The GRC Pundit

The old paradigm of regulatory change management is clearly a recipe for disaster given the volume, pace of change and the broader operational impact of today’s laws and regulations. Just as the CFO needs a financial system or the sales department needs CRM, legal and compliance need regulatory intelligence.

Organizations should explore how technology and process combined with regulatory content can transform ad hoc regulatory change management. Organizations must make regulatory information actionable and accountable with regulatory intelligence. A critical part of meeting the demands of a dynamic business and regulatory environment is to gain control of regulatory risk, resource management and better control compliance and legal spending.

Layers of Regulatory Information

While the market seems to be eager to grasp onto the phrase “risk and regulatory intelligence,” it means nothing if corporations do not know what to do with the knowledge the process brings them. Information overload merely bears down on the organization. Organizations need the ability to get the right information to the right people at the right time. This must be supported by clear accountability, task management and workflow management capabilities.

There are three major layers of regulatory information that contribute to supplying sustained intelligence to the organization.

1. Law: The specific law is the primary and authoritative source of regulatory information.
2. Legal interpretation and analysis: Laws can often be unclear or downright confusing; expert analysis and interpretation about what it means can be provided. This layer may come as non-legal advice by an expert who understands the breadth of related issues and developments, or as specific legal advice to the corporation. This often includes monitoring which organizations are getting in trouble for lapses in compliance, and why and how it may impact them.
3. Policies, controls, forms, and assessments: The third layer of regulatory information is the practical application of laws and regulations in the organization in the forms of policies, controls, forms and processes, and assessments.

There are content providers that provide the range of regulatory information across all of these layers. More recently, these content providers deliver GRC technology platforms to automate the distribution and practical application of this information. Their solutions provide collection of content information with process management to provide regulatory intelligence.

The critical change organizations must make is to develop defined processes to route new legal and regulatory developments to the right subject-matter experts to make this information actionable in the organization’s specific context.

A Model Regulatory Intelligence Approach

Success in regulatory change management begins with a strategy ¬— to effectively manage regulatory changes in a dynamic environment. Ultimately, the organization must identify and prioritize regulatory changes resulting from changes in case law, new legislation, regulatory changes, and new rules and requirements, and also must maintain oversight and control over business processes to mitigate risk. This requires deploying a common process that delivers real-time accountability and transparency across regulatory areas impacting the business with a common system of record.

The goal is to deliver:

• Efficiency: Optimize human and financial capital resources to consistently manage regulatory change and enable sustainable management of resources as the business and regulatory landscapes change over time.

• Effectiveness: Greater understanding of changing legal requirements and how their impact enables the business to be proactive in gathering, organizing, assessing, prioritizing, communicating, addressing and monitoring the legal and regulatory change process. The organization also needs the ability to demonstrate evidence of good business practices.

• Agility: Regulatory intelligence enables a dynamic and changing organization to understand how the regulatory environment effects business change, and also how regulatory change impacts the organization.

Building a regulatory intelligence strategy requires the implementation of a process model that monitors regulatory change, measures impact on the business, and implements appropriate policy, training, and control updates. Regulatory intelligence processes also include the following core elements:

• Regulatory taxonomy and catalog: This is a catalog of regulations the organization has to comply with across jurisdictions. Regulations are broken into categories to logically group-related regulations (e.g., employment and labor, anticorruption, privacy, quality, health and safety, AML, and fraud).

• Roles and responsibilities: The core of regulatory intelligence is accountability — making sure that the right information gets to the right person, and that they take appropriate action to address regulatory change. This requires the definition of subject-matter experts for each regulatory category defined in the taxonomy. This can be subdivided into subject-matter experts with particular expertise in subcategories or specific jurisdictions, or to perform specific actions as part of a series of changes to address change requirements.

• Business impact analysis: The subject-matter expert must conduct a business impact analysis regarding the regulatory change. It may be as simple as acknowledging that the change has no impact and the organizational controls and policies are sufficient, or it may indicate that a significant policy, training, and compliance monitoring program must be put in place.

• Integration with policies: Regulations should be mapped to the policies that authorize how the organization will comply with them. Whenever a regulatory change is put into the system, corresponding policies related to the regulation should be flagged to be reviewed. This linkage should also extend to other areas of compliance, such as controls and assessments.

• Update communication, training, and attestation plans: Along with policies, regulatory changes should be evaluated to see if compliance and policy training, communication, and attestation plans need to be updated or developed. This includes understanding the need to update underlining communication mechanisms that exist between business, experts, workforce and third parties.

