Thinking Cautiously about Risk Appetite

How does the current trend for Caution in Risk Management affect business potential?

Because well-considered risk taking is critical to business growth and success, not just for individual companies but also to enable or entitle the expansion of a properly functioning economy.

Food for Thought

Business-to-business lending and borrowing always involves a high degree of risk. Therefore, curtailing that appetite for risk can directly hobble entrepreneurship, deprive deserving businesses of capital, and reinforce deflation.

Take a Positive Stance

Moreover, for any business, the assessment of risk should not dwell on the potentially damaging prospects but also on the opportunities; potential rewards and gains. If you take an overly cautious stance this is more difficult to do or can create a restrictive position.

Although the need for risk taking is recognised by both businesspeople and economists, a lot of this is based on theoretical lip service and rhetoric, rather than real positive and optimistic determinations and outlooks.

Complexity

The complexity of risks in the global economy severely tests many companies, both in their judgment about how much risk to take and in their controls for tracking and managing it. What doesn’t help the situation in any way are sponsors and senior management teams who are not comfortable or practiced at discussing risk in the context of strategic decision making or in articulating those expectations to the organisation.

Positive Solution
To overcome the problem of over cautious risk taking, sponsors, senior managers and companies needs a fresh, more rigorous definition of the appropriate level of risk the organisation can accept or endure. The organisation needs to stress its structure, confirm its strengths and articulate its risk appetite.

Set the Appetite

In addition to asking how much risk to avoid and how much to accept, we need to prepare for the possible downside. Leaders should be setting a better example, by defining how much risk they want and establishing how much capital they are willing to stake against it.

Result Focus

Clearly this is only part of the algorithm, because the result of all this effort is to achieve as much potential and capital gain. The whole organisation should be involved and open to this discussion on risk appetite.

Trading on the edge

Traders and deal makers are at the sharp end of it. They, of all people need to fully understand the risk appetite of the company and the part that their individual deals might have in the corporate-wide performance, because they are the ones that have to implement it effectively.

Unshackle and empower your people, by giving them a clear framework, an appetite for risk and a plan for success.

Internal Audit - CCM and Risk Management

Internal auditors are familiar with walking those fine lines, but championing a "Continuous Controls Monitoring" (CCM) program requires an extra fine sense of balance.

Designing effective controls, especially those aimed at preventing incompetence and financial fraud, is typically defined as an activity performed by company management or business units and, under internal auditing standards, internal audit departments must be seen to be independent from management.

Clearly, that doesn't mean internal auditors don't have a role to play in Continuous Controls Monitoring (CCM). Auditors may not be able to help management design effective cost controls or tell them whether a particular control is the right one to have, but they can help in monitoring the situation.

Auditors are not 'troubleshooters' or management consultants, but they are very capable of testing your controls and processes and providing you with the results. In addition to these results, the auditor should provide some searching questions, which can be fed back into and addressed, in the next management meeting. This is an important feedback loop for management, which should not be under estimated.

The need for strong internal controls is heightened in public and financial companies, because of the Sarbanes-Oxley, Basel II requirements, etc . and external auditors have an equally heightened role to play in testing the soundness of these controls.

In these cases, the management are obliged to design controls to fulfill a regulatory obligation and win accreditation or regulatory approval, verifying the effectiveness of these controls. This verifying audit is required to be carried out by its external auditors, but this will only happen after due diligence and much work has been carried out internally, by the organisation's own audit team.

In reality, internal audit departments, conduct their audits to prevent or to root out fraud and error in high-risk transactional areas. Technology is a powerful double-edged tool, that can be used both for and against an organisation. So, it is vital that internal audit teams maintain tight control of that the tool so that the parameters of the tests don't get changed without their knowledge.

Change and Business Analysis

What makes a good and effective Business Analyst in these days of economic storms, tightened belts and changing political tides.

While strong abilities in communication, collaboration and analysis will always be the mainstays of strong business analysts, our changing technology environment is altering the world in which business analysts commonly work and therefore, their skills have to change in line with this and meet current business requirements.

While a Business Analyst's traditional skill set is still king, those decidedly non-technical leadership, communication and business-process understanding traits, the changes in software delivery methods have altered what business analysts need to offer right now.

The Rise of Agile Methodologies and Lean Concepts
It's the end of traditional software delivery as we know it, thanks to Agile and Lean. A recent survey found that 41 percent of respondents are using Agile techniques and 10 percent are exposed to Lean concepts.

Organisations are planning and implementing new, lighter-weight software delivery processes on a large scale, and this is largely changing the world of the business analysts. The BA's need to stay up to date with recent approaches and changes in methodologies, understand the subtle changes to their roles, and modify their practices accordingly.

Agile Approaches Change the Business Analyst Role
Requirements look very different in an Agile project than they do in a traditional waterfall endeavour. With Agile, the team typically describes requirements at a high level early on in the process and only elaborates on them when it's time to implement them.

The team uses different artifacts such as user stories, and the requirements definition process is much more collaborative and iterative.

Agile Methodologies

With an increase in the adoption of Agile methodologies inside businesses today, BAs need to understand what's changed and what's different in the methodologies so that they can help guide the transformation of their role and practices.

If their CIOs and business-unit leaders aren't already adapting the business analyst role to new software delivery methods and process changes, then the BAs might need to do it themselves.

