A risk maturity model is a tool to assess the effectiveness of an organization’s risk management efforts. In other words, how well do your functions and processes enable risk-aware decisions that support key enterprise objectives?
Risk maturity models are an excellent way for organizations to examine the current program’s proficiency and compare that to where they want to be. The more mature your risk management system is, the more effective you will be in making decisions, taking the right risks, and achieving better outcomes.
Why Use a Risk Maturity Model?
Describing risk management capabilities based on a risk maturity curve allows a company to intentionally establish where their efforts are now and track progress over time. A continuum also makes sense because every management team is engaged in risk management in some way – even if the “system” is nascent. And in today’s ever-changing risk environment, even a world-class risk management system should always be looking for ways to improve.
What Stages Are Part of a Risk Maturity Model?
A risk maturity model categorizes an organization’s risk management capabilities and culture according to five stages:
- Ad hoc. Risk management is undocumented and largely depends on individual heroics.
- Preliminary. Risk is inconsistently defined and managed in silos with lax process discipline.
- Defined. A common risk assessment/response framework is in place. An organization-wide view of risk is provided to leadership and the board, often in the form of a list of top risks. Action plans are implemented in response to high-priority risks.
- Integrated. Risk management activities are coordinated across business areas. Risk management techniques and tools are used where appropriate, with enterprise-wide risk monitoring, measuring, and reporting. Alternative responses are analyzed with scenario planning and techniques like Monte Carlo Simulation. Process metrics are in place – but the emphasis remains on managing a list of risks. Discussions about risk are separate from discussions about strategy and performance.
- Optimized. The focus is on managing risk within the context of enterprise objectives instead of managing a list. Strategic planning and capital allocations, as well as daily strategic and tactical decision-making, all consider what might happen. Decision-makers have a reasonable level of assurance that they are taking the right risks and at the right level to achieve success, not just avoid failure. Early-warning systems are in place to notify the board and leadership of specific risks that exceed the organization’s established risk appetite or risk-capacity thresholds – and when enterprise objectives are in danger. Discussion of risk at top management and board levels is fully integrated with the discussion of strategy and performance.
How to Assess Your Risk Maturity
A risk maturity model is simply a self-assessment tool to help you determine a path to success. Here are a few of questions to consider as you dive into your assessment:
- What is your risk appetite? Determine how much risk your organization is willing to take on in pursuit of strategic objectives and the overall risk awareness across the enterprise.
- How well are Enterprise Risk Management processes incorporated into your decision-making? Measure how deeply risk is embedded into your culture and how strongly risk management efforts are supported by the board and top management.
- What is your risk management process? Determine how well your risk management program follows best practices for identifying, assessing, evaluating, mitigating, and monitoring risks.
- Do you identify risks by source or symptom? Finding and addressing the root cause of a risk will help strengthen your mitigation efforts.
- How well do you uncover new risks – or detect changes in known risks? Gauge the quality and consistency of the way risk information is collected and processed.
- Is risk part of performance management? Assess the strength of the connection between risk and the planning, communicating, and measuring of your organizational goals.
- Does risk management support business continuity and resiliency efforts? Evaluate how deeply business continuity, operational planning, and other resiliency activities incorporate a risk-based approach.
For organizations at the lower end of the scale, risk management is often perceived as a compliance activity. Managing risk is seen as an unavoidable burden to avoid failure – instead of an opportunity to add value and contribute to success.
At risk mature organizations, risk management is integrated into the culture and incorporated into daily decisions. These companies know what risks to avoid and what risks are strategic opportunities. And they have the insight, tools, and processes to protect themselves from evolving threats.
Organizations on the high end of the risk maturity model consistently outperform their peers from a financial perspective. The board and leadership also understand the impact of risk on enterprise objectives.
Regardless of your current status, more can likely be done to improve the processes, tools, and functions needed to support risk-aware decisions at every level. A risk maturity model can be a valuable tool to track your jour journey to improved – even world class – risk management.
For more on effectively managing risk at an enterprise level, download our e-book, Charting a Course for Enterprise Risk Management, and check out Riskonnect’s ERM software solution.