Volatility: Enemy #1...

Organizations implement Operational Risk solutions to lower "volatility" in earnings growth and return on capital. The focus on volatility is because no institution likes to see peaks and valleys in their earnings or their return on capital.

A steady and consistent growth curve without "Volatility" is the goal by many steadfast organizations.

Contrary to the goal of minimized "volatility" there are also those who feed off of the chaos and the large swings between these highs and lows in the marketplace and with specific companies in vital sectors of the financial economy. Will a Blueprint for Regulatory Reform be the answer?

As a hedge fund investor, can you explain what the strategy is for your investment fund? Do you know what your money is being invested in?

Does your hedge fund manager provide transparency on calculating your return on funds invested? What was the reason you invested in alternative investments to begin with?

Carrying this analogy to the operational processes within your organization, the goal is to keep the processes running smoothly. When people or systems deviate from the agreed upon "Rule Sets" then change ensues along with the volatility of the performance measures.

Errors, Omissions and systemic "glitches" are the catalysts to volatility that creates fear, uncertainty and doubt.

Do you understand the Math? When the process gets to this stage and people don't trust the rules anymore, you are on the brink of a failure and impending loss, in dollars or peoples lives.

Operational Risk Management is a discipline that is emerging in corporate ranks because it has already proven that it saves lives. The regulators and inspector generals are going to demand it.

The "Rule Sets" of playing business in the financial, health care and energy sectors are not the only ones being subjected to this increased scrutiny and renewed focus on OPS Risk.

Now the Defense Industrial Base (DIB) and the Defense Department are under increased oversight at the highest echelons of the Pentagon as a result of a failure in Operational Risk Management.

"Lessons learned are being discussed in the ranks of the U.S. Treasury Department and the Department of War all relating to the failure of people, processes, systems and or external events. Operational Risk is all around us and now ready for prime time focus in terms of strategy execution, implementation and measurement."

Whether you utilize Operational Risk Management (ORM) in the Defense Industrial Base or in the Financial Services sector, it's important to revisit what it is NOT:

Operational Risk is Not:

• About avoiding risk
• A safety only program
• Limited to complex-high risk evolutions
• A program -- but a process
• Only for on-duty
• Just for your boss
• Just a planning tool
• Automatic
• Static
• Difficult
• Someone else’s job
• A well kept secret
• A fail-safe process
• A bunch of checklists
• Just a bullet in a briefing guide
• “TQL”
• Going away

The goal of Risk Management is not to eliminate risk, but to manage risk so the mission can be accomplished with minimum impact. We manage risk to operate, not avoid risk as a means to prevent loss...

Virtual Truth: False Information Risk...

How does "False Information" impact the risk to your organization? 

Decisions based upon faulty or inaccurate information is the root of many of the systemic failures of catastrophic history. The Titanic, Challenger Shuttle and Three Mile Island nuclear incident can all be attributed to the integrity of vital information.

Fast forward to the financial crisis and the past decades of consumer credit expansion strategies. What data have you been collecting from US consumers or clients about their personal identifiable information attributes?

The Information Age has drawn us into a more dangerous business operating environment as these digital assets have become another commodity to be sold in an international market place, to the highest bidder. Are you ready when the federal "Suits" or the local LEO's (Law Enforcement Officer) knock on your door in pursuit of the truth:

The Fair Credit Reporting Act (FCRA) spells out rights for victims of identity theft, as well as responsibilities for businesses. Identity theft victims are entitled to ask businesses for a copy of transaction records — such as applications for credit — relating to the theft of their identity. Indeed, victims can authorize law enforcement officers to get the records or ask that the business send a copy of the records directly to a law enforcement officer. The businesses covered by the law must provide copies of these records, free of charge, within 30 days of receiving the request for them in writing. This means that the law enforcement officials who ask for these records in writing may get them from your business without a subpoena, as long as they have the victim’s authorization.

The financial integrity of your future as a business and as a consumer is at stake. Christopher Burns brings this to light in a dramatic fashion in his book; Deadly Decisions:

"First, it is often extremely difficult to validate, corroborate, or verify the information we are dealing with, except by comparing it to the other information we are dealing with. And often the whole system is contaminated by misunderstanding, bad data and false assumptions that are hard to spot. The truth test rarely works. And second, the real issue of truth is not whether you or I should believe this or that, it is what we believe together. The truth that matters is group truth, and where we get into trouble is when a whole organization--a company, a community, a nation--starts to act on information that has been gathered from many sources and processed by many people but has come to contain significant elements that are false.”

