In today’s interconnected business landscape, risk management has become an increasingly important aspect for organizations to consider. With the global supply chain becoming more intertwined, risks faced by one entity can have a ripple effect across the entire network. Therefore, it is crucial for businesses to have mature enterprise risk management programs that can effectively deal with the dynamic nature of risk.
But what exactly does risk maturity mean? Risk maturity refers to how well an organization can identify, assess, manage, and monitor risks. It measures the level of quality and integration of an organization’s risk management practices. A highly mature organization will be adept at making risk-informed decisions and achieving desired outcomes. It understands its risk appetite and can effectively manage an acceptable level of risk. Additionally, it can gather data on risks from all parts of the organization and communicate this information to stakeholders, providing them with actionable insights.
To help businesses assess their risk management capabilities and progress towards their enterprise risk management goals, risk maturity models (RMMs) are utilized. These models serve as assessment tools based on established standards such as the ISO 31000 Risk Management Standard and COSO. They allow organizations to benchmark themselves against industry best practices and identify areas for improvement. By using an RMM, businesses can establish repeatable policies and procedures, consolidate workflows, make informed risk-based decisions, and implement comprehensive ERM technology stacks that centralize risk information and automate risk policy enforcement.
Many organizations view ERM and risk maturity as a competitive advantage. By effectively managing risks, businesses can avoid potential pitfalls and gain a competitive edge. Risks can come in various forms, such as weather-related disasters or cybercrime. By benchmarking against peers and industry best practices, companies can use risk management to not only mitigate existing risks but also generate more profitable opportunities. Chief risk officers play a crucial role in utilizing risk as a strategic tool for growth and profitability.
There are generally four or five levels of risk maturity that an organization can attain. These levels vary slightly depending on the model used. For example, risk thought leader David A. Hilson specified four levels in his article “Towards a Risk Maturity Model”: Naïve, Novice, Normalized, and Natural. Another model coined by Steven Minsky features five levels of maturity: Ad hoc, Initial, Repeatable, Managed, and Leadership. These levels assess an organization’s culture, business processes, employees’ experience level, and application of risk management processes.
No matter the specific model framework, the levels in an RMM typically progress from reactive to proactive as the organization becomes more risk mature. Attributes evaluated in an RMM include executive support for an ERM-based approach, ERM process management, risk appetite management, root cause discipline, uncovering risks, performance management, business resilience and sustainability.
To assess an organization’s level of risk maturity, an audit should be conducted against the criteria laid out in the RMM. Each attribute is then evaluated, and the organization is assigned the appropriate level of maturity. This assessment helps management identify areas of strength and areas that require improvement. It can be used to benchmark against other organizations and gain a competitive advantage. Some ERM software providers offer their own RMMs and guide client organizations through a managed risk maturity assessment. Additionally, the Risk and Insurance Management Society (RIMS) provides a free online assessment tool.
After assessing the organization’s risk maturity, appropriate actions can be taken to advance its level. Ad hoc organizations should focus on implementing the beginnings of a risk management program. Initial stage organizations should work on turning fragmented ERM processes into standardized repeatable ones. Repeatable stage organizations should formalize standardized ERM processes across the business. Managed organizations can then focus on making ERM more proactive and strategic. Leadership organizations find ways to create value in the ERM program.
Various risk management frameworks and standards can be used as guidelines for developing ERM programs. Examples include the COSO ERM integrated framework, which provides principles and concepts for effective risk management and the ISO 31000, which provides guidance and processes to help organizations manage risk effectively.
In conclusion, risk management is crucial in today’s interconnected business environment. Risk maturity models provide organizations with tools to assess their risk management capabilities and progress towards their ERM goals. By adopting mature enterprise risk management practices, businesses can make informed decisions, mitigate risks, and gain a competitive advantage.