Risk management is essential for any organization, regardless of size, industry, or geographic location. Historically, risk management involves:
- Identifying potential risks.
- Evaluating their likelihood and impact.
- Implementing strategies to mitigate or avoid them.
However, a more modern and comprehensive approach to risk management has emerged in recent years – ServiceNow IRM. It is a broader and more holistic approach to risk management that considers not only financial, operational, technological, and reputational risks" to eliminate repetitive information. It entails combining all components of risk management into a single framework. This also enables organizations to identify and respond to possible threats effectively.
In this article, we'll explore the differences between IRM and TRM and help you understand which approach may best suit your organization's needs.
Understanding Integrated Risk Management
Integrated risk management is a comprehensive approach to risk management that considers all potential risks an organization may face. It recognizes the interconnectivity of risks and that managing them in silos can lead to gaps and inefficiencies. Integrated risk management involves organizational processes focusing on identifying and managing risks.
Identifying potential risks, evaluating their likelihood and impact, and implementing strategies to mitigate or avoid them are the standard components of risk management. It also involves continuous monitoring and reporting to manage risks effectively. ServiceNow IRM approach combines all components of risk management into a single framework, allowing organizations to identify and respond to possible threats effectively.
Also read about the Key Activities for Integrated Risk Management
- Example of Integrated Risk Management
A global manufacturing company uses integrated risk management to identify and manage risks across its operations. The company's IRM team works with business unit leaders to identify risks related to the company's strategic objectives, such as supply chain disruptions or changes in regulatory requirements. The team then assesses the potential impact of these risks on the company and develops strategies to manage and mitigate them, considering the company's overall objectives. These strategies may include risk transfer, such as insurance or hedging, or risk reduction measures, such as process improvements or diversification of suppliers.
By adopting IRM, organizations can enhance risk management strategies and gain a competitive advantage in their industry.
Understanding Traditional Risk Management
Traditional risk management focuses on identifying and managing risks specific to the organization. The process involves identifying potential risks and assessing their likelihood and impact. Traditional risk management aims to protect the organization from financial losses, legal liability, and reputational damage.
Read more about the Importance of ESG & IRM for Organizations
In traditional risk management, risks are often managed independently, with each department or function responsible for managing them. For example, the IT department may be responsible for managing risks related to cybersecurity, while the HR department may be responsible for managing employee-related risks. This approach can lead to gaps in risk management and a lack of coordination between departments.
- Example of Traditional Risk Management
A financial institution uses traditional risk management to manage its credit risk. The institution's credit risk department identifies and assesses potential credit risks associated with lending activities, such as the risk of default or non-payment. To mitigate these risks, the department then implements controls, such as credit checks and collateral requirements. The institution also sets risk limits for different lending activities and continuously monitors its credit risk exposure.
How do IRM and TRM differ in terms of implementation?
Regarding execution, IRM differs from TRM in that IRM is a more comprehensive and holistic approach to risk management that incorporates all areas of risk management into a single framework. This means that IRM necessitates a larger initial investment of time and resources to build and implement the framework. On the other hand, TRM is a more traditional method that focuses on risk management in silos. TRM can thus be established more rapidly and with fewer resources. However, it may not provide the same protection against today's complex and linked hazards.
Know more about Integrated Risk Management and its Benefits
- Key Differences Between Integrated Risk Management and Traditional Risk Management
IRM takes a holistic approach to risk management by considering risks' interconnection and potential impact on the organization. In contrast, TRM often focuses on managing risks within specific departments or functions, leading to silos in risk management.
1. Holistic vs Siloed Approach
The approach is the key distinction between integrated risk management and conventional risk management. TRM usually takes a siloed approach, where risks are assessed and managed in isolation. Whereas integrated risk management takes a holistic approach, where risks are assessed and managed across the entire organization.
2. Proactive vs Reactive
Another key difference is the approach to risk mitigation. TRM tends to be reactive, where risks are identified and addressed only after they occur. Whereas IRM is proactive, where risks are identified and addressed before they occur.
3. Continuous vs Periodic
TRM is often conducted periodically, such as quarterly or annually. In contrast, IRM is continuous, where risks are monitored and managed on an ongoing basis. This means that integrated risk management is more agile and can respond to risks in real-time, as they arise.
4. Opportunity vs Threat
TRM tends to focus solely on managing threats to the organization, such as financial risks, security risks, and compliance risks. IRM, on the other hand takes a more balanced approach, where risks are viewed not just as threats but also as opportunities.
Get insights on The Essentials of IRM - Integrated Risk Management
How Can Organizations Decide Between Integrated Risk Management & Traditional Risk Management?
Companies can choose between IRM and TRM by assessing risk management requirements and priorities. If a company wants a more comprehensive and holistic approach to risk management that incorporates all potential hazards into a single framework, IRM may be preferable. On the other hand, TRM can be more suited if an organization has unique risk management needs and wants to manage those risks in silos. Finally, the choice between IRM and TRM will be determined by the organization's risk management goals, resources, and risk exposure.
While the traditional risk management approach has proven effective, the increasing complexity and interconnectedness of the business world have led to the emergence of Integrated Risk Management (IRM).
As a result, the decision between IRM and TRM will be influenced by an organization's risk management objectives, resources, and risk exposure. Organizations must remain watchful and proactive in risk management regardless of the selected technique to achieve long-term success.
Organizations can also utilize ServiceNow's IRM solution, which provides a powerful platform for managing risks and making informed decisions of all sizes. This solution streamlines risk management processes and improves an organization's overall risk posture.
Author: Shashank Vashist