Risk management has become a critical aspect of organizational governance in today’s ever-evolving business landscape. Companies are constantly navigating various risks that could impact their operations, financial stability, and reputation.
Two key components of risk management are Enterprise Risk Management (ERM) and Third Party Risk Management (TPRM). In this section, we’ll delve into what these frameworks entail and how they intersect to safeguard Organisations against potential threats.
Enterprise Risk Management (ERM): A Comprehensive Approach
ERM is a structured framework designed to identify, assess, and mitigate risks across all aspects of an organisation. Developed over decades, ERM has matured significantly, particularly following events like the 2008 financial crisis, which underscored the need for more robust risk management practices. Today, ERM is considered a cornerstone of risk management in large enterprises.
At its core, ERM involves establishing comprehensive risk management policies that articulate the company’s commitment to addressing various risk categories. These policies set the stage for defining risk appetite, determining the threshold beyond which risks are deemed unacceptable. Risks are categorised into financial, operational, compliance, project, IT, cyber, environmental, HR, contractual, security, and fraud risks, each requiring specific management standards and accountability measures.
An example of an Enterprise Risk Management Framework
Strategic risks, in particular, are highlighted as they can significantly impact a business’s strategic direction. By addressing these risks proactively, Organisations aim to enhance business resilience and ensure continuity in the face of disruptions.
Underpinning the ERM framework are platforms, tools, and techniques that different organisational functions employ to manage diverse risk types effectively. Additionally, the traditional three lines of defence model—comprising operational management, risk management and compliance functions, and internal audit plays a crucial role in reinforcing risk management practices.
Third-Party Risk Management (TPRM): Extending Risk Oversight
As Companies increasingly rely on third-party suppliers to deliver critical products and services, managing risks associated with these external entities has become paramount. Third-party risk management (TPRM) extends the principles of ERM to encompass risks inherent in the supply chain.
Just as companies implement ERM internally, they expect their third-party partners to adhere to similar risk management standards. However, gaining visibility into the risks posed by third parties can be challenging, especially in complex supply chains involving multiple layers of suppliers.
TPRM involves assessing and monitoring risks associated with third-party relationships through various engagement techniques, including collaboration, relationship management, performance monitoring, and risk assessment processes. By leveraging data insights and gathering relevant information, Organisations can anticipate potential risks and ensure that third-party partners effectively manage their own risk landscapes.
An ERM Framework represents a single organisation risk landscape
Intersecting Frameworks: ERM and TPRM
While ERM focuses on internal risk management, TPRM extends this oversight to external partners, aligning with the supply chain risk management concept. Effectively, TPRM serves as an extension of ERM, enabling companies to assess and mitigate risks across their entire ecosystem.
Multiple ERM Frameworks and the same as Multiple Organisations in the Supply Chain
By integrating TPRM into their overarching risk management strategy, Businesses can strengthen their resilience and mitigate potential disruptions stemming from third-party relationships. However, managing TPRM effectively requires robust platforms, tools, and services tailored to the unique challenges posed by external partnerships.
ERM Enter TPRM with visibility issues
Visibility in an organisation’s risk landscape is infinitely harder from one organisation to the next and thus why the dedicated TPRM disciple was created.
ERM Big Data big scale issue
Even just as this visual scale of 5 suppliers each with three sub-suppliers you can see how the problem very quickly becomes one with a lot of moving parts and complexities.
In conclusion, the relationship between ERM and TPRM underscores the interconnected nature of modern risk management practices. As businesses navigate an increasingly complex and interconnected global landscape, adopting a holistic approach to risk management encompassing internal and external risks is essential for long-term success and resilience.
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