• Monitoring and auditing: The ultimate goal is to provide accountability and sustained performance. A clear system of accountability must be in place that includes monitoring of the process — who is assigned each task, and its status. This goes further into a detailed audit trail the organization can use to understand who made what decision and how the process was conducted.

Over the years, many organizations have matured in their view of internal risk-intelligence issues. However, monitoring external regulatory environments remains a broken process. To date, regulatory risk is managed in a very sporadic and ad hoc fashion with little accountability and oversight — if at all. Most organizations rely on manual ad hoc processes to manage regulatory change, and many times they only address limited areas of coverage. In this model, it is not uncommon to have duplicated coverage areas further exacerbating the problems.

Within legal and compliance it is not uncommon to have a myriad of legal professionals doing ad hoc monitoring of legal and regulatory change and emailing parties of interest with little or no follow-up, accountability, or business impact analysis. The typical organization is in a very immature state of monitoring of case law, regulations, and pending legislation to predict the readiness of the organization to meet new requirements. The difficulty is how to share regulatory change information and what to do about it. The process must require a joint accountability and collaboration effort between legal, compliance, and the business.

These flawed processes — in most cases it is a stretch to call it a process — involve individuals that are overwhelmed with information who fire off an email to a subject-matter expert who may or may not get to it — leading to, in varying degrees:

• Excessive emails, documents, and paper trails: Organizations rely on manual paper trails, email, and documents to monitor regulatory change with little or no accountability or follow-through. It’s not possible to verify who addressed a regulatory change, what actions need to be taken, or whether the task was transferred to someone else.

• Lack of an audit trail: Ad hoc processes are prone to failure, as there is no accountability for who reviewed what and what action was decided upon. This approach lacks a clearly defined audit trail, and does not allow for non-repudiation. In fact, it is prone to deception, as individuals are able to fabricate or mislead about their actions to cover a trail, hide their ignorance, or otherwise get themselves out of trouble.

• Limited reporting: Manual and ad hoc regulatory change processes do not deliver regulatory intelligence — there is no ability to report on the number of changes, who is responsible for reviewing them, the status of business impact analysis, and courses of action. The organization has no report or dashboard about the number of items being tracked, who they are assigned to, and whether they on or behind schedule for review. Trying to make sense of data collected in manual processes and electronic documents is a nightmare. How do you aggregate and provide meaningful reports from hundreds or thousands of disparate sources of information in emails and documents? The answer: A lot of labor and time.

• Files and documents out of sync: Adding to this behemoth of labor is the effort to track and control versions of all of emails and documents, which quickly become out of sync and lose relevance. The accuracy and relevance of the information soon comes into question. Where are key decisions documented and how? If an organization makes the decision that a regulatory change does not impact them, where and how are these efforts, actions and decisions documented?

• Wasted resources and spending: Silos of ad hoc regulatory monitoring lead to wasted resources and hidden costs. Instead of determining how human and financial resources can be leveraged to meet an enterprise view of managing regulatory change, they are developed independently without measure — and are merely a stop-gap, not integrated into a defined business process with clear systems of accountability and transparency. The organization ends up with inefficient, ineffective and unmanageable processes and resources to respond to regulatory change. The added cost and complexity of maintaining multiple processes and systems that fail to produce desired results wastes time and resources, and sustains and creates excessive and unnecessary burdens on business and operations.

• Poor visibility across the enterprise: A reactive, siloed approach to regulatory change means the organization can’t see the big picture. The organization has islands of initiatives that are individually assessed and monitored — supported by scattered silos of documents and emails that are not integrated into a system to manage the process. This results in poor visibility across the organization and its control environment that inhibits planning, budget optimization, and process transparency.

• Overwhelming complexity: Complexity is a result of multiple ad hoc and manual approaches to regulatory change and confuses the business. Varied approaches prevent predictable resource requirements and impact business goals due to uncertainty and confusion. Complexity further increases risk and frustration amongst employees, partners, management, investors, regulators, and other stakeholders.

• Lack of business agility: A regulatory intelligence strategy without a common process architecture leads to a lack of agility caused by reactive approaches, and is exacerbated by manual approaches overly reliant on email and documents. When information is trapped in individual roles, documents, and emails, the organization is crippled. It lacks a full perspective of regulatory change and intelligence. The company is spinning so many compliance plates, it struggles with business change and inefficiency. The business is not able to adequately prioritize and tackle the most important and relevant issues or make informed decisions.

