Many use data analytics to study both opportunity and risk, so when the risk actually occur they already have an effective risk mitigation strategy in place. Highly advanced ERM programs are also using robotic process automation to continuously monitor key risk indicators. A level 4 ERM program in this case provides the confidence to be ready, move faster and be more agile than the competition.
It’s important to overcome the ERM Maturity level 3 plateau. An effective and mature ERM program will also help in gaining the support of your organization’s board and executive to embed a new way of thinking around ERM and implement new innovation at a faster pace and larger scale while delivering sustainable positive results.
ERM maturity is a high value discipline that is a long-term strategic journey for high performing organizations. The sooner you get started on the journey, the sooner you will experience the rewards.
Contact Richard Arthurs, Enterprise Risk Services, at 587.702.5978 or [email protected]
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