Trusted Information is at the core of current global trading, business transactions and the fabric of our own personal identities. False information and knowledge is what creates operational risk factors that can change a whole company or the integrity of a whole nation.

Systems that comprise vast databases of "so called" trusted information are at our fingertips being utilized to make coherent and effective decisions. Yet what may be the more catastrophic Operational Risk beyond the simple stealing of information is the potential opportunity for the destruction of vital information.

The vulnerability of our institutions and the critical infrastructure of the United States economy is ever more at risk of a systemic loss. While our stolen data will continue to be sold to the highest bidder on a global platform for trading, the 4GW "Non-State" actors will change their modus operandi. This is a given.

Trusted Information systems that have certified integrity and the oversight controls to ensure the highest level of virtual truth is the "Holy Grail.”

The degree to which these same systems include false knowledge is our most complex problem for business and government in the next decade…

Trust Decisions: Future Risk Architecture...

Leadership within the enterprise requires "Trust Decisions" that they can count on.  Operational Risk Officers have a fiduciary duty to provide top executives with the confidence that the data and information they provide is trusted.

So how do you assist any corporate leader, who has the responsibility and accountability to the Board of Directors to make informed and sound decisions?  The answer is, that it depends on how willing the CxO's in the enterprise are to engineer a "Trust Decision" model and framework for the business.

The truth is, most executive managers have their own way of doing this.  The process that the CEO makes decisions, is quite different from how the CFO makes decisions and the COO may have a documented and tested way to make their decisions.  The point is, that major "Trust Decisions" for the good and welfare of the enterprise are being made by people who are each doing it differently.  These human decision makers are relying on a number of ways to get to the final answer.  The decisions from leadership are not as trusted and reliable as they could be.

As an Operational Risk executive charged with making timely and correct decisions you have no choice but to have the tools and the trusted sources to enhance your situational awareness.  The safety and security of the facility, information or peoples lives are at stake.  That is why you test and continually improve the process so your analytics dashboard, intelligence feeds and data sensors are all operating with integrity and in real-time.

You are relying on information that changes by the nanosecond and a system designed to provide decision support.  Intelligence-led investigations or reacting to the latest incident requires systems designed and tested to support human "Trust Decisions."  Now back to the executive leadership and their process for decision-making.  What is it?  How does the CEO make the final decisions for the future wealth of the company and it's stakeholders?  Are they trustworthy?

Unless you have seen the "Trust Decision" process and trusted data framework engineered for your enterprise, then probably not.  Think about all of the leadership level projects and how they turned out.  How did executive leadership decide to buy that other company or merge with their favorite supplier?  What process did they use to ensure all of the due diligence data was correct?  Why are the sources of data trusted?

We have the opportunity to improve and to arrive at a point where we make "Trust Decisions" our priority and a prerequisite.  After all, our employees, customers, shareholders and even mankind deserve it.  The challenge begins.

Whenever you encounter your next major business decision with your CxO, ask them how they arrived at the decision.  Ask them to explain the process they used and the sources of trusted data they relied on.  Ask them why they think the architecture of the decision at hand, is the most sound and trusted decision that can be made with the time available.

You are now well on your way to better understanding the power and the future risk architecture of TrustDecisions.

Operational Risk: The Pursuit of Trusted Information...

Operational Risk is about Performance Management and Business Resilience. A few months ago the topic of "Compete or Die" was discussed here. Why revisit this topic?

CEO's and the Board of Directors realize the road to eliminating fear in their organization and the marketplace is through trusted information.

Being agile, ready and capable of a quick recovery is what competitiveness is all about, on the field, on stage or around the table in the Board Room.

Working towards control and protection while "Fear" builds in the back of your mind makes you stiff, depletes your energy and creates doubt. And when you are operating a business or standing on the tee of your first sudden death hole on any PGA weekend, you better have resilience.

The business equivalent to Homeland Security and Critical Infrastructure Protection is Operational Risk Management—a domain that many executives see as the most important emerging area of risk for their firms. Increasingly, failure to plan for Operational Resilience can have “bet the firm” results. 