Cross-Functional Knowledge

Business analysts need to obtain cross-functional knowledge and experience by being exposed to new technologies and different business units. Cross-training in project management, software development and quality assurance would help.

As with most roles in technology, it's never safe to rely on the skills you already possess. Effective business analysts are constantly seeking to improve their core skills and staying up to date with technology changes to add the most value to their organisation.

Bad Dreams, Nightmares and ERP Systems

I had the good fortune this week to be invited to the inner sanctum of the European Commission offices in Luxembourg. If it is not the famed 'Emerald City' of the European Community, then it is certainly a semi-precious substitute.

The offices themselves are tired, uncomfortable and functional, at best, lacking the sparkle and seductiveness of modern commercial enterprises and high-tech locations. There was a definite feeling of stepping back into Eastern Europe under the Communist regime.

Legacy mud baths
My hosts were very keen to distance themselves from the environment and the legacy 'systems' that they had inherited. They were seeking a rapid improvement in their physical situation and in their technological environment and that was why I was there. To help pull them from the clawing and energy sapping mud of stale and redundant legacy systems.

The offshore island of Luxembourg
Luxembourg is an island of prosperity in the vast ocean of unemployment and economic doldrums of France, Germany and Belgium, that surround it. It is the great white hope of some 120,000 people from these other nations that commute daily to work there. Beware of peak time traffic jams at the borders.

This does not take into account those that travel from much further afield, living in hotels for most of the week and travelling home on weekends. Expanding the catchment area into the UK, Spain, Italy and Eastern Europe.

My brief but interesting meeting with the technological worker gnomes of the Commission was both enlightening and concerning. The fear of legacy systems seemed out of all proportion to their overall threat and effect, a bit like the extreme measures that the UK government is currently taking against the H1N1 virus outbreak.

Bad Dreams and Software Solutions

The urgency with which these issues are driving the tactics, has more to do with political pressures than sound economic strategy. The pressure to appear active and 'moving' on the issues far out-strips the effectiveness of the results achieved. Never mistake 'movement' for 'action', or 'tactics' for 'strategy', they are completely different entities.

The headlong rush to implement a 'tool' that will absolve and absorb the responsibility for good management, is the 'holy grail' of all government bodies and corporation managers. This makes them very vulnerable and accomodating to the consultants' pitch to sell ERP system solutions, an SAP or a Tivoli, snake-oil software that will 'assume' command of the enterprise and take all your problems away.

Unfortunately, although ERP systems are sold as 'solutions' by 'solution providers', this is a 'misnomer', an elegant piece of marketing. An ERP system will not solve your problems but they will capture most of them in the one location, inside the ERP system itself. Does this help you?

'A fool with a tool, is still a fool'.

Operational Legacy systems
There are a number of reasons why a 'legacy' system remains operational; a) the management has not addressed the impact of the structural issues surrounding it, b) it is still economically viable and change cannot be justified on the grounds of a good Business Case and ROI, c) the outlay and investment in the original system has not been 'realised'.

a) The structural issues will not be resolved by shoe-horning a round-pegged ERP system into a square-wholed enterprise. Bite the bullet and address the structure first. In this way you have greater chance of success, by overlaying and mapping a new ERP system into an organisation, rather than inflicting one.

b) Unjustifiable ROI and Business Case. Do the maths, and if this is the correct answer, stick with it. Stand firm. Do not go back and change the question to fit the consultants' solution. This way monsters lie!

c) If the outlay and investment in the original system has not been 'realised' then loading another burden on top, with additional gearing, will also not work.

Who is the Villain here?

Rememeber that, although today your system is shiny and new, another year or so down the road you will have to face the withering criticism as to why your latest ERP 'rocket-to-the-moon' system is now overloaded, running out of power and falling back to Earth. Preparing to take its place as your biggest ever obsolete 'legacy' system.

'I have a garage full of tools to repair my car. Now, if only I knew why it wasn't working!'

Do not skimp on replacing old laptops

Your Business may not survive it!
Not replacing laptops can prove very costly. You will need additional service cover against losses and breakdowns, because the warranties have expired, not to mention the lost productivity in using a three year old model. Keep your laptops up to date and in the new budget. If there are cuts to be made then this not the time or the place.

Companies are trying to cope with reduced IT budgets and are postponing the purchase of new laptop computers but they are making a big mistake.

Extending the use of laptops two years beyond the traditional three-year lifetime cost companies an average of $/Euros 1,050 per machine, more than the initial replacement cost.

The additional costs will include a hype in repair costs simply due to old age, normal wear and tear and the end of three-year warranty periods.

For each laptop user that is using the outdated equipment, it costs the company about $/Euros 9,600 in lost worker productivity over the two-year period.

Many companies are keeping a tight control over new purchases because of the recession. Some forward-thinking companies have taken the more positive step of replacing some user laptops with less expensive smartphones or other handheld devices. Such devices can be far more cost-effective for users who are only using laptops to access e-mail.

The replacement of corporate laptops with mobile devices should grow significantly over the next decade. In fact, it is predicted that in less than 10 years, the majority of Internet users will be accessing the Internet via a mobile device instead of a laptop or desktop.

Mobile devices are now being seen as mission critical but organisations are not quite at the point where they are completely confident about replacing laptops with smartphones. They are looking seriously at it and planning to research the potential gains in efficiency.