Modern enterprises face risks that affect how efficiently they operate and comply with regulatory requirements.
E-commerce enterprises, in particular, operate in a risky and highly regulated environment. These enterprises need to understand their risks and implement measures for managing them.
The only way an e-commerce business can stay resilient in today’s dynamic and increasingly multifaceted business environment is by implementing enterprise risk management (ERM). It will allow your business to integrate and coordinate risk throughout its operational setup, thus preventing service disruption, regulatory non-compliance, and much more.
In this enterprise risk management for e-commerce guide, we review what ERM is all about, its benefits, and how to create an ERM strategy. Let’s get straight to it.
What’s Enterprise Risk Management?
ERM is an all-inclusive approach that entails identifying, evaluating, and mitigating business risks that could interfere with your e-commerce enterprise’s operations and goals. Simply put, your company’s ERM strategy outlines the organization-wide approach to risk.
Traditionally, ERM involved individual departments in a company handling their risks and implementing separate control measures. Nonetheless, this approach has several drawbacks. A case in point is when a manageable threat for one department was unmanageable by another department. Leaving individual departments to their devices can destabilize a company’s overall operations.
Enterprise risk management for e-commerce helps businesses to manage risks at the organizational level rather than the departmental level. Instead of having each unit within your company manage its risks, all threats get evaluated using an organization-wide lens. In doing so, you get a detailed picture of your risk environment, which can help you create a cohesive, streamlined, and “big picture” risk management strategy.
With ERM, you can mitigate most business risks, including:
- Legal risks resulting from lawsuits.
- Compliance risks related to violating industry regulations.
- Financial risks.
- Operational risks that influence the enterprise’s daily activities.
- Strategic risks related to the company’s long-term plans.
Components of ERM
An ERM strategy for e-commerce businesses can only be effective if it has the following components:
- Risk Appetite
When implementing your ERM strategy, you should establish how the business will assess its risk tolerance as it pursues its strategic goals. Understanding your risk appetite will ensure business continuity when risks become threat events.
- Culture and Governance
Most e-commerce enterprises are risk-averse. To prevent risks from crippling operations, it’s best to implement collaborative team structures and internal governance models for mitigating risk.
- Compliance Requirements
External regulatory requirements and the organization’s internal requirements should be considered when creating an ERM strategy.
- Measurement and Reporting
An effective ERM strategy should measure progress besides providing consistent and timely progress reports to all stakeholders.
Benefits of Creating an ERM System
The primary reason for utilizing enterprise risk management for e-commerce is its ability to provide a clear picture of the organization’s risks. It’s a no-brainer that risk awareness significantly improves your ability to respond to threats.
ERM also streamlines your business operations by allowing you to evaluate threats holistically, something siloed risk management can’t achieve. With ERM, you have a clear-cut framework for managing all business risks. It allows you to continuously evaluate, detect, and monitor risks before they morph into serious issues.
How To Create an ERM Plan for E-Commerce
Here are the steps to take when creating an ERM strategy for your e-commerce business:
1. Objective Setting
You should evaluate your business objectives before deciding whether to absorb risk. The goals should align with your enterprise’s risk appetite.
2. Risk Identification
This stage of the ERM process involves defining and taking risks. It’s best to remember that risks can either be negative or positive, hence the need to categorize them. During risk identification, pinpoint all risks that could affect your business. After that, categorize them as either threats or opportunities before aligning them with the organization’s overall business strategy.
3. Risk Assessment
Your organization should outline the steps for evaluating the impact of risks. For instance, you can assess risks by looking at the likelihood of their occurrence and their impact on your finances.
4. Risk Response
How you respond to risk events determines your recovery. The risk response stage focuses on ways to respond to risks when they occur. Risk response strategies include:
- Risk avoidance.
- Risk reduction.
- Risk sharing.
- Risk acceptance.
5. Control Activities
These are the actions you take to implement procedures and policies for mitigating identified risks. Control activities can either be detective or preventive. Detective control activities are measures implemented to flag risks and implement appropriate follow-up measures. On the other hand, preventive control activities get implemented to stop risks from occurring.
ERM is critical to modern-day businesses, more so e-commerce enterprises. Every e-commerce enterprise faces different risks, and an ERM strategy helps your business avoid, recover, or adapt to risks in today’s volatile business landscape. Even after implementing enterprise risk management for e-commerce, it’s best to review the strategy regularly to stay apprised of the ever-changing threat landscape.