There are numerous examples of how errors, omissions and glitches have brought down the reputations of many a Fortune 500 companies. What do they all have in common that led to their demise? A lack of economic and business resilience to remain competitive in the marketplace.

The threat of Tort Liability and the loss of reputation is top of mind these days with every major global company executive. The threat is real and increasing at a faster rate than many other real operational risks to the enterprise. Litigation from regulators, class actions and competitors has given the term Legal Risk new emphasis and meaning.

Once corporate management understands the need for a "resilience" mentality in place of a "protection" mental state, a new perspective is found. Investing in the vitality, agility and competitive capabilities of the organization sounds and is more positive.

It alleviates the fear of doom and gloom and inspires new found innovation. The future of your organizations longevity and in it's adaptability can be achieved with a new perspective. Compete or die.

Performance Management could be enabled or suppressed by the amount of power you give your leadership. Do they have the ability to make a $1M decision or $10K decisions when it comes to investing budgeted capital into their business unit growth?

Do they manage risk on a level where they are the most informed and the most knowledgeable about the business, or is the "Mother Ship" back at the home office dictating the way they spend or the way they invest?

The ability to know how to manage risk at the point of creating new information is the nexus of several disciplines and requires substantial training. Every minute that goes by with people not behaving correctly puts the enterprise at greater risk to lost performance opportunities.

All these issues can be summed up in a single concept: trusted information. Simply accessing data is no longer enough. Today's CEOs, CFOs and knowledge-workers must be able to reliably track the information they use for decisions back to the original source systems in order to ensure its timeliness, accuracy and credibility.

Over the last few decades, organizations have invested Billions of dollars in systems to collect, store and distribute information more effectively. Despite this, information users at all levels of the organization are often uncomfortable with the quality, reliability and transparency of the information they receive.

Today's organizations rarely have a "single view of the truth." Executives waste time in meetings debating whose figures are correct, rather than what to do about the company's issues.

Additionally, they worry about the AI consequences of making strategic decisions using the wrong information, directly impacting the long-term survival of the organization.

The search for trusted information is a continuous pursuit for commanders in the "Mission Ready Room" and the "Corporate Board Room".

So how do you achieve the level of assurance that's required to make the "bet the farm" risk management decisions in your enterprise?

Strategic Organizational Resilience & Survivability...

According to the best practices from several sources, the Board of Directors is responsible for the "Strategic Resilience and Survivability" of an organization.

Let’s take a look at what the highly influential Basel Committee says about one principle as it pertains to Business Crisis and Continuity Management (BCCM):

Review and Testing of Business Continuity Plans – Basel Principle 13

“It is the responsibility of the organization's Internal Audit and Business Continuity functions to ensure that all of the organization's business continuity plans are tested and reviewed on a periodic basis to spot incorrect assumptions, oversights or changes to equipment, and employees and to identify any changes in business requirements not reflected in specific plans. Any undocumented requirements must immediately be documented. In addition, appropriate information owners and users must be informed of updates to plans.”

The Basel Accord for large global money center institutions says you have to test all of your suppliers and their plans so that you don’t have any service interruptions. The question is how often is enough? When is the last time you knocked on the door of your Power Company, Phone Company, and Water Company and said I’m here to audit your BCCM plans. And in every country you operate critical information processing and personnel centers.

Having survived several large quakes in Southern California in years past, you can be sure that all of the testing in the world can't prepare people for human behaviors that come from within.

People literally lose all sense of common sense when you are on the 42nd of the 50+ skyscraper and without any warning it physically sways a couple feet to the left and a few more feet to the right.

Believe it, the issue is not the testing itself, it’s how to create a real enough scenario that you get similar behaviors out of unsuspecting people.

Certainly the largest organizations realize that the threats are taking on different forms than the standard fire, flood, earthquake and twister scenarios.

These large catastrophic external loss events have been insured against and the premiums are substantial.

What it is less easy to analyze from a threat perspective are the constantly changing landscapes and continuity postures of the many facets of the organization having to do with people, processes and systems.