• Greater exposure and vulnerability: Regulatory change complexity, exposure and vulnerability are the opposite of what GRC and regulatory intelligence are designed to achieve. There is excessive focus on immediate burdens, rather a drive toward regulatory intelligence integrated within a common process. This creates duplication, gaps, and a business ill-equipped to align regulatory changes to the business.

• No accountability: Ultimately, this means there is no true accountability for regulatory change. The organization lacks visibility into who is responsible for changes in a given regulatory area, and what the status is. Accountability is critical in a regulatory change process — organizations need to know who the subject-matter experts are, what has changed, who is assigned, what the priorities are, what the risks are, what needs to been done, whether it is overdue, and the result of the change process.

For regulatory intelligence and wise decisions, organizations require a process to assimilate the intake of relevant information, track accountability around who needs to perform what actions, model the potential impact on the organization, establish priorities and determine an appropriate course of action.

GRC technologies are beginning to be used to take in risk and regulatory information, weed through irrelevant information, and route critical information to subject-matter experts responsible for making a decision on a particular topic. This at a minimum requires workflow and task management capabilities, but in more mature systems provides direct integration with content and information aggregators. These aggregators contain an organization profile, and relevant new developments are routed to specific individuals responsible for evaluating specific business or subject matter content.

Hordes of regulation bear down on the organization

Business is under siege by legion of laws and regulations. Compliance itself has become difficult as business is bombarded with thousands of new regulations in addition to changes to existing regulations each year.

At the U.S. Federal level alone (not U.S State or local jurisdictions; not other countries) there were over 3,500 new regulations issued last year. This brings the total number of regulations issues since 1995 to nearly 60,000 (from the Competitive Enterprise Institute’s 10,000 Commandments). In addition to that, there are another 4,000 regulations pending – waiting for approval. You add in the breadth of State laws in addition to the laws in other countries that business has to comply with and the sheer volume is staggering.

The Open Compliance and Ethics Group, in compiling its guidance on common requirements across employment labor laws at the U.S. Federal, State, and local jurisdiction level, sifting through more than 3,000 employment/labor laws and regulations across the U.S.

The problem is not just a U.S. problem. A leading Brazilian bank has catalogued over 80,000 regulatory requirements that impact its operations around the world.

Organizations are in a complex environment of regulatory risk. When the organization approaches regulatory risk management and compliance in scattered silos that do not collaborate with each other there is no possibility to be intelligent, let alone wise, about risk decisions that could impact business execution or strategy.

Lack of regulatory intelligence

Organizations suffer from a lack of regulatory intelligence. The typical organization does not have adequate processes in place to monitor regulatory change, determine impact on business processes, prioritize and make changes to policies, procedures, and controls – particularly in an environment under siege by an ever changing regulatory and legal landscape. New regulations, pending legislation, changes to existing rules, or even court proceedings all can have a significant impact on the organization.

Information itself is not enough – organizations are overwhelmed by data through legal and regulatory newsletters, websites, emails, journals, and content aggregators. In fact, the overwhelming amount of information and duplication of information is part of the problem. Organizations fail in regulatory monitoring itself, which is the first step towards regulatory intelligence. The organization needs regulatory intelligence – getting the right information to the right person to be able to decide how and when, the organization needs to process regulatory change. Organizations need to grasp the breadth of regulatory data and transform this information to intelligence which then brings knowledge that can be acted upon in a measurable and consistent manner.

Regulatory intelligence is about enabling accountability and reliability of changes in the legal and regulatory environment that the business operates in. The primary directive is to alert the organization to regulatory and legal conditions that can impact their business. It is part of a broader risk intelligence strategy that monitors external and internal changes to the business environment, and alert the organization to risk conditions (e.g., geo-political, economic, natural disaster) that can impact their business.

The corporate compliance and legal roles struggle with monitoring a growing array of regulations, legislation, regulator findings/rulings, and case law. Regulatory intelligence systematically streamlines monitoring by using an automated process with workflow, task management and accountability documentation that results in meaningful information to consistently manage regulatory change. The challenge is for organizations to develop processes to harness internal and external information to be intelligent about their risk and regulatory environments across different parts of the business from so many external sources and be able to exhibit their process and state of complying.

