Risk Management

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.



Risk management is a venerable tool in finance. Bankers have long used risk-management techniques to determine whether you're creditworthy of a home or business loan. One of the most basic tenets in taking risk for a bank is to assure that the officers who sell loans aren't the same ones who approve credit. And they're rewarded accordingly: loan officers for loans approved, credit officers for sound loans.

"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.

Steps to Managing Risk

Randy Payant, vice president and research director at the IPS-Sendero Institute, a risk-management education and training group in Scottsdale, Ariz., says risk management is a fourfold process:

Identify risk-prone areas. For example, in a supply-chain network accessed by your vendors, you'll need to locate every point of entry, servers, available applications and numerous other vulnerabilities. Once they are identified, you can determine the levels of risk your organization is willing to take at each point, such as whether you want to allow all employees at a given vendor in your supply-chain network access or only a select few.

Measure or quantify your exposure. How many ports can be accessed remotely? How many external users will there be? What levels of access will be permitted?

Limit the factors that contribute to risk. Reduce the number of people with access rights. Restrict hours of availability for systems.

Control your realm. Create and monitor IT procedures.

IT always has operational risk issues. But IT professionals also have to be aware of risk in another area, one that's particularly hazardous in these days of e-commerce. "CIOs don't have to worry about financial risk, but they have to be concerned with data security," Kafafian says.

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