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Ultimate Operational Risk Management Platform

The Titanic is a study in operational risk management. Unfortunately, many organizations are in the same state – they do not see a complete picture of the risks they face and therefore are ignorant of the significance of the aggregate of a lot of islands of operational risk. And when things did go wrong there were not enough lifeboats . . .

There are a variety of risks the Titanic faced – overconfidence, poorly manufactured rivets, focus on speed while ignoring the external risk environment, inadequate design, and lack of someone diligently watching for icebergs. Organizations are in the same ‘boat’ today.

Deloitte illustrated this very well a few years back in their Value Killers research. In this research they studied the Global 1000 and found that nearly half of these companies had a drop in value of 20% or more in less than a month (this was before this last year). In 80% of these cases (that is 400 out of the Global 1000 for those not following along mathematically) it was because of multiple risk factors creating a greater risk environment but these risks were managed autonomously in different parts of the organization.

Organizations continue to manage operational risk in silos, where distributed business units and processes maintain their own data, spreadsheets, analytics. modeling, frameworks, and assumptions. Operational risk platforms (if deployed) are typically not equipped to capture the complex interrelationship among operational risks that span global operations, business relationships, lines of business, and processes. Individual business areas focus on their own view of risk and not the aggregate picture of risk, failing to recognize substantial and preventable losses.

Increasing demands of Operational Risk Management (ORM) requires effective technology to support a comprehensive system of record to manage operational risk in a systematic way – across the entire business including its business relationship and external risk environment.

The “Ultimate ORM Platform” enables the enterprise to answer the following questions across business lines and aggregate risk to an enterprise perspective:

  • Do you know you know your risk exposure at the business process as well as enterprise operations levels?
  • How do you know you are taking and managing risk effectively to achieve optimal operational performance and hit strategic objectives?
  • Can you accurately gauge the impact of risk taking on business strategy as well as loss?
  • Does the business get the information it needs to take timely action to risk exposure to seize opportunities while mitigate negative events?
  • Do you have repetitive and inefficient controls, documentation, processes, testing, and risk measurement / management?
  • Are you optimally measuring and modeling risk?

To answer these questions, the ultimate ORM platform will have to cover the following key areas:

  • Risk and control assessment. This includes risk identification, assessment, surveying, and analysis. To mange operational risk, an organization will implement a taxonomy of risks and a framework designed to provide a sound and well-controlled operational environment. The ORM solution needs to be able to integrate with multiple-frameworks (e.g., ISO 31000AS/NZS 4360:2004, COSO). In addition, organizations need to manage the balance between the cost of controls and the reduction in risk that the controls effect. The platform should support a range of assessment styles including qualitative and quantitative assessments, as well as top-down and bottom-up techniques. Risk measurement should cover both inherent and residual risk metrics.
  • Internal loss events. Operational losses are increasing in frequency and impact because business has grown more complex, particularly as transaction volumes have increased, organizations have distributed operations, growth in business relationship, and businesses’ reliance on automated systems outpaces their ability to monitor risk. Critical requirements for an ORM process includes capturing loss information. This includes creating a consistent categorization scheme for loss events (e.g. Basel II causal categories for losses), and linking loss to the risk taxonomy. This last requirement is extremely important since it allows an organization to pinpoint the root cause of losses and determine if certain controls are failing. This process facilitates the continual optimization of risk management as well as the control environment. An ORM platform needs to combine assessment data with loss event data to support an ORM process.
  • External loss data. External losses are also a key component of the Ultimate ORM Platform. The solution should support automatic up-load and down-load capability for interfacing with external loss consortiums (e.g., ORX) or commercial providers (e.g.,AlgorithmicsAONSAS). In addition, the system should facilitate the use of external loss for capital modelling, scenario analysis and benchmarking.
  • Key risk indicators. Continual monitoring and management of key risk indicators – including trending and aggregation of KRIs – is a critical element of an ORM process. An ORM platform is to support automatic notification to risk owners when KRI values reach thresholds. Workflows should automate ORM process such as KRI review and analysis. KRIs must support thresholding and time-trending. The best systems will also allow you to align enterprise performance management with risk management and give you a view into risk optimization as opposed to simply risk mitigation. Organizations take risk – they need assurance they are taking the right risk to meet objectives and that risk is effectively monitored and managed.
  • Reporting. An ORM platform needs to provide timely and accurate information to risk managers, risk owners in lines of business, senior and executive management, board, and external constituencies such as auditors and regulators. ORM reports enable management to maintain risk at appropriate levels within line of business, escalate issues and provide consistent data aggregation across business roles and functions. With improved visibility into its risk environment, an organization is in a position to make risk intelligent business decisions. The ORM platform needs to support a variety of ORM reports including high-level dashboards, risk models, and detailed reports. It has to be able to aggregate data across business entities, relationships, risk categories, event types, and time periods.
  • Extensible & flexible platform. One size fits all does not apply for an ORM process. Organizations need an adaptable solution and process to meet specific needs, taking into account corporate governance including corporate policies and procedures. When choosing a technology platform organizations need to pick an application that can adjust to its process as opposed to adjusting processes to fit the application. Important areas for extensibility include
  • Business hierarchy. Multiple hierarchies (legal, finance, organizational), multiple levels (with no limit), and asymmetrical hierarchies are all essential to conform ORM to the business.
  • Localization. As most firms operate in a number of localities around the world, many of which have their own local reporting needs, it is essential that the technology solution you choose can be deployed enterprise-wide and can be effective across all geographies and business functions.
  • Risk Framework. The ORM platform must be able to adapt to different risk categorization, taxonomies, measurement schemes, and evolve as risk processes mature over time.

