ORM Vs ERM | What are the fundamental differences?

What is the difference between Operational Risk Management and Enterprise Risk Management?

In reality, Operational Risk Management (ORM) is only a small part of a truly holistic Enterprise Risk Management (ERM) program. In this blog, we explore the fundamental differences between Operational Risk Management and Enterprise Risk Management. We examine the stark contrast between the focus areas of each program, explain how the primary objectives and stakeholders differ, and explore the additional benefits an ERM program can bring by aligning risk management activities with strategic objectives and enterprise performance.

A Difference in Key Focus Areas

ORM specifically focuses on managing risks related to day-to-day operations within the organization. This includes the operational risks associated with processes, systems, people, and external factors that can impact the organization’s operating model.

ERM on the other hand has a much broader scope, with a focus on identifying and managing risks across the entire organization including strategic, financial, operational, IT & Cyber, third-party, and compliance related risks. ERM has a strong focus on managing risk in line with strategic objectives and enterprise performance – enabling companies to take certain risks in order to achieve their long-term goals and avoid risk which could have a detrimental impact on operational performance.

Differing Objectives

The objective of ORM is to identify, assess, and mitigate risks that could disrupt or negatively impact the organization’s day-to-day operations. It focuses on minimizing the likelihood and impact of operational failures, such as process breakdowns, technology failures, human error, or external events.

The primary objective of ERM is to ensure that the organization achieves its strategic objectives while effectively managing risks. ERM aims to provide a comprehensive framework for identifying, assessing, prioritizing, and managing differing types of risk across the entire enterprise. With this broader scope of objectives, ERM needs a more integrated approach with significant data mapping to enable an organization to understand the impact of risk on strategic objectives and enterprise performance. The risk teams and board members would then use the consolidated ERM data to support strategic decision making – enabling them to take risk in areas where the reward outweighs the risk.

Different Stakeholder Involvement

As ORM is dealing with purely operational risks relating to people, systems and procedures, the stakeholders tend to include operational managers, process owners, and frontline employees who are directly involved in identifying and managing operational risks within their specific areas of responsibility. Risk teams will likely own the process and do the reporting and share the results with senior management teams.

Although ERM is still typically driven by the risk team, it requires further involvement from senior management and the board of directors in setting risk appetite, marking strategic risk decisions, and getting oversight of an organizations overall risk exposure. ERM considers the interests of all stakeholders, including shareholders, customers, employees, regulators, and other external parties.

Of course, ORM is still one aspect of ERM, and those same operational managers, process owners, and frontline employees will still feed data into the operational aspects of the ERM program, but holistic ERM includes many more teams, departments, and individuals from across the organization.  IT teams will be involved in the cyber & IT risk aspect, those who deal with suppliers, vendors, and service providers will be required to feed into the third-party risk management program. The compliance team and operational employees will be involved to ensure compliance with policies, procedures and regulations and employees of all levels will be involved in logging incidents, hazards and near misses, to understand risk exposure.

ERM requires a much heavier involvement from the board and senior leadership team than traditional operational risk management programs. The board will be involved in defining the organizations goals & strategic plans and cascading them throughout the business to ensure completion. As part of their strategic plan, they will want to capture and manage strategic risks and they will want the authority to enable certain risks – if the likely outcome supports their strategic plans and outweighs the risk. Mapping risk to strategic planning through an effective ERM program is essential for leaders to get visibility of how risk will impact performance and strategy to make important strategic decisions regarding risk taking, budgeting, and resource planning.

Differing Levels of Integration Required

ORM is often a subset of ERM and is integrated into the organization’s operational processes and focuses specifically on operational risks and their mitigation strategies.

ERM on the other hand provides the overarching framework for managing other types of risks in addition to operational risk including IT & cyber, third-party, strategic, and compliance related risks.

ERM integrates risk management into the organization’s overall strategic planning and decision-making processes. It considers the interdependencies between different types of risks and their potential impact on the organization’s ability to achieve its objectives. ERM also considers the impact of risk on operational performance enabling the organization to take risks to improve performance and avoid those risks that will negatively impact performance.