The Bottom Line: Organizations need to move ad hoc monitoring and execution of regulatory changes to a regulatory intelligence process.

I would love to hear your thoughts on Regulatory Intelligence and corresponding organizations strategies. Please feel free to comment on this blog.

New GRC strategies, mergers, acquisitions . . . the last few weeks have been hopping for a market research analyst.Every time I sat down to blog on my thoughts someone else has come out without an announcement resulting in a whirlwind of buyer, market, and press questions.Between sessions at the OCEG GRC 360 Executive Forum I have found time to gather my thoughts and provide them to you briefly.

However, this is just a pause in the storm of GRC related activity happening.There are a few other announcements I expect to hit the press in the next month or two as other GRC vendors revise their approach as well as focus on more consolidation through acquisitions.

For now – let us look at the announcements by IBM/OpenPages, Wolters Kluwer/FRS Global, and Thomson Reuters – in the order they were made public.

IBM to Acquire OpenPages

IBM has struggled for years with a consistent technology approach to GRC.While I have found that IBM Global Services has fairly consistently delivered a GRC related vision for services, IBM has struggled on the technology side.Five years a go IBM was really pushing Workplace for Business Controls and Reporting as their GRC platform.This did not received by the market very well and IBM thus let a GRC strategy drift in different areas of the organization.IBM acquired FileNet in 2006 – FileNet was starting to make some very focused traction in GRC before the acquisition but fell off the GRC radar after the acquisition.Overall, GRC was hijacked by IBM Tivoli and largely took on an IT risk and compliance view and was not truly enterprise GRC.

OpenPages has been one of the primary market leaders in GRC technology for several years.In the number of GRC related projects Corporate Integrity gets involved with, OpenPages is in the top three vendors (along with Archer and BWise) to consistently get into the final selection in GRC RFP/RFIs.OpenPages has had particular success in focusing on the financial control as well as operational risk management aspects of GRC.

My two cents . . . the acquisition of OpenPages by IBM could be good or bad.It validates the market growth and interest for GRC and is spurning a lot of other activity by other large solution providers looking at GRC.However, I was disappointed that the IBM announcement itself did not reference GRC.It focused on risk management with some limited discussion on compliance – but did not reference the concept of GRC to provide efficiency, effectiveness, and agility to harmonize GRC processes across the business.There seems to be particular interest in enhancing the relationship between business intelligence/strategy (the Cognos side of IBM) with OpenPages risk management capabilities – this is highly interesting and relevant.However, there is a chance that OpenPages itself gets lost in the aftermath of an acquisition and loses market momentum.My advice to IBM is to clearly define and articulate a GRC message and strategy and maintain the OpenPages brand and market momentum.Further, OpenPages has tried with limited success to penetrate the IT Risk and Compliance market – IBM should make OpenPages the process and content hub for an IT GRC strategy that connects with the wide array of IBM’s security and IT management technologies.

Wolters Kluwer Financial Services Acquires FRS Global

In the GRC market – content is king.Many of the vendors have great technologies to manage risk and compliance processes, establish accountability, and implement workflows.The major area lacking in many platforms is content.In the world of IT risk and compliance there is a lot of content for control libraries (e.g., Unified Compliance Framework) but most GRC platforms do not have much to offer when it comes to domain/industry content for risk and compliance.Several major content providers such as SAI Global, Thomson Reuters, and Wolters Kluwer have been acquiring a range of GRC technology providers and integrating their content with them (Lexis Nexis has worked more on OEM/partner strategies in the GRC space as with their partnership with QUMAS).

Wolters Kluwer has articulated a very specific GRC strategy in their ARC Logics brand that branches across the range of their GRC technologies they have acquired (e.g., Axentis, Ci3 Sword, MediRegs, TeamMate).Part of their strategy is to focus broadly across industry as well as have deep industry focus on specific industries.Financial services is a specific industry of focus (as well as healthcare and others).The acquisition of FRS Global is a very positive execution on their strategy to integrate content and technology and deliver value to financial services organizations specifically.FRS Global will extend the impressive risk capabilities found in the ARC Logics Sword product to deliver regulatory reporting for financial services as well as enhance risk management capabilities. Combined with the breadth of Wolters Kluwer financial services content – this acquisition will further enhance Wolters Kluwer ability to deliver GRC value to financial services organizations.

