By Chase Drossos
In today’s dynamic business environment, management must precisely navigate a plethora of obstacles in controlling a company’s exposure to risk so as to develop a clear path for success. The water industry is particularly burdened by this risk from a variety of sources including regulatory changes, supply sourcing and personnel changes.
An Enterprise Risk Management (ERM) program is an extremely valuable tool for risk management. ERM is defined by the Institute of Internal Auditors as “a structured, consistent and continuous process across the whole organization for identifying, assessing and deciding on responses to and reporting on opportunities and threats that affect the achievement of its objectives.”
An ERM program is typically the overall set of systems and processes organized and implemented by management throughout the organization to synchronize and align company objectives.
The 2015 WeiserMazars U.S. Water Industry Outlook polled water industry management regarding their ERM status, and more than two-thirds of the surveyed companies did not yet have a fully implemented program in place. Generally, the private sector has had more established ERM policies than the municipal sector, but it’s expected that over the near- to mid-term, municipal entities will begin to catch up.
Common reasons to avoid putting ERM in place include time and resource restraints or misunderstanding of its purpose or value. Regardless of the size or complexity of a company, an ERM program can be critical to the achievement of objectives.
An ERM program is necessary for all businesses due to the various benefits derived from an effective process, including:
- Organization of company objectives into an executable format with benchmarks and a roadmap to achievement
- Shared understanding and acknowledgement of company risks, providing clarity and foresight for management
- Enhanced transparency and accountability throughout the organizational structure
- Improved budgeting and cost control
- Increased stakeholder confidence and value
Risk identification for ERM should consist of a mix of company-specific items and general industry risks refined to fit the situation of the organization.
For example, in the water industry, one key challenge identified by U.S. Water Industry Outlook respondents was aging infrastructure. This is an industry-wide risk that should be refined for each individual water company when creating an ERM plan, based on the current age and condition of the specific systems in place.
Within an ERM plan, the discussion of the timeline to replace aging infrastructure would be based on available financing or capital funding options, acceptable level of loss of water due to aged pipes (non-revenue water loss), labor resource restriction, etc. The long-term nature of this risk would also require discussion and strategic planning centered on expected future market changes.
Each company’s risk profile is different, even within an industry; therefore, the management of risks will greatly depend on the objectives and vision of the company.
