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Traditional Risk Management Vs.

Enterprise Risk Management

RMI 300 Professor Hoch Group #1 Anthony Agnese Katie Gounko Vincent Livreri Patrick McElduff Heather Rougeux Eric Santamaria Julian Torriente

Risk Management is a big part of the financial world; it helps determine the risk in an investment and how to handle the risk that comes with that investment. There are two types of risk management that organizations use to help determine and handle their risks: Traditional Risk Management (TRM) and Enterprise Risk Management (ERM). Traditional Risk Management mainly takes into account hazard and operational risks. Enterprise Risk Management looks further into other risks including financial and strategic. Traditional Risk Management and Enterprise Risk Management have four major differences: risk categories, strategic integration, performance metric, and organizational structure. Organizations usually do not favor one type of risk management over another; it mainly has to do with how they need to manage certain types of risks. TRM has risk categories based solely on pure risk where the status quo is the goal. Pure risk includes operational risk and hazard risk. ERM risk categories concentrate on all risk, both pure and speculative. The strategic integration for ERM is throughout the entire organization while a TRMs strategic integration concentrates only on the strategy of of the organizations departments that deal with pure risk. ERM uses performance metrics to reach equilibrium between risk and outcome. TRM uses performance metrics to measure success as either an activity or a result. For example, if people are getting hurt because they are not wearing protective eyewear while working and then the risk manager implements a policy where every worker must wear protective eyewear this is reducing the risk. During the performance metrics the organization would look at if the injuries decreased. The organizational structure of TRM consists of the manager of TRM reporting to a specific department head, for example the head of operations or the human

resource manager. ERM has the organization structure where the manager of ERM reports to the CEO of the organization because they are dealing with all departments and aspects of the organization Enterprise risk management expands an organizations risk focus to include financial and strategic risks, allowing it to account for all eventualities that can affect its ability to achieve goals.(Flitner, 2012) There are five key benefits regarding Enterprise Risk Management. The first is increased consistency and communication of risks within the organization. This can work for all members and departments in the organization. The consistency among each worker in the organization provides improved opportunities for strategy and coordination throughout the workplace. Communication about risk can be lacking around the office due to concerns of confidentiality and job security.(Ulrey, 2013) As a result of this, valuable information related to the overall strategy of the firm are not shared across various departments. Another benefit associated with ERM is the enhanced reporting and analysis of risks. Having enhanced reporting basically gives you better analysis of risks. Risk dashboards give directors and executives more focus and enabling them to make better decisions when it comes to certain risks. (Ulrey, 2013) Overall, the reporting gives the organization better categorization and classification of risk data. ERM can also increase your companys profitability. The reason for this is because strategic decisions involve more than preparing only for adverse outcomes. ERM allows your organization to venture into additional business opportunities by allocating resources by rational decision making at the local level.(Flitner, 2012) Through the ERM approach, every decision made at each level is sounder, which ensures efficiency. So over time, a sound ERM approach will show higher earnings. Adopting an

ERM approach ensures that if the unexpected happens, there will be much less disruption than usual since the organization has already listed that event as a possibility and has prepared for it through Enterprise Risk Management. Through these benefits the organization can work with a more cost-effective management. The cost effectiveness of ERM is directly related to certain audit activities; better management of the market, competitive and economic conditions, and increased leverage of disparate risk management functions. (Ulrey,2013) Organizations using ERM data and reporting can better manage their decisions when it comes to investments and capital, especially making their decisions timelier. These organizations will also be reducing their overall costs of their risk management processes and minimizing the need for resources for certain responses. Traditional risk management is described by George L. Head (a leader in the field of RMI) as: "In many organizations, risk management as a function is limited to only threats of loss.(Nyblom,2004) Traditional Risk Management uses a tactical approach by viewing a threat as a potential event that might or might not occur and is focused on the direct consequences of that threat. The goal of TRM is to minimize the effects of accidental losses for insurable events through financing, indemnification or holdharmless clauses, claim handling, or risk control. In most instances, these risks will directly affect program performance; the impact on a program's key objectives is most often an indirect consequence of a tactical risk. (Nyblom,2004) Traditional Risk Management can be broken up into two different processes, managerial and decision-making. TRM as a managerial process is defined as a process that includes the four functions of planning, organizing, leading, and controlling the