Thomson Reuters Launches Governance, Risk, and Compliance Business Unit

It is about time.Thomson Reuters was one of the first companies to articulate an integrated GRC technology and content strategy.However, this was locked inside the Thomson Reuters Tax and Accounting business unit and failed to branch out into other areas of Thomson Reuters.During this time Thomson Reuters has acquired other technologies and content providers (e.g., Complinet).When you look at the vast content resources that Thomson Reuters delivers, they could be the leader for GRC if they can successfully and integrate content and technology.

I have had some concerns if they could successfully maintain technology.The Tax and Accounting business unit was focused on deep content needs and technology always appeared as a band-aid in the GRC deals I have seen them involved in.I have not seen the investment and advancement of the Paisley product they acquired a few years back.

This new business unit is just what is needed.Thomson Reuters has articulated a beautiful vision of technology and content integration, which combines their GRC technology platforms into a single business unit and articulates integration with WestLaw and other Thompson Reuters leading GRC content.My gut feel is that this focus on a GRC business unit will allow broader implementation of GRC content into technology but also allow the technology itself to be a priority of investment and development.This should not only keep Thomson Reuters competitive in the market but allow them to be a primary leader in it if they can execute on this vision.

 Why GRC & What Is It?

GRC, simply put, is to provide collaboration between silos of governance, risk, and compliance. It is to get different business roles to share information and work in harmony. Harmony is a good metaphor, we do not want discord where the different parts of the organization are going down different roads and not working together. We also do not want everyone singing the melody as different roles (such as risk, audit, compliance) have their different and unique purposes.

Note: GRC is not a restructuring of the organization. It is getting varying risk and compliance roles to cooperate, collaborate, and share so there is a big picture of risk and compliance to oversee that the organization is properly governed.

When it comes down to it . . . the acronym is not important, there are many GRC initiatives that I get involved with that do not use the term GRC. The goal is the same – to drive efficiency, effectiveness, and agility across risk and compliance processes to support a dynamic and extended business environment. GRC is a lot about process improvement and sharing information and processes. It is about simplification and efficiency.

Compliance should not drive risk. Nor should risk drive compliance. They both should cooperate with each other and share relevant information. Compliance is being challenged to do periodic risk assessments for unethical/non-compliant/criminal behavior. Audit is being challenged to do risk-based audits. Should these roles completely reinvent risk and risk management or work with the risk management team within an organization cooperatively, to learn from the risk experts themselves, to use a framework like ISO 31000 which is aligned to the OCEG GRC Capability Model?

On the flip side, risk needs to work with compliance. The current economic mess is due in part to many banks that had good credit risk policies – they knew their thresholds and appetite, and it was articulated in policy. The issue was they were not compliant with there policies. Risk management without a compliance program is ineffective. Again – two different departments with their own expertise that need to work together.

I think we all know the answer to that. Cooperation is best. To let different areas of the business lead where they excel but not dominate the others. But to work together in harmony – to collaborate and share information and processes so we can achieve a holistic view of risk and compliance across the business.

While the GRC term is 8 years old, I state in my research and teaching that it is nothing new. Organizations have been doing GRC all along. The issue is have they been doing it efficiently (human and financial), effectively (meeting internal and external requirements), and with the proper agility (for a dynamic and extended business environment)? Does the approach we have been taking make sense or are there better ways to do things that bring more process efficiency?

That is what GRC is about – that is the philosophy behind it.

As for the formal definition of GRC. . .

From OCEG’s GRC Capability Model: GRC is a system of people, processes, and technology that enables an organization to:

Understand and prioritize stakeholder expectations.

Set business objectives that are congruent with values and risks.

Achieve objectives while optimizing risk profile, and protecting value.

Operate within legal, contractual, internal, social, and ethical boundaries.

Provide relevant, reliable, and timely information to appropriate stakeholders.

Enable the measurement of the performance and effectiveness of the system.

As my friend and colleague Norman Marks states, “The definition can perhaps best be summarized as how an organization understands stakeholder expectations and then directs and manages activities to maximize performance against those expectations, while managing risks and complying with applicable laws, regulations and obligations.”I have some IMPORTANT NEWS to announce. The OCEG GRC Certification test is ready to be released.

 

GRC Certification & Training

To date there has not been a GRC certification for individuals that is based on a publicly vetted common body of knowledge. The only source of such knowledge, in my experience, has been OCEG’s GRC Capability Model.

 

Now OCEG is releasing a GRC certification for individuals based on the very popular GRC Capability Model.

