QuickStudy: Risk Management

Computerworld - In 1654, when people hand-wrote letters instead of subscribing to e-mail list services, Blaise Pascal and Pierre de Fermat exchanged missives that established the basic principles of probability and ushered in the notion of risk management. Pascal's motive was to gain an edge in gambling, but he unwittingly helped improve a CIO's odds at venturing into new operations, such as e-commerce, as much as lending a hand to a chief financial officer's investments.

"Historically, when financial institutions thought about risk, they focused on credit risk," says Bob Kafafian, chief advisory officer at Lancaster, Pa.-based Hopper, Soliday, an investment banking and brokerage division of Tucker Anthony Inc. in Boston. But that has changed dramatically, he says. Risk is understood to be everywhere in business, finance, information technology and just getting out of bed in the morning.

"We live with an uncertain future," says Randy Payant, vice president and director of research at the IPS-Sendero Institute in Scottsdale, Ariz. "The difference between uncertainty and risk is that you can quantify the impact of risk but not uncertainty."

Complexity of Risk

The complexity and pervasiveness of risk make it critical for executives to be aware of it and to have ways to identify and control it. For example, Kafafian says, banks need risk-conscious executives managing more than a loan portfolio. He says most good banks apply risk-management techniques throughout an enterprise, evaluating everything from complying with regulators to Y2K conversion work. He says even human resources and marketing departments must be prepared to handle risk, from choosing marginal employees in difficult hiring times to launching controversial advertising campaigns.

Misjudging risk in any area can be crippling, he says. For example, when Victoria's Secret was planning to air a commercial during last year's Super Bowl, the company's IT team didn't conduct a risk-management analysis of what effects advertising to the world's largest audience of men would have on its Web servers. As a result, systems were overloaded and the company suffered a loss of orders and a public relations disaster.