The many sources of significant loss events are changing as we speak. Here are a few that should not be overlooked:

· Public perception

· Unethical dealings

· Regulatory or civil action

· Failure to respond to market changes

· Failure to control industrial espionage

· Failure to take account of widespread disease or illness among the workforce

· Fraud

· Exploitation of the 3rd party suppliers

· Failure to establish a positive culture

· Failure in post employment process to quarantine information assets upon termination of employees

In summation, the following six factors are the critical aspects of effective and strategic organizational resilience and survivability:

1. Business continuity planning will be conducted on an enterprise-wide basis 24/7.

2. A thorough and continuous business impact analysis and risk assessment is the foundation of an effective BCCM.

3. Business continuity planning is more than the recovery of the technology; it is the recovery of the business.

4. The effectiveness of a BCCM can only be validated through continuous and thorough testing.

5. The BCCM and test results will be subjected to continuous independent audit.

6. A BCCM will be continuously updated to reflect and respond to changes in the organization.

Frankly, corporate directors have their hands full managing risk and continuity on behalf of the shareholders.

The risk management process will someday have as big an impact on the enterprise as other key functions because shareholders will be asking more questions about the changing landscape of managing risk for corporate governance…

operational risk

Trust Decisions: EO of ORM...

In our most uncertain times over the past few years, it is again time to revisit several key factors of Operational Risk Management (ORM) within our Global Critical Infrastructure organizations.

Think of examples like Maersk or Boeing and UnitedHealth Group or Silicon Valley Bank.

Into the future, our Risk, Security and Controls personnel shall have equal power with the executives who are responsible for bringing in the revenue.

This means that the future power-base of the Sales and Marketing teams would need to also be on par with the Internal Audit, Security and Risk Management executives.

This internal culture shift is harder to achieve than one would think.

The ego's aside, the people who make it their job to worry about potential losses, look over the horizon and to mitigate risks day in and day out, are just not used to warning everyone each day to every alert, each instance or possible threats.

It is because everybody loves to hear that the business has been won, the competition defeated and the company just closed the biggest "Deal" in it's history. Let the spin doctors in Marcom get the Press Releases flying!

Not the doom and gloom.

It has been said before, the tone starts at the top.

The CEO and Board of Directors who are cognizant of the necessity for effective risk management objectives must also create a balanced power-base at the top to balance the "Revenue Generators" with the “Risk & Loss mitigators.”

So who are some of these people who deserve a greater exposure to this new born culture shift:

• _Director of Information Security promoted to CISO. (Chief Information Security Officer)

• _Director of Corporate Facilities to CSO. (Chief Security Officer)

• _Director of Regulatory Affairs to CCO. (Chief Compliance Officer)

• _Director of Privacy to CPO. (Chief Privacy Officer)

• _Director of Human Resources to CHO. (Chief Humanity Officer)

If the CEO thinks that this is too many chiefs in the "C" Suite, then what about the idea of creating the:

Executive Office of Operational Risk Management (ORM)

This would be on par with the Chief Financial Officer and might even include the Chief Information Officer.

The new EO of ORM would now be on the same level of power with the EVP of Sales or Marketing and beyond the Chief Operations Officer (COO).

They would be laser focused on mitigating a spectrum of corporate threats, implementing relevant employee education and determining the true effectiveness of any organizational risk controls.

Just not so much on the effectiveness of sales incentives and corporate promotions or the uptime of corporate marketing processes.

So what does someone such as Sherron Watkins, the former VP of Corporate Development at Enron Corporation think the moral is?

You've been asked this one numerous times Sherron, I'm sure, but what's the moral of the story?

“Being an ethical person is more than knowing right from wrong. It is having the fortitude to do right even when there is much at stake.”

Reputation Risk: Is Murphy to Blame?

Any board member or executive today is well aware of the direct impact of an adverse event or significant business disruption can have on shareholder value and customer confidence. When it does happen, how many people just throw up their hands and shout, Murphy's Law!

"Murphy's Law ("If anything can go wrong, it will") was born at Edwards Air Force Base in 1949 at North Base.

It was named after Capt. Edward A. Murphy, an engineer working on Air Force Project MX981, (a project) designed to see how much sudden deceleration a person can stand in a crash."

Murphy is all about managing the "What if's" and planning for their possibility.

More than one business has been subjected to the Law's of Murphy whenever a complex and logistical project or program is underway.

If you are one of those corporate executives who has been unable to use your security badge the Monday after the big office move, you are not alone.

The question is not that it could happen, it's what impact will it have on employee satisfaction the day it happens, and beyond.