This is a landmark certification. There is not other GRC certification based on an open and vetted source of GRC guidance that is a compendium (I call it the GRC Rosetta Stone) of guidance from across over 100 standards, frameworks, best practices, and regulatory guidance. This is the GRC Capability Model found in the OCEG Red Book. It defines a process model of common elements, principles, sources of failure, and other areas for a successful GRC strategy or individual risk and compliance effort.

OCEG has confirmed that those that attend the next two GRC Bootcamps (London in October and Dallas in November) will have an opportunity to take the written test during the bootcamp with no additional fee for testing – only for these two bootcamps. However, the individual registering for the bootcamp and to take the test must be an OCEG Individual Premium member or higher. I highly recommend that you consider attending one of the next two GRC Bootcamps so you can be among the first to receive this certification. After these two Bootcamps there will be an additional fee for the test/certification.

 

I am a man on a mission. Make that a business on a mission – to completely refocus organizations on how they approach policy management and communication. To take business to the new frontier, to boldly go . . . You get the picture.

Policies are in a complete and disappointing disarray. In my training and workshops I have found bright spots. There are organizations that are developing a consistent enterprise-wide approach to writing, communicating, and managing policies and procedures across the organization – supported by a centralized system to manage the policy life-cycle.

However, most organizations are a mess:

• Policies are scattered, written in varying language styles with inconsistent use of definitions and terms.
• Often out of date (I have seen policies of organizations that have not been reviewed in a decade).
• To make matters worse – they are often scattered across different internal websites and document systems.

What are organizations thinking?

Policies define and articulate the corporate culture. They set expectations and boundaries for what is acceptable and unacceptable. They also can establish a legal duty of care for the organization.

Enough of that – I have written plenty on this issue. Today I want to bring it to a new level. Not only are businesses failing in consistent and effective policy management, they are also behind the times in communication.

To the point: How do you manage and communicate policies in a YouTube generation?

In my training and advisory I am encountering organization after organization stating that the new generation of workers are demanding video. They do not read policies. Do not get me wrong – the written policy will always be critical as it defines what is allowed and disallowed to the ‘letter’ and is critical. The issue is how do we communicate to a generation of workers what expectations and boundaries are when they have been raised on video?

The answer is we need to take policy management systems to a new level:

1. Any employee (across geographies, educational levels, and disabilities) should be able to log into a centralized policy platform and be able to find all of the policies and procedures that relate to their role in the organization.
2. These policies should be written clearly in a consistent template and style that reflects the culture and tone of the organization.
3. These policies are to be written in a way that the average reader can understand.
4. Any tasks for the acceptance and attestation to policies should be clearly communicated and easily accomplished.
5. It should be apparent how to ask for help and clarification on the policy by having a phone number or link to ask questions.
6. Finally, and to the point, many policies (but not necessarily all) should have a video component in which the policy is explained to the individual.

This video component should be integrated into the policy management system – not just a link to some other systems. I firmly believe the value and ease of use is realized when the written policy and the video training on the policy are in the same integrated interface.

This is what I call Next Generation Policy and Procedure Management.

What are your thoughts and experiences on managing policies and procedures?

Corporate Integrity is also delivering a full-day workshop on this topic:

Chicago, IL, USA – Effective Policy Management & Communication

Date: August 23, 2010 – 8:00 AM to 5:00 PM (PT)

I would love to hear your thoughts on the topic of Policy Communication in a YouTube Generation. Please feel free to comment or send me an e-mail.

Sincerely,

Michael Rasmussen, J.D., CCEP, OCEG Fellow
Risk & Compliance Lecturer, Writer, & Advisor
[email protected]

 

Businesses are engaged in a continuous struggle to grasp the intricacies of risk management in an interconnected environment. The focus during the past few years has been on operational risk management — managing risk to business operations and processes. However, the standard definition used for operational risk management is flawed:

Operational Risk Management: “. . . the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.”

What is wrong with this definition? It completely ignores the impact of extended business relationships on operations. Properly revised, it would read “the risk of loss resulting from inadequate or failed internal processes, people, systems, and business relationships, or from external events.”

No organization is an island unto itself. Risk and compliance challenges do not stop at the traditional organizational boundaries. Organization area complex and diverse system of processes and business relationships that cross countries or span the globe. Organizations struggle to identify, manage, and control governance, risk management, and corporate compliance (GRC) across extended business relationships. Adding to this is the growth and focus on corporate social responsibility (CSR) initiatives that force organizations to determine if business partners hold the same values, practices, and ethics communicated to stakeholders, customers, and the world.

