The economic crisis has undoubtedly exposed myriad uniquechallenges facing risk managers in today's corporate enterprise.Risk professionals not only need to remain current with theirtraditional risk management practices, but they also must acquirean understanding of various organizational functions.

This knowledge has become a key component of effective andcomprehensive risk management.

Consider the complex financialinstruments and practices that led many financial firms to failduring the subprime mortgage meltdown.

What might have happened, had risk managers at some of thosefinancial firms possessed a good working knowledge of thoseinstruments and practices? And what if they had used that insightto develop new risk models to measure the organization's riskexposures across various functions, including mortgage lending?Could the collapse of some financial institutions have beenprevented?

Effectively managing corporate risk today requires the adoptionof enterprise risk management–a holistic, dynamic andoperations-oriented strategy that encompasses broad areas ofresponsibility across the entire organization.

As companies become more complex and powerful in our globaleconomy, risk managers must remain vigilant of the ever-changingenvironment–not only within the organization but also in the worldsurrounding it.

Moreover, ERM demands an understanding of the organization'score business and operations–including finance, compliance,security and business continuity.

ERM addresses more than traditional risk management by wideningthe focus to broader organizational areas. These include globalsupply chain, global logistics, regulation and compliance, productand facility safety, business continuity planning and management,security, litigation, governance and human capital.

An extended approach allows the risk management function tobecome more fully engaged in the operational side of the business.This is critical for global organizations in light of thepotentially serious risks posed by lean manufacturing, cross-borderdealings, and widespread systems of infrastructure, law andregulation.

BENCHMARKING RISK

ERM offers risk managers the ability to manage risk across theenterprise and improve the amalgamation of financial riskmanagement and operational risk management. Not only does thiscreate options to identify, evaluate, mitigate, finance andtransfer risk, but it also contributes to the optimization ofrisk-related decision-making and alignment of the ERM strategy withthe organization's overall risk tolerance and goals.

Benchmarking an organization's cost of risk and quantifyingpotential added value or lost opportunity are key objectives fortoday's risk management function. If the organization does notunderstand the drivers of its total cost of risk, however, thevalue of the ERM program, likewise, is not understood.

For instance, if an organization measures its cost of risksimply as the cost of goods and services it directly applies totraditional risk management concerns, it seriously underestimatesthe contributions that could be made by the risk managementfunction.

Indeed, evaluating the true cost of mitigating organizationalrisk requires a more refined approach–one that will enable acompany to derive a great deal more value from its overall riskmanagement effort.

When implementing an ERMstrategy, companies should augment the use of traditional risk datawith advanced operational-risk analytics and scoring. This allowsan organization to quantify its true cost of risk moreaccurately.

The use of analytics also helps establish a more consistentbasis of risk-adjusted cost for decision support and offers aunified organizational cost of risk, benchmarking and planning.

Under the ERM approach, risk managers are able to look at theorganization's overall structure as a chain of operations andprocedures for products and services. This puts a great deal ofattention on supply chain risk and related exposures–often directlyreflected in the firm's market valuation.

Managing and mitigating supply chain risk through acomprehensive ERM program is an important component for asuccessful business. Doing so not only protects the company's mostvaluable assets but also establishes a unified, high-performancerisk-mitigation model.

In fact, for most organizations, one of the most effective andpractical ways to implement ERM is by expanding the application ofrisk management to assess and mitigate risk for as many supplychain operations as possible.

The current global economic landscape challenges risk managersto stay ahead of the dynamic changes taking place both inside andoutside the organization. Doing so requires a successful ERMprogram that applies risk management practices to allmission-critical points of the enterprise's operationalnetwork.

Working alongside senior management and other key personnel,risk managers must teach and promote the use of proper risk-baseddecision-making techniques. This allows everyone from C-levelexecutives to various supervisors and department heads to make moreinformed decisions when weighing the priorities ofcost-effectiveness versus enterprisewide risk exposures.

Involving key personnel in the overall ERM process also helpsrisk managers become more deeply involved with the supplychain.

For example, risk managers can more easily risk-score geographiclocations for various owners, suppliers, distributors or customersfor natural disaster loss potential, or they can use advanced riskmodels to improve risk-adjusted decision making.

They also can employ gap analysis, value prioritization andallocation, and a variety of other advanced risk analytictools.

Furthermore, risk managers can use quantifiable risks associatedwith traditional and evolving business supply chains to enhancerisk-based scenario planning and analysis.

Using scoring and risk-adjusted costs throughout anorganization's supply chain benefits the overall ERM program byestablishing an easily identifiable metric that can be applied tovarious complex decisions.

The process supports sound corporate governance and complianceby providing risk-based decision-making in core areas. It alsoallows companies to assess their exposures across time periods,geographies and operations.

Managing the risks and uncertainties of today's turbulenteconomic climate requires the current corporate enterprise to adopta holistic risk management strategy.

To help meet these unique challenges, organizations shouldconsider the important contributions the ERM function can offer,when empowered with advanced analytics and risk-scoring tools tocontinually manage the dynamic changes occurring both inside andoutside the enterprise.

Mark Anquillare is chief financial officer ofVerisk Analytics, the parent company of ISO, in Jersey City,N.J.