22 June 2007

Private Equity: Nexus of Risk...

In recent comments in the main stream security media we have heard that convergence is over. It means that the arguments are over on whether convergence is a highly debated topic, not that it is still occuring. In fact, it is speeding up with M & A activity and the private equity surge to buy and sell large global enterprises.

Why would a company like Blackstone Group do an MBO with a company like Intelenet Global Services? Convergence in information technology is still happening under the umbrella of Business Process Outsourcing (BPO) at a rapid pace. More layoffs and elimination of redundant data centers, call centers and customer service centers is a tremendous business. Especially when you are trying to gain control, slice up and sell companies like Sungard, Nielson and other significant investments in critical infrastructure. It's going to be a deja vu moment anytime soon. When you are operating a private equity firm with so many facets you require special people with power and to give you advice. That is why Paul O'Neil is only a phone call away from the Senior Managing Directors at BX.

What kind of Operational Risks are happening within the portfolio of private equity firms like Blackstone as they try to achieve economies of scale and convergence? The same kind that exist within any organization that is focused on convergence and divergence of information simultaneously. Centralize telecom and decentralize risk management to the business units. Centralize information processing and decentralize access through mobile devices. The list goes on.

Execution, Delivery & Process Management

Losses from failed transaction processing or process management, from relations with trade suppliers and vendors. This includes Transaction Capture, Execution & Maintenance Miscommunication, Data entry, maintenance or loading error Missed deadline or responsibility, Model / system misoperation Accounting error, entity attribution error, Delivery failure, Collateral management failure Reference data maintenance, Monitoring & Reporting Failed mandatory reporting obligation, Inaccurate external report (loss incurred), Customer Intake & Documentation Client permissions / disclaimers missed Legal documents missing / incomplete, Customer / Client Account Management Unapproved access given to accounts, Incorrect client records (loss incurred), Negligent loss or damage of client assets, Trade partners, non-client vendor misperformance and vendor disputes.

Business Process Outsourcing (BPO) and Business Process Management (BPM) are being hailed as the answer to mitigating much of the operational risk exposures. It is also about creating new found synergies and elimination of redundant systems in order to drive greater return on investment. Yet all of the enterprise architecture, IT reengineering and Six Sigma / Lean will not change the current and impending threat to our interdependent Internet Protocol (IP) linked economy.

John Schwarz from the New York Times highlights the reality of the possibility of an Internet Armageddon. "ANYONE who follows technology or military affairs has heard the predictions for more than a decade. Cyberwar is coming. Although the long-announced, long-awaited computer-based conflict has yet to occur, the forecast grows more ominous with every telling: an onslaught is brought by a warring nation, backed by its brains and computing resources; banks and other businesses in the enemy states are destroyed; governments grind to a halt; telephones disconnect; the microchip-controlled Tickle Me Elmos will be transformed into unstoppable killing machines."

Private sector companies that are owned or controlled by large private equity and alternative investment hedge funds may be even more at risk and the target of both nation state (China) and non-state actors (Al-Qaeda in Europe). Getting access to the information on the future plans, strategy and architecture of protecting critical infrastructure companies is a priority by those who wish to wage a simultaneous salvo of both digital and physical attacks.

A major hurdle that nations face in defending their critical infrastructures is working with the entities that actually own their countries' telecommunications networks, electrical grids, and transportation systems. This is a major issue in the United States, given that the private sector owns more than 85% of the critical infrastructure and doesn't take kindly to government demands that shareholder money be invested in protection rather than expansion.

Cooperation between government and private-sector critical infrastructure owners is essential. "When it comes to information warfare, corporations in general are no match for a trained [enemy] intelligence officer," David Drab, a 27-year veteran of the FBI who retired in 2002 and is now principal for information content security with Xerox Global Services, said in an interview. These officers have an objective, they have resources, and often they have the element of surprise on their side, he added.

Acceleration of private equity investments puts control of managing the vital lifeblood of information into the hands of Senior Managing Directors, CIO's and Project Managers at the BPO third parties. The nexus of thinking from these participants is to do what ever it takes to converge operations and eliminate redundancy. One can only hope that they are becoming together to discuss the same topics as other large financial institutions. The East Coast Buildings Plot is just one example of why this is imperative.

In publicly released statements, bin Laden has also stressed his “policy” of “bleeding America to the point of bankruptcy.” And an excerpt from the Al Qaeda publication Sawt al-Jihad states:

“If the enemy has used his economy to rule the world and hire collaborators, then we need to strike this economy with harsh attacks to bring it down on the heads of its owners. If the enemy has built his economy on the basis of open markets and free trade by getting the monies of investors, then we have to prove to these investors that the enemy's land is not safe for them, that his economy is not capable of guarding their monies, so they would abandon him to suffer alone the fall of his economy.”

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