The bottom line: Organizations are complex entities that extend to hundreds or thousands of business relationships around the world. Even the smallest organization can have diverse global business relationships. The impact of the extended enterprise is significant for business. Organizations must actively manage and monitor risk and compliance across the lifecycle of a business relationship.

Any given organization stands in the shoes of its vendors and delegated partners/entities – their problems are your problems and their issues can directly impact your brand and reputation. The challenge before organizations is “Can you attest to an in-compliance status of your extended business relationships across the range of risk issues that can impact your business operations and brand?” . . .

This posting has been an excerpt of Corporate Integrity’s published research, Managing Risk & Compliance Across the Extended Enterprise.

Corporate Integrity is also delivering a full-day workshop on this topic:

Chicago, IL, USA – Managing Compliance Risk Across Extended Business Relationships

I would love to hear your thoughts on the topic of Managing Risk & Compliance Across Extended Business Relationships. Please feel free to comment in this forum, or send me an e-mail.

There has been a lot of consolidation and restructuring in the GRC space already in 2010 – SAI Global takes the next step by acquiring Integrity Interactive.

As an industry pundit and analyst it is always fun to play match maker. For some time I have been pontificating that SAP and CA are very complimentary in their approach to the GRC market. While one focuses on business processes and applications (SAP), the other (CA) focuses on IT management and security. I was quite excited when they formally announced that they have worked out a partnership and demonstrated an interesting level of integration.

Business today requires agility and efficiency to stay competitive. Organizations must respond rapidly to changing conditions, while managing financial and human capital costs.

Compliance processes often work against business agility and efficiency. Requirements and initiatives bear down on the business, and become burdensome and inflexible. When managed manually and/or across numerous siloed business units, compliance can slow down and encumber the business.

Risk can be a burden or a tool that enhances business performance. Healthy risk-taking drives business; however, organizations must understand whether they are taking the right risk, if risk is being managed effectively, and how to monitor risk. A cavalier and uncontrolled approach to risk will result in disaster — even for companies with strong brands.

Poorly managed risk and compliance generates complexity, redundancy, and failure. In this instance, the organization is not thinking about how controls and processes can be architected to meet a range of risk and compliance needs — nor does it gain an understanding of how risk management and compliance impact corporate performance. Too often organizations are reactive and lack a cohesive strategy. This isolated and periodic snap-shot approach to risk and compliance causes organizations to spend excessively on internal management and external auditors.

What may seem like an insignificant risk in one part of the organization may have a different impact when other risks are factored-in, either from another business process or risk category. Organizations are at-risk when they rely upon out-of-sync controls and disconnected corporate policies. Executives are becoming aware of these redundant risk-and-compliance projects, and are identifying the need for an integrated governance, risk, and compliance (GRC) strategy.

Organizations report significant issues and cost associated with manual and basic technology approaches in these areas:

• Common anomalies, malicious activity, and errors go undetected.
• Significant spend on external auditors and consultants.
• Horrendous reporting.
• Unmanageable amounts of paper and spreadsheets.
• Reactive after-the-issue fire fighting.

Success in today’s dynamic environment requires organizations to integrate, build, and support business processes with an enterprise view of GRC. While new risk and compliance issues constantly come to bear, organizations must take care to tackle the problem at its roots. A sustainable enterprise view of GRC means accountability is effectively managed and a complete system of record provides visibility across the key business processes and multiple applications.

Technology should empower business-process owners (who are also the control owners) to manage risk and compliance continuously. Technology can directly integrate controls within business processes, applications, and systems to prevent and/or detect unwanted behavior. IT should not be required to operate the control environment, which will improve the security of the audit trail. Audit does not need to be a quarterly event, but part of everyday activity and good business practices. This leads to cost savings and efficiency, while allowing the organization to remain agile.

A well-designed system of control is not necessarily a well-operating system of control. Many organizations pursue GRC with limited results as they have focused their efforts on GRC documentation. While this concept and approach to GRC is a good start, achieving efficiency in GRC requires a GRC strategy to be operating effectively not just designed (documented). Operating effectiveness is where GRC value is obtained and is built upon design effectiveness:

• Design effectiveness: Begins with understanding of how a GRC system of internal control is effectively designed. To determine this, the organization starts by documenting controls and processes. An assessment is performed, and for each risk and compliance requirement, controls and incentives that mitigate risk are identified. Ultimately, the organization must determine whether these controls and incentives and the system as a whole are designed to satisfy stakeholders and regulators while managing risk and requirements.