In your future planning to mitigate the Operational Risks associated with Murphy and your reputation, we are reminded of a few of our favorite Murphy's Laws:

1._Computer systems are unreliable, but humans are even more unreliable. Any system which depends on human reliability is unreliable.

2._If there is a possibility of several things going wrong the one that will cause the most damage will be the one to go wrong.

3._A difficult task will be halted near completion by one tiny, previously insignificant detail.

4._High speed chases will always proceed from an area of light traffic to an area of extremely heavy traffic.

5._Every emergency has three phases: PANIC... FEAR... REMORSE.

Do you think you're spending too much time with your team planning? You haven’t.

Success in your organization doesn't happen because everything goes according to the plan. It happens because you were prepared when things go wrong.

The organizations whose team has planned for every possible scenario and trained together in live simulations will become the most successful.

Their missions will be accomplished on time and within budget.

Incidents of different severity and frequency are happening around you and your organization every day.

Would your employees know what an incident looks like let alone know what to do next to mitigate the risk to them and the organization?

Operational Risk: Volatility of Change...

What is volatility and how could this be an operational risk in your particular institution or organization?

The threat of "Volatility" depends on what is being measured. The stock price. The return on capital. The key is that you want to reduce volatility in most cases.

It scares some people. Long term investors, employees and customers.

Volatility is the standard deviation of the change in value of a financial instrument with a specific time horizon. It is often used to quantify the risk of the instrument over that time period.

Who likes volatility?

Volatility is often viewed as a negative in that it represents uncertainty and risk.

However, volatility can be good in that if one shorts on the peaks, and buys on the lows one can make money, with greater money coming with greater volatility.

The possibility for money to be made via volatile markets is how short term market players like day traders make money, and is in contrast to the long term investment view of buy and hold.

So volatility is in the "eye of the beholder". The point is that some people thrive on it and others are better off with that smooth and predictable future.

Risk in a financial institution is defined in terms of earnings volatility. Earnings volatility creates the potential for loss. Losses, in turn, need to be funded, and it is the potential for loss that imposes a need for institutions to hold capital in reserve.

This capital provides a balance sheet cushion to absorb losses, without which an institution subjected to large (negative) earnings swings could become insolvent.

How much capital is allocated to Operational Risk is a measurement issue. The decisions an institution makes in managing Operational Risks is not risk versus return, but risk versus the cost it takes to avoid these threats.

The key determinant of an institutions risk factor against operational failures is not the amount of reserve capital, it is the performance of management.

In fact, in a few spectacular cases of operational failures, incremental capital would have made no difference to the firm's survivability. It comes back to strategy, safety, security and soundness.

How volatile are your earnings? At the end of the day the question is about management controls and measurement.  What if your measurements were not earnings, but the number of workplace accidents and acts of violence?

How effective are they at mitigating operational risks in the areas of the institution that can't be insured?

Look at places where "Change" is happening in huge volumes and at a rapid pace and you will know where to begin.

Global Risk Economy: Follow the Money...

Operational Risk in the global economy is migrating to places that 10 years ago would not have been easily forecasted.

New countries, financial institutions and software technologies have changed the playing field for our risk management executives.

Why is this happening?

One example is the movement of employment to more emerging markets where corporate tax rates are lower and the supply of talented workers with specific skill sets is prevalent.

The simple movement of people and systems to those new countries creates new found risks that may not have been as pervasive in the past for the institution.

Another example is the evolution of new computing platform paradigms such as the emergence of "The Cloud" or “Infrastructure-as-a-Service".

This outsourced IT model not only provides economy of scale in terms of just in time computing power but also the more economical licensing models.

Operational Risk within the confines of the global workplace will continue to follow what countries are attractive and where these people and the systems are now operating from.

Along with this migration of responsibilities of vital corporate processes to other cultures and countries comes the risks associated with potential lack of safeguards, both legally and to the physical protection of key corporate assets.

In the United States, our “True International Economy" explains why there are tens of millions of employees now working for US-based corporations outside the country.

Once you have accepted this fact, your personal risk mindset may also change.

How many U.S. organizations have now moved their Corporate Headquarters to Dublin?

How many American companies now have personnel in foreign countries reviewing online “Social Media” content with the assistance of AI?