organization's activities to minimize the adverse effects of accidental and business losses on that organization at reasonable cost." (Arora,2011). While TRM as a decision making process follows a series of five steps that we have seen in class before: 1) Identifying and analyzing exposures to accidental and business losses that might interfere with an organization's basic objectives 2) Examining feasible alternative risk management techniques for dealing with those exposures 3) Selecting the apparently best risk management techniques 4) Implementing the chosen risk management techniques 5) Monitoring the results of the chosen techniques to ensure that the risk management program remains effective. Organizations who incorporate risk management techniques to their day-to-day operations find several advantages and disadvantages to these techniques. Traditional Risk Management has helped hundreds of firms in several different areas of business grow and prosper. When implemented correctly TRM can reduce or even completely eliminate certain risks that firms may face on a day-to-day basis. TRM also has the potential to help the silo mentality of business operations by opening better lines of communication so objectives can be met more efficiently. With advantages, come disadvantages. Most firms see a high cost for implementing TRM techniques and some firms seem hesitant to change and the fear of ending up with a lot of paper work. TRM techniques have changed or improved in most cases the effectiveness of how a business operates and conducts them. Another disadvantage of the TRM approach is that the risk factors must first be identified and evaluated, then eliminated.

This can cause problems because it assumes the objective reality of risk. The assumption that risk is objective gives managers a false sense of security. (Mangan, 2002) There has been a transition for the past years from traditional risk management to enterprise risk management. In the past managers have viewed risk in a negative way. They associated risk with costs and expenses; this is a TRM way of thinking. TRM is solely about managing risk. The transition, which has been from TRM to ERM, is where managers are starting to view risk as a positive aspect of business, which can create value (Rochette, 2009). The culture of risk management within business has changed. Although there are some organizations within some industries, which are still using TRM, most organizations have transitioned to ERM. ERM encompasses all risk and looks at risk as a positive, rather than a negative. Risk management can be done in two main ways, ERM and TRM, both of which help manage and control the risk of organizations. There are advantages and disadvantages to each; it is up to the specific organization to decide what type of risk management they feel will be the most beneficial. Most firms uses Traditional Risk Management for example Banks use TRM when they are concerned with a borrower who might default on their loans and Physicians uses TRM when they are treating their patients (Nyblom,2005). And for Enterprise Risk Management there was a case in 1982 where Johnson and Johnson had an incident where a person inserted poison into one of its product and then placed them in a store shelves causing seven people to died. They responded by recalling its product and then destroy them which costed them millions of dollars and lastly they made a method in preventing from people from tampering with any product (Garrison,2008). As you can see both TRM and ERM are different in its uses and the methods companies handles them.

References Arora, S. (2011). Disertation. In scribd.com. Retrieved November 7, 2013, from http://www.scribd.com/doc/54431522/Dissertation-Sahil-Arora-28-April Nyblom, S. E. (n.d.). Beyond Traditional Risk Management. In .onepetro.org. Retrieved November 7, 2013, from http:/www.onepetro.org/mslib/servlet/onepetropreview?id=ASSE-04-644-1 Do companies need Risk Management? (n.d.). In .pr9.net. Retrieved November 8, 2013, fromhttp://www.pr9.net/comp/science/1544march.html#.UoucunmDmSp Flitner, A. (2012). Foundations of risk management and insurance. (1st ed.). Malvern,Pennsylvania: The Institutes. Garrison, R., Noreen, E., & Brewer, P. (2008`). Managerial accounting (12 Ed ed.). New York, Ny:Mcgraw-Hill. Used Chapter One also it is an e book ; http://highered.mcgrawhill.com/sites/0073526703/student_view0/ebook/chapter1/chbo dy1/enterprise_risk_management.html

Mangan, Anita and Stahl, Bernd Carsten (2002): Who is Responsible for ISIS? The Irish credit unions problem of introducing a standardised information system. In: Hackney, Ray (ed.): Semantic Futures. Proceedings of the 12th Annual BIT Conference, Manchester, UK, 06 to 07 November 2002. NyBlom, S. E. (2005, may 12). [Beyond traditional risk management]. Retrieved November 18, 2013,from Risk Vue website: http://www.riskvue.com/articles/rb/rb0505c.htm Rochette, M. (2009). From risk management to ERM. Journal Of Risk Management In Financial Institutions, 2(4), 394-408. Ulrey, S. (2013). Retrieved from http://www.insideindianabusiness.com/contributors.asp?id=2148