In this post, we’ll give some background on the growth of Enterprise Risk Management and how it relates to the construction industry, and explain why adopting an Enterprise Risk Management philosophy for running your construction business is a wise decision. We say philosophy, because at its core, ERM is a shift in thinking, a shift in managing your business. It applies best in high risk industries, like construction, which have high failure rates due to persistent failures to recognize and mitigate risk across the entire business. Enterprise Risk Management Growth In a 2001 survey, Enterprise Risk Management: Implementing New Solutions, it was noted that 41% of the public companies surveyed indicated that they were currently implementing some form of ERM program. As a result of Sarbanes-Oxley Act (aka SOX, the compliance requirements set forth after the Enron debacle), that number has been climbing ever since. Why? Quite simply, the rules of the game have changed for public companies. They must now prove they have strong internal controls, complete intregrity and systems to manage all risks they face. Unexpected “surprises” are no longer accepted; they now have swift consequences. Given this environment it’s no wonder that Enterprise Risk Management (ERM) is being adopted by public companies at an ever increasing pace. In the United States, the Securities and Exchange Commission, as well as the U.S. Federal Reserve and the American Institute of Certified Public Accountants, are demanding more accountability from corporate directors in terms of identifying risks and developing systems for managing them. The National Association of Corporate Directors is encouraging audit committees to expand their scope of risk management reviews. Dunn and Bradstreet has released software to provide ERM Solutions. Standard & Poors, one of the largest credit rating companies of businesses worldwide, has announced that it is now including questioning about a company’s ERM practices to determine ratings for credit. This rise in expectations requires a level of risk management knowledge and capability not found in many organizations, so companies are scrambling and reacting to institute risk-based controls. But how does all this apply to private companies that don’t have to worry about compliance issues brought forth by SOX? Plainly stated, ERM is not just for the “Big Guys” anymore. As Tim Ling, president and chief operating officer of Unocal, stated: “I think you will see almost all companies over the next few years moving in the same direction [as we are], really trying to integrate the notion of risk management with the notion of just business management. To me, running a business is all about managing risk.” Essentially, managing risk is really about properly managing a business, and therefore managing risk can create shareholder value if done correctly. Thus, ERM is now seen less as a reactionary requirement to regulations, and more as just plain old good business practice. In fact, according to the RIMS 2011 ERM Benchmark Survey, over 75% of the 14K public and private companies in the survey had active ERM programs or were investigating ERM adoption: Why Contractors make good Candidates for ERM Does ERM apply to contractors? Yes, more than ever. Since ERM best fits companies in high risk fast moving industries, contractors are prime candidates for adoption. Here are some reasons why: All of these characteristics make contractors great candidates for ERM. So let’s talk about the how ERM can actually overcome the challenges for implementing risk controls as stated above, namely: the abundance of construction risk, the time constraints upon management, the insufficient knowledge about ERM and unstable controls. How ERM overcomes the challenges for implementation of risk controls Takeaways In short, ERM addresses an abundance of risk by following a systematic process that educates the workforce on elements of risk within their area of responsibility, empowers them to individually install risk controls which are then monitored within the process to make sure the controls remain fully in place, thus creating a “no surprises” management environment. Without an ERM framework, the failure to recognize risks or to mitigate known risks can make it difficult to compete, financially weaken the company, and potentially jeopardize its future. So there you have it. ERM is being adopted worldwide and it is a perfect fit for construction. It will just be a matter of time before you will be expected to run your business with a risk-based approach. In fact, banks and sureties are already asking contractors, “Who handles enterprise risk management for your company?” Do you want to be the company that lags behind in understanding and taking action on business risks, or do you want to be a survivor in today’s fiercely changing and competitive environment? As to the ultimate question: “Should I personally get engaged in a risk-based mindset and adoption of ERM,” we leave you with some final questions: To learn more, contact Druml Group for construction enterprise risk management solutions.
