What is Enterprise Risk Management (ERM)? Depends on who you ask.

According to ERM vendor Aon, it's all about a "fundamental shift" in the way businesses approach risk. This fundamental shift came in handy for Rockwell Collins, a supplier of military and commercial aircraft parts. After the 9/11 tragedy, the company lost some $350 million overnight — but still managed to survive, thanks to a robust ERM strategy.

In an article from CIO magazine, Art Gemmer, the company's principal risk analyst, said about the matter, "Either we're the luckiest company in the world or our enterprise risk management mind-set gives us insights that make us do better."

In the same article, Gemmer elaborates on his ERM beliefs saying that it helps companies prepare for events on the scale of a 9/11, but more important, improves the way a company handles the more predictable risks on a daily basis. ERM allows a company to avoid bad investments and, conversely, make investments that might intuitively seem too risky. Most companies strive to improve IT decision making through better governance. ERM makes governance better. Speaking of governance…

It appears that ERM is the ugly spawn of the Sarbanes-Oxley Act, which in turn, was created thanks to the naughty business behavior of companies like Enron, Worldcomm and Haliburton. I guess Haliburton hasn't been indicted of any wrongdoing, per se, but it's only a matter of time if you ask me. Anyhow, it sounds to me like ERM can apply to internal and external business risks within an organization.

Still, it'd be nice to know how this ERM thing works, wouldn't it? A recent news release from ERM vendor Open Ratings explains it pretty well. The company landed Eaton Corporation as a client last week. With 2005 sales of $11.1 billion, Eaton is a "global leader" of fluid power, electrical, automotive and truck components and segments. Eaton is working with Open Ratings to create a companywide monitoring system that will give advance notice of potential supplier instability in time to put safeguards in place, specifically in its divisions Automotive and Truck.

Expanding the use of Open Ratings' solution as part of a comprehensive supply chain strategy, "Open Ratings will help us gain critical visibility and actionable insight into any potential issues before a disruption occurs," said Richard B. Jacobs, vice president of supply chain management at Cleveland-based Eaton.

Open Ratings' SBManager captures critical information on lawsuits, quality issues and other indicators, then creates a forecast report of supplier stability. Using machine-learning technology, SBManager combines third-party data from financial, legal and government compliance organizations with an organization's own experiences with supplier quality and reliability to profile, monitor and alert managers of potential problems in the supply base. Warnings of a potential crisis can arrive as much as six months in advance.

"Production threats can come from limitless sources: Tier 1, 2 and 3 suppliers, transportation carriers, government action and more," said Jim Lawton, vice president of marketing for Open Ratings. "Today's global economy, increased dependence on outsourcing strategies, supplier rationalization and lean manufacturing initiatives have created this new imperative for deep, predictive supplier intelligence."

Open Ratings hopes to help Eaton bring "the art of supplier risk management to a new level."

Sounds to me like ERM is money well spent.

References

Aon: Enterprise Risk Management (ERM)

Risk's Rewards
By Scott Berinato
CIO Magazine, Nov. 1, 2004

Open Ratings Powers Eaton's Supplier Risk Strategy; Executive Dashboard Core to Enterprise Risk Management
Open Ratings announcement/press release (via Business Wire), Feb. 17, 2006

Additional Reading

Eaton Ramps up Supplier Risk Strategy
by Editorial Staff
Supply & Demand Chain Executive, Feb. 21, 2006

Rethinking Risk
by Andrew K. Reese
Supply & Demand Chain Executive, August/September 2005