"You may have heard the phrase "Follow The Money" in several contexts in the past."

Whether it was Watergate investigations in the 70's or now the 2020’s and the new “Global War in Space”.

The real-time tracking of where money flows, can be a core indicator of where Operational Risk managers need to keep their radar focused and on high alert.

Operational Risk Management (ORM) in the next decade will take on a whole new international meaning and significance than it currently does today.

The risks associated with people, processes, systems and external events will become even more exponential…

operational risk

Problem-Set: Enterprise OPS Risk...

Who is responsible when a particular Operational Risk problem-set has risen to your organizational awareness?  Clue: It is not the name of a department or single person.

This means that all people in your company, agency or command unit may have encountered behaviors, information or evidence of potential Operational Risk loss event outcomes.

Until you have a documented 1-Pager in your organization, you don’t have a problem-set or someone with the responsibility to solve it.

What is the Problem-Set? Give it a short Title that identifies the issue.

How do you describe the Background on the new problem-set in less than two short paragraphs?

Explain the Challenge ahead.

In less than one paragraph of three or four sentences, explain what the intended outcomes of solving the problem-set will be.

Now provide the Boundaries in your process of discovery and activity, that will provide you with the solutions solving the problem-set.

Now, who is the Owner / Sponsor of this problem-set?

“You have an “Operational Risk” loss event potentially waiting to happen.”

The people and/or the team who have been assigned to the defined  “OPS_RISK_PROBLEM-SET” (ORP), now have the organizational responsibility and power to engage with mitigating the risk of the potential outcomes, by designing and implementing the prototype Solution.

If leadership assigns you to this particular 1-Pager, it is now your responsibility to follow the process and to execute the steps you have been trained to carry out within your organization.

This shall occur in a timely manner, based upon the severity of the Operational Risk:

Design an easy and memorable numerical scale that could be utilized with the team or owners of your Problem-Set to provide a quick numerical severity for the ORP.

SEVERITY / LIKELIHOOD OF LOSS EVENT

LOW >>>>> 1 >>>>> 3 >>>>> 6 >>>>> 10+ HIGH

Stack rank your company, agency or command unit ORPs from High Severity to Low Severity on a pre-determined schedule, relevant to the size and pace of your national regulatory requirements.

If your organization is categorized as one of the 16+ national Critical Infrastructure Sectors as defined by the U.S. Department of Homeland Security (DHS), your organization shall engage in a continuous process of solving new problem-sets that are being continuously discovered in your enterprise.

Now you are on your way to solving more problem-sets with timely defined solutions within your entire Operational Risk Management (ORM) organization.

Onward!

Trusted Horizon: "Augmented Intelligence"...

When you read that critical powerpoint report last week at work, did you trust what the author had written?

How did you make the decision to trust the numbers that the author placed in the columns and rows chart on page 3?

Did you trust the author and source because of their previous track record of accuracy?

Did the numbers come from a sensor that has been tested in an independent lab to a 99% level of truth?

You trusted that report at work for a reason. It was a “Trust Decision”.

Why?

Have you personally tested the math? What is the source of the data?

So why do you trust Apple vs. Samsung? Verizon vs. AT&T?

Would you pay $100 for a machine that was 99% accurate or could you live with a machine that was 50% accurate and only cost $50?

Think about your mobile navigation mapping app. Where are you going?

These kind of discussions are fundamental yet necessary for us at this point in our digital innovation journey. Just as humans have since the inventions of the Personal Computer, Internet and Quantum Computing.

Trust Decisions are mathematical.

mathematical

adjective

1: of, relating to, or according with mathematics

2 a: rigorously exact : PRECISE

b: CERTAIN

3: possible but highly improbable

We have been trusting computers, data and all kinds of sensors as a result of established testing standards. You name it. ATM’s. Stock Markets. Airplanes. Rockets.  Satellites.

Today, would you trust the answer of any question asked to your favorite Large Language Model (LLM)?

LLM’s will challenge your future digital “Trust Decisions” because you might decide whether you believe Chat-Brand A vs. Bard-Brand B vs. Claude-Brand C.

No different than your preference today on using Google search or Bing.

Are human lives at stake? How will we ensure the trust of our digital machines? 

Into the future, our ability to produce high accuracy “Trust Decisions” will depend on your own “Augmented Intelligence” (Ai)...