Different Software Capabilities

While ORM and ERM programs are both best managed using GRC software, ERM programs require the platform to offer more complex functionality.

ORM programs require the GRC platform to offer traditional operational risk capabilities. These include the capability to create an operational risk register, roll out online risk assessments, build control registers and carry out control checks, and implement risk mitigation workflows to reduce risk. They will also offer a variety of reports enabling risk teams to summarize risk exposure and guide the business on the best course of action. GRC platforms configures for ORM will also offer a variety of personalized dashboards – enabling each user to get a summary of actions & tasks and a summary of risk in their specific area.

GRC platforms that offer ERM capabilities tend to offer a broader variety of requirements. These platforms will enable firms to set up multiple risk registers with different categories and types. Organizations will be able to build a variety of different risk assessment forms based on the different types of risk being assessed. ERM platforms will still enable firms to build a control library, perform control checks and implement risk mitigation strategies but they will also offer additional functionality.

Teams will be able to set up a best-practice third party risk management program to manage vendor risk. They can build a vendor library capturing critical details about each vendor – and perform benchmarking & score-carding and monitor performance against KPIs and SLAs. ERM platforms often provide an online vendor portal allowing suppliers to complete third-party risk assessments online.

ERM platforms also enable firms to manage cyber and IT risk, by building a cyber risk register, carrying out cyber risk assessments, monitoring compliance with IT policies & data privacy regulations, managing IT related incidents, and monitoring usage of IT assets.

But the main difference between ORM platform capabilities and the requirements for an ERM platform is the integration between risk management, enterprise performance and strategic objectives. ERM platforms allow firms to plan and deliver their strategy, understand the impact of risk on their strategic objectives, and manage strategic risk. ERM platforms also enable firms to understand the impact of risk on operational performance and often offer API integrations with other systems and data sources – pulling enterprise performance data into and out of the platform to build a clear picture of how risk is affecting enterprise performance.

Risk appetite also plays a big part in any ERM program. The Board will work with the risk team to define the risk appetite and lay out the amount of risk they are willing to take in pursuit of their strategic objectives. It is the risk team’s responsibility in conjunction with the rest of the organization to ensure the business operates within those agreed levels by monitoring risk and ensuring controls are effective.

Of course, integrating risk with enterprise performance and strategic objectives also bring a wealth of reporting outputs to help organizations understand the impact of risk on enterprise performance and strategic initiatives. This data will support leadership teams to know which risks to take, and where to allocate vital budget & resources to reduce risk.

Where do I start on my journey from ORM to ERM?

If your organization has an operational risk management program in place but would like to take it a step further to a fully integrated ERM program, here are some important factors to consider.

Firstly, make sure you are using a best-practice GRC platform that offers sufficient ERM capabilities for your current and future needs. This includes:

• Strategic planning capabilities and enterprise goal setting.
• API integrations – to map risk to operational performance.
• IT & cyber risk and compliance capabilities.
• Third-party risk management.
• ERM dashboarding.
• Risk appetite functionality.
• Incident management enabling the organization to tie incidents back to the originating risks and controls.
• Unlimited risk registers, categories, and types.
• Executive level reports and dashboards for leadership teams including Power BI reports, heatmaps and bow tie analysis.
• A simple intuitive interface to enable staff of all levels to feed into the ERM program.

Be sure to decide the scope and key requirements of your ERM program up front and involve a variety of stakeholders from board members & executives who will have to guide the strategy and risk appetite right down to middle management and operational staff who will be completing risk assessments, control checks, and strategic tasks & actions. Clearly defining how staff will use the platform and what data they will need to extract up front will ensure a successful implementation.

Remember an ERM platform can scale and grow with your organization as requirements expand – so don’t feel pressured to set up every aspect of ERM during the initial implementation of a GRC platform. Pick the functionality that addresses your key pain points and add more as the solution gets further embedded into your operations.  

For more information on how the Camms platform can support your organization to implement a best-practice risk management process that meets your needs, request a demo.