Static vs. Dynamic Risk

Static vs. Dynamic Risk Do you agree or disagree: • Risk issues are largely static, not changing from year to year, so why do we need any change in the organizational approach to addressing risk?  • The traditional risk silos are addressed by specialists who know exactly how to deal with their respective areas of risk. Eric Hiu Fung Tse- AD 610- Week2-  Assignment

Table of Content

Static vs. Dynamic Risk. 1

Table of Content 2

Executive Summary. 2

Dynamic vs. Static Risk. 3

Silos vs. Integrated. 5

Conclusion. 6

Reference. 7

 

 

 

 

 

 

 

 

 

Executive Summary

Risks are not always static. Many of them dynamic because the business world (and our world is changing). This is one of the reasons why we need an organizational to address the risk. The process is continuous and dynamic.

Traditionally corporate risk management uses silos approach that has limitations. Many risks are cross functional that sometimes specialists may not know exactly how to deal handle the risks in their respective area. Those limitations drive the emergence of an integration/unified framework to handle enterprise risks as a whole.

Dynamic vs. Static Risk

The international business world has been changing dramatically that, people face an assortment of risk almost unimaginable from 10 years ago. For example this decade we introduce e-commerce and other technology that drives business model from years (to the old days) to months (nowadays). No one would agree that risk issues are largely static.

Another example is internet that let everyone access information widely ad quickly (Kevin Peraino, 2000). As the Internet comes of age, companies are rethinking their business models, core strategies, and target customer bases. “Getting wired,” as it is often called provides businesses with new opportunities, but it also creates more uncertainty and new risks8. In his book The High risk Society, Michael Mandel states, “Economic uncertainty is the price that must be paid for growth.” To be successful, businesses must seek opportunities “where the forces of uncertainty and growth are the strongest.9

The third example is the introduction of derivatives, which were originally intended to help manage risk, has themselves created whole new areas of risk. Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit. (Michael Simkovic, 2009) However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy. (Michael Simkovic, 2009) (Michael Simkovic, 2011)

From the above examples, we can conclude that risks issues have never been static. We need to adopt various techniques to identify risk, and once identified, the process of identification should be dynamic and continuous.

To summarize, here are few forces creating uncertainty in the new economy:

-          Technology and the Internet

-          Increased worldwide competition

-          Freer trade and investment worldwide

-          Complex financial instruments, such as derivatives

-          Deregulation of key industries

-          Changes in organizational structures resulting from downsizing, reengineering, and mergers

-          Higher customer expectations for products and services.

All these changes provides business with new opportunities, but it also creates more uncertainty and new risks (Washington Post, 2000)

 

Silos vs. Integrated

Historically, risk management in even the most successful business has tended to be in silos – the insurance risk, the technology risk, the financial risk, the environmental risk, all managed independently in separate compartments. Coordination of risk management has usually been nonexistent, and the identification of new risks has been sluggish. (Barton, 2002)

Silo-based approaches are reactive, not proactive, and their functions segregated; each silo has its own tools and applications to assist with specific management and reporting requirements. Problems arise because these independent systems do not communicate with one another across business lines. (ACI worldwide, date)

Companies need a broader view of managing risky corporate activities, so that they can gain a complete understanding of risk profile. This expanded view allows institutions to better detect and prevent fraud by monitoring transactions and events across the entire range of corporate activities.

From all the above reasons, we would to change our approach to manage risk – Barton (2002) introduces a new model – enterprise wide risk management – in which the management of risks is integrated and coordinated across the entire organization.

Comparing with the old paradigm, with each risk considered in isolation, the new risk management approach is holistic, integrating the risks across the organization and designing risk response strategies.

So how do we integrate risk and adopt the enterprise wise risk management? Companies build portfolios of risks, in the form of, a risk map, a list of risks, or a model that highlights the company assessment of risks. Afterwards companies integrate the risks with best practices and tools, and to find room for enterprise-wide management to handle those risks.

Companies choose to implement ERM to remove traditional risk silos (Brown, J. 2007). In fact, based on a survey conducted by Internal Auditors Research Foundation and Tillinghast Tower Perrin a main motivating factor driving ERM is the desire for a unifying framework (Miccolis, 2001) that would result in goal of overcoming organizational barriers in implementing ERM (Miccolis, 2001). It would be interesting to evaluate that if a company implement ERM framework and remove the risk silos then if they would still need specialists

The advantages of new approach far outweigh the disadvantages. It reduces costs through operation consolidation and enables standardization and flexibility on risk managing methodology, practice and process. It improves workflow efficiencies and synergies. It increases cross-selling opportunities, service delivery and measurability of the overall enterprise environment. (ACI Worldwide. (Date).)

Conclusion

Risks are not always static. Many of them are dynamic because the business world (and our world is changing). This is one of the reasons why we need an organizational approach to address the risk. The process is continuous and dynamic.

Traditionally corporate risk management uses silos approach that has limitations. Many risks are cross functional that sometimes specialists may not know exactly how to deal handle the risks in their respective area.  Those limitations drive the emergence of an integration/unified framework to handle enterprise risks as a whole.

Reference

ACI Worldwide. (Date). Taking Risk Management From the Silo Across the Enterprise

 Barton. (2002). Making Enterprise Risk Management Payoff,

 Brown, J.P.W. Enterprise Risk Management. Retrieved on June 4, 2007.

 Kevin Peraini. (2000). A Shark in Kid’s Clothes, Newsweek (October 2 2000): 50

Miccolis, et al. (2001). Enterprise risk management: Trends and emerging practices.

Tillinghast-Towers Perrin, Institute of Internal Auditors Research Foundation.

Washington Post. (2000). New Challenge Arise as All Business Becomes E-Business.

Eric Tse, Richmond Hill, Toronto
Tse and Tse Consulting -Security, Identity Access Management, Solution Architect, Consulting 
http://tsetseconsulting.webs.com/index.html
http://tsetseconsulting.wordpress.com/
http://erictse2.blogspot.com/