Enterprise Risk Management: A Framework for Analytics

Last month, I introduced the concept of an “analytical broker” and discussed the push for analytics from the C-Suite down through the organizations that are your clients. I also used a small vignette to raise the question, “what is an analytical broker?”

This month, I introduce enterprise risk management from a new perspective. One of the best reasons to become familiar with an enterprise risk management framework is because it facilitates the application of analytics. In fact, you should primarily think of ERM as a framework for the application of analytics.

Every analytical broker should be familiar with the ISO 31000 ERM framework. This framework provides a common international platform for implementing ERM and the various analytical components.

There are three main ISO documents relating to ERM. They are:

• ISO Guide 73:2009 – This is a vocabulary index and helps get everyone on the same page in terms of word usage and definitions.
• ISO 31000 Risk Management – This is the detailed outline of the ISO ERM framework.
• ISO 31010 Risk Management Risk Assessment Techniques – This outlines various techniques for risk assessment.

You can purchase these documents directly from ISO’s website at http://www.iso.org/iso/home/standards/iso31000.htm. Alternatively, they are available at Amazon.com.

A quick summary of ISO 31000 is available on a Canadian based web site from the publishing company Praxiom Research Group, Ltd. They sell “plain English” translations of ISO standards. I have no affiliation with them, but did purchase their ISO 31000 document and found it to be a good overview.

http://www.praxiom.com/iso-31000-intro.htm

For an excellent book on the ISO framework, other ERM frameworks, and a variety of supporting topics, I would highly recommend Enterprise Risk Management by Fraser and Simkins:

http://www.amazon.com/Enterprise-Risk-Management-Practices-Executives/dp/0470499087/

I had the opportunity to meet with Dr. Simkins, one of the authors of this book, last year. She is one of the leading experts in the field and in touch with what is going on both domestically and internationally with ERM.

Analytics must have a purpose. ERM provides the framework and the connection to corporate strategy that makes the analytics valuable, which is why ERM is our first stop on the tour to answer “what is an analytical broker?”

While a full description of ERM is outside the scope of this blog, I offer the following survey results concerning implementation of ERM as evidence of the need and opportunity to utilize ERM as part of your analytical toolkit. (Survey Conducted by Enterprise Risk Management Initiative at North Carolina State University: 460 participating organizations (about half private / half public companies))

1. Only 28% of organizations surveyed were satisfied with their ERM implementation
2. 80% have “immature” implementation
3. 43% say implementation is poor
4. More than 50% of boards of directors have not assigned responsibility for risk oversight (note: this is a critical piece of ERM)
5. 44% say there is no or minimal tracking of risks
6. Companies have minimal awareness of various ERM frameworks
7. Highest awareness is of COSO cube, but most see it as theoretical and complicated (I did not discuss the COSO cube in this blog – I believe ISO is better and is certainly the standard outside of the US)
8. Top reason for struggles: Lack of resources dedicated to risk management (this is where being an ERM expert can create a competitive advantage)

The challenge is that ERM is an analytical process, and most organizations don’t have the resources to implement ERM. You, as an analytical broker, should be able to bring ERM to organizations that are large enough to benefit from its use.

A Process for Getting Started

In a recent speech to a group of brokers, I outlined the following process to get started with ERM as part of your analytical toolkit:

1. Implement ERM within your own organization (implementation for your firm has multiple benefits)
   • a) Appoint someone to oversee this
   • b) Train them to become your ERM expert
2. Design an ERM consultative process
3. Identify one large current client for an ERM engagement
4. Revise your ERM consultative process
5. Package ERM Consulting services and offer to current clients
6. Target a market with ERM assessment service and seminars
7. Add analytical capability within your firm by partnering with analytical firms (like SIGMA) and using analytical software

Finally, the power of data analytics is pushed through an ERM framework to create powerful competitive advantages. This is happening now. CFOs are under tremendous pressure to drive analytics into all aspects of the business. A unique opportunity exists for the “analytical broker” to create a leadership position within the marketplace.

Find someone within your organization to lead an effort to build ERM expertise. It is a critical step on the road to becoming an analytical broker.

As always, feel free to email me directly with your comments at TLC@SIGMAactuary.com. Also, register for our free resource portal at www.SIGMAactuary.com/resources.