• Operating effectiveness: An effectively operating GRC system considers how GRC is being managed within business, and its impact on the business. The organization should determine if the system operates as-designed, and if the system supports the needs of a dynamic business in a way that increases business agility while minimizing use of financial and human capital resources.

Organizations face a complex array of risk and compliance demands that impact the business. The organization must implement control-monitoring processes and technology that streamlines GRC operations, minimizes risk, meets regulatory requirements, and supports business agility and efficiency. GRC control monitoring should exist within the context of business processes and the supporting application environments, and across all potential sources of change to those controls.

Achieving efficiency and value in GRC requires a long-term GRC vision, and shorter-term wins. The more extended and distributed the business is, the more challenging risk and compliance are to manage. A solid GRC foundation provides an extensible technology platform that is adaptable and scalable. An enterprise GRC solution does not operate as a silo unto itself, but integrates with critical business processes and applications. The goal is to:

• Avoid issues and mitigate risk: Organizations must mitigate loss, fraud, error, and risk within acceptable boundaries. GRC automation allows the organization to detect potential or actual issues within key business processes and applications, to avoid negative or unintentional consequences.

• Reduce reporting time: Effective operation of GRC means creating efficiency in human and financial capital resources. It is critical to implement a GRC approach that reduces the amount of time spent by internal and external assurance personnel.

GRC is about protecting the business — staying within defined risk and requirement boundaries to minimize loss while optimizing performance. An organization approaching GRC proceeds through three levels of maturity:

1. Manual and isolated: The first level is a reactive approach to risk and compliance. Different issues are managed in different parts of the organization, relying on burdensome and costly approaches to managing risk and compliance. This ad hoc approach is a manual and labor-intensive process, and results in mountains of paper and electronic documents. This produces a compliance posture that is often full of holes or outright smoke-and-mirrors.
2. Documentation and workflow: The second level is documentation of GRC controls and processes. This is often maintained in document or policy-management systems that have content and workflow capabilities, but little understanding of business processes and no integration with the underlying business application environment. The focus of this level of maturity is the design effectiveness of GRC — to document the busin
   ess appropriately to satisfy regulators and stakeholders.

3. Control automation and monitoring: The third level focuses on the operating effectiveness of GRC. Here, the organization achieves economies in GRC through processes and controls connected and in-sync with objectives, policies, and risks associated with business processes and applications. Value is created by ensuring that control violations are identified immediately, minimizing loss from fraud and errors, and by greater efficiency in human and financial resources.

The most economical GRC approach focuses on automation and efficiency. The goal is to connect policies and procedures to control objectives and automate monitoring and enforcement of controls. Automated controls can span business processes, applications, and information to reduce inefficiencies in current methods of internal control monitoring and validation.

The importance of automated monitoring increases as the velocity of change steps up within the organization. Change can be good or bad. As companies expand the number of users spread across geographies, there is more opportunity for mistakes, fraud, or operational errors. Growth also multiplies the application levels within which users can make changes, for both end-users and database users. Changes can also come from third-party systems running batch processes, application triggers that are poorly implemented, or stored procedures that do not leave a transaction footprint. Accidental changes can occur during IT system upgrades, patches, or restarts.

When control monitoring becomes a background process of everyday business activities, a continuous real-time audit trail is always available. This eliminates the need for time-consuming investigations that take place when exceptions are identified, weeks or months after the fact. The scope of monitoring can expand beyond a limited subset of key controls required for compliance activities. By empowering business process owners to monitor the integrity of their operations, operational risk from fraud and errors is greatly reduced.

For audit and compliance, this eliminates or greatly reduces sample-based audits while providing a comprehensive control baseline and change history for data and processes. The scope of review can also be significantly expanded without requiring additional resources: Audit processes that were performed once every several years can be done continuously. Once validated, auditors can rely on the existence of automated controls and continuous change-tracking as evidence of compliance.

This posting has been an excerpt of Corporate Integrity’s published research, Achieve GRC Value – Efficient Business Process & Application Monitoring.

I would love to hear your thoughts on the topic of GRC Software. Please feel free to comment in this forum, or send me an email. Please comment on this blog or send me an e-mail.