Understanding the difference between compliance and risk management may not sound like a priority point for your business. But in distinguishing the two, you could move away from simply avoiding risks to discovering value and opportunity within them.
Here, we’re taking a look at what compliance and risk management really mean, and how separating the two terms could pay dividends for your business. Use the links to navigate or read on below for the complete guide.
- What is Compliance?
- What is Risk Management?
- What Are the Key Differences Between Risk Management and Compliance?
Compliance is the process of adhering to laws, rules, regulations and policies which govern a particular industry. It safeguards businesses against unique threats and litigation, while also demonstrating their values and standards to prospective customers, clients and partners.
Compliance is business critical. Without it, companies could face criminal proceedings, legal disputes, and render existing contracts and insurance policies null and void. Non-compliance can also result in reputational damage, with stakeholders, customers and potential new hires put off a business by a perceived lack of standards and ethics.
To maintain compliance, many large businesses enlist specialist personnel, tasking them with ensuring that the company complies with relevant laws and regulations. These ‘compliance officers’ oversee all internal departments, monitoring both business activity and individual employee actions to ascertain that all compliance requirements are being met.
One thing that’s important to note about compliance – particularly how it relates to risk management – is that it is in itself a risk. Indeed, the penalties for non-compliance are among the biggest threats to business continuity and growth – so you can begin to see how the two terms differ and compare.
Risk management is an umbrella term pertaining to the individual actions a business takes to reduce operational risk. It seeks to anticipate the worst-case scenario of ‘risk events’, so that the right action can be taken to reduce uncertainty, minimise threats and guarantee positive outcomes.
Whatever the industry or sector, risk affects every business, but it needn’t do so negatively. With the appropriate risk management strategy, a company can turn ‘downside threats’ into ‘upside opportunities’, maximising the odds of success while taking a proactive approach to business growth and change management.
Effective risk management requires a tactical, four-stage strategy. This includes:
- Identifying the risks – what vulnerabilities exist within a business’ operations?
- Assessing the potential damage – what is the worst-case outcome of an individual risk event?
- Planning responses – what positive action will the business take if the threat is realised?
- Initiating the change – with threats accounted for and responses in place, it’s time to make the change. This requires careful management and an agile approach to ensure the right action is taken at the appropriate time.
Risk management and compliance are closely aligned; they each protect a business from threats, ensuring seamless continuity and growth in times of change. And yet where there are similarities, there are also significant differences, as we explore below.
Box-ticking vs Analysis
It could be said that guaranteeing compliance is simpler than managing risk. Why? Because compliance requires only a box-ticking approach to adhere to laws and regulations a business is (or should) be aware of, while risk management commands an analytical approach wherein a business must anticipate threats before they happen.
Complying with industry regulations and standards is the bedrock of any successful business. Companies need only dot their i’s and cross their t’s to retain compliance – it’s the minimum expected of them from clients, partners and industry bodies.
Risk management, however, requires an attentive approach to how the business is run and where changes are made. It relies on analytical thinking and decisiveness, as well as an element of resolve from senior management to settle on the risks worth taking.
Industry-wide vs Company-specific
Compliance affects all businesses within a particular sector – including competitors. That means rival firms must operate within the same constraints, so adhering to compliance (or not) rarely offers any competitive advantages.
This isn’t the case with risk management, however. How a business responds to threats can lead to significant gains over competitors – with new policies, new processes and new ways of thinking that can help companies leapfrog rivals to attain a greater share of the market.
Here’s an example showing this kind of risk management in action: say a start-up business disrupted an industry brimming with established players; they present a significant threat within that market space. But how the older brands respond can have a huge say in how this affects their business in the long term.
Integrated vs Isolated
As touched on earlier, corporate compliance often falls to a single department or a team tasked with ensuring all processes across the business comply with current legislation. And given that there’s limited commercial advantage to be found in compliancy, this kind of siloed, isolated approach is adequate in making sure everything is legal and above board.
When it comes to risk management, however, an integrated, multi-departmental approach is preferred to ensure that all opportunities which arise from risk are seized upon. To this end, integrating departments through technology like enterprise resource planning (ERP) software can help drive value and make sure that the business is unified in its response to risk.
Have you enjoyed this guide on risk management and compliance? For more business guides and features, keep up to date with the JS3 Global blog. If you’d like to learn how ERP software can help your business manage risks and drive growth, our specialist advisers can talk you through the best solutions for your needs. Click here to visit the homepage or contact us on +44(0)161 503 0866.