Would an “Enterprise Risk Management Lite” approach work in your co-op or utility?
Enterprise risk management is just for large organizations, right?
You might think that an enterprise risk management (ERM) program is just for a large cooperative or utility. A smaller organization has lessor resources - people, financial, customer base - to cushion the impacts of the regular risks that are part of the business.
Using an “ERM lite” program is an approach that any organization can use, whether you are a staff of one or twenty. The lite approach has many elements of a more formal program. Here are some insights into the elements that go into a program that can be a unique fit and help you sleep at night by planning for potential events. The lite approach, in many cases, puts a more formal touch on things you are doing already.
An ERM lite framework
The framework of an ERM lite approach should include these parameters:
1. The organizational makeup: Identify key stakeholders and assign roles and responsibilities. For a small co-op or utility, it might be just you. But, your oversight Board will also play a role in the risk mitigation process.
2. Identifying business risks: Listing risks to your organization. Common risks in the electric business are power supply, impact of renewables, staffing, succession planning, rate, and debt management. Water risks include source of supply, environmental impacts, succession planning, and rate and debt management. You detect a common theme in each area.
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3. Identifying potential impacts and likelihood of potential risks: Analyzing the identified risks in terms of their potential impact and probability on the organization.
4. Evaluating risks: Evaluate the organization’s risk appetite and tolerance levels. Determine which risks to mitigate, accept, transfer, or avoid
5. Establishing risk mitigation plans: Developing and implementing risk treatment plans for the identified risks takes a varied approach, depending on the risk areas. This may involve implementing controls, insurance, outsourcing, or other risk mitigation strategies.
6. Prioritizing risks: Prioritizing risks based on their significance to the organization. You may assign a lower priority to a high risk due to mitigation steps taken. For example, a risk to an electric utility or co-op is a substation fire. The risk mitigation is obtaining insurance and a backup substation transformer. Once those items are in place, you can rest more easily.
7. Monitoring risks: Regularly monitoring the effectiveness of the mitigation approaches should be done. Having a regular monitoring schedule (monthly, quarterly) will ensure that you do not “set it and forget it”. The regular process forces a review of changing conditions and their impact on mitigation plans.
8. Communicating and reporting risks: Regularly communicating risk information to relevant stakeholders, including management and the oversight board, is part of the foundation of an ERM program, be it a light or a heavy program. The board is not necessarily responsible for identifying risks, but the board is responsible for providing the resources to mitigate risks.
9. Integrating risk mitigation with strategy: Integrating risk management into the decision-making process is an integral part of the implementation of the utility or co-op strategy. This ensures risks and mitigation resources are considered when making strategic choices.
10. Training: Team, management, and board training will help bolster the ERM process. Holding an ERM session will go a long way toward understanding the importance of the ERM program and its positive impact. Obviously, this is easier the smaller your organization. :)
11. Continually improving: Continuous improvement is an overused phrase, but we should always strive to do better. The same goes for your ERM program.
Setting up an ERM Lite program is not difficult
The need for the formality of an ERM program will be questioned, as many organizations consider risk management part of everyday business. But formalizing and shining attention on potential risks, mitigation plans, and resource dedication will yield more predictable results than the seat-of-the-pants method.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.