Part II
Companies across the world are searching for new ways to get ahead of competition through complex strategies such as industrial and international diversification, open innovation, sophisticated capital structuring, etc. However, under the guidance of such strategies, organizational risks mushroom. This has prompted companies to adopt enterprise risk management (ERM), which is a relatively new and enterprise-wide approach to risk management. As many companies engage in ERM, various frameworks have been introduced to guide its implementation: the Casualty Actuarial Society’s (CAS’s) framework, Coso’s Enterprise Risk Management Integrated Framework, the ISO 31000 risk management framework, etc. But the bulk of them have been about technical and compliance requirements. For those interested in understanding the organizational factors to be taken into account for successfully implementing ERM, the existing frameworks fall short.
A study conducted by The Ciem Institute shows that an array of sociotechnical factors combines to influence the successful implementation of ERM.
What are those social and technical factors you may be asking yourself? In this second part of the article, only the technical factors will be presented, the social factors having been previously exposed in Part I.
B- Technical Factors
With regard to ERM implementation, the technical subsystem points mainly to organizations’ integrative capabilities. Our study has identified the most relevant integrative capabilities to be: knowledge integration capability, IT capacity, and organizational change capacity.
Knowledge integration capability
Given that ERM cuts across all the organization’s functional areas, knowledge integration capability is mandatory.
Indeed, how well knowledge movement across boundaries – between these functional units including risk management phases – is performed can impact the effectiveness of ERM implementation process.
It has been found that ERM successful implementation heavily relies on the firm’s dynamic capability to integrate these disparate pockets of domain-specific knowledge, at least with regard to risk management. Knowledge integration capability, as a pivotal organizational capability to create shared and stable risk management syntax, to generate a mutual understanding, and to transform existing knowledge as to balance competing interests is mandatory for successful ERM implementation.
IT capability
Implementing and running ERM will require the organization to daily manage a huge amount of data coming from inside and outside. The dataset is far too voluminous and complex to manage without IT support capabilities. In the absence of proper IT capability, as the volume of information to be processed exceeding the capacity of human processing would submerge the organization.
Organizations’ IT capability positively influences successful ERM implementation. Flexible IT-enabled capabilities allow departmental and functional units to better integrate their specific risk management methodologies, to develop business partnership and to develop tacit knowledge owing to sustained interactions among organizational members including IT personnel.
Organizational Change Capability
Implementing ERM implies modifying the way that organizations usually conduct their affairs. Therefore, organizations should develop their managerial and organizational capabilities to implement the kinds of changes that are needed to achieve ERM development and implementation. One important feature of ERM concerns the combination of all risk management activities into one integrated framework that facilitates the identification of interdependencies between risks arising from inside and outside the organization. However, many of these risks originate from organizations’ external environment, which comprises dynamic change conditions. Further, ERM is expected to render organizations more anticipatory and effective in evaluating, embracing, and managing the myriad risks that they face. Therefore, the viability of ERM relies on organizations’ capability to adapt to the environment dynamic change conditions. Hence, an organization’s capacity for change becomes increasingly important as it allows the changes that are needed to implement ERM more easily and more completely within the organization.
Complementary factors
In addition to the socio-technical factors identified so far, three complementary factors have been found to play an important role in an effective implementation of an ERM system. These factors are slack time, prior work experience with changes.
Slack time: ERM implementation requires sensemaking and processing capabilities. If the pace of work in an organizational setting allows team members to devote to the ERM project more time and attention than the minimum required, they are likely to increase their processing capability as they allocate time to knowledge-related. Such a condition will contribute to the success of the ERM implementation project. In contrast, low levels of slack time are likely to hamper sensemaking and processing capabilities hamper sensemaking and processing capabilities which are needed for the successful ERM implementation.
Prior experience with changes: Through prior experience with changes, organizations learn how to initiate and implement changes on an ongoing basis. Thus, organizations where ERM project teams have many years of experience with changes associated with the implementation of enterprise-wide systems or other complex innovations, the successful implementation of ERM is more likely as team members possess greater sensemaking capability.