Which vendors provide this breadth and depth of ORM functionality?

Only a handful – and many are still growing to achieve this vision. ORM vendors that I have deep respect for in the ORM area include BWiseCURAMEGAOpenPages, and Texert. Each of these vendors has proven capabilities to handle multiple frameworks and integrated processes for ORM.

OpenPages has given a lot of development and thought to the integration of loss information this past year that has recently impressed me. It is impossible to model risk without understanding where your most significant issues have been – historical trends do have an important place in risk modelling. BWise and MEGA have carried the torch in quantitative risk modelling – though not every organization needs this, while some will use an external application or spreadsheet for complex risk modelling.

There are indusry specific ORM solutions for financial services from vendors such as Algorithmics,Oracle Financial Services Suite, and SAS. However, these solutions tend to be more rigid and lack on the extensible/flexible platform requirement. I have had a deep respect for Ci-3 as well over the years but am waiting to see where this heads under the Wolters Kluwer acquisition.

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Sound Advice Against Reckless Risk Taking

A respected friend, Charles Le Grand, recently posted this on a mailing list we belong to . . . 


It is a fundamental problem between risk takers and those who would constrain risk to a prudent level.  For example, many young people take stupid risks with their money, lives, and health and say “See. Nothing happened.  Why should I worry?  I have insurance.”  Similarly many people responsible for the assets of others are willing to risk them for the benefit of personal gain without due regard for their stewardship role.  So it engenders a culture of reckless risk taking and disregard for stewardship.  “Everybody is doing it.  That’s just the way it is.”  So we abandon prudence in favor of self governance.  And we quickly forget about the last time everybody got burned from such irresponsibility. . . 

. . . Those who would recklessly endanger themselves and others must be constrained for the overall good.  And our governance bodies must stop giving in to the siren call of fast and fabulous gains, and once again favor the value of steady progress.  We must learn to spot the signs of recklessness and deceit.  We must use the available tools to spot anomalies and reveal them for what they are – whether short lived phenomena or outright lies.


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Commodity Risk Management


The global economy is driving many organizations to develop enterprise risk management strategies.  Unfortunately for many they often interpret this as SOX on steroids and fail to deliver a true enterprise view of risk.  ERM often is trapped in an internal control view of risk that fails to comprehend and interpret the complexities of global business.

For this reason I am introducing a critical area of risk management that should be part of enterprise risk strategies for organizations that are susceptible to risk in the availability and pricing of commodities. 

Organizations are in an ongoing effort to achieve sustainability, consistency, transparency, accountability, and efficiency across risk and compliance initiatives. The fact of the matter is: organizations need complete visibility into the portfolio of risks spread across distributed and complex business processes and relationships. A spectrum of organizations are susceptible to uncertainty and risk in relation to commodities. Rising demand for commodities, limited supplies, complex supply chains, international relations, hedging, and exchange rates – all have a large impact on the ability of organizations to produce and deliver goods to their clients profitably.

As organizations define their enterprise risk and GRC strategies it is essential that they gain an understanding of the central relevance that commodity risk management plays. 
Risk management is ultimately about managing uncertainty in business. While there are a number of risk management initiatives that are part of a GRC or ERM program (e.g., treasury, operational, strategic risk), commodity risk management is often overlooked and poorly managed across a number of siloed roles in the organization which are focused on specific commodities.

If an organization’s bottom line is subject to extensive variability because of fluctuating commodity prices, it becomes paramount that the organization develop and implement processes and systems to manage commodity risk centrally on a holistic basis.

To learn more about Commodity Risk Management I encourage you to download (no charge) my latest research on the topic from my website:  Foundations of GRC: Commodity Risk Management.

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Risk & Compliance Market Trends in 2009


Chalres Dickens might as well have been speaking about the risk and compliance market (GRC market) when he stated “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.” 

What was considered foolish a few years back – basically conservatively running a business – now is reaping rewards and once again shows the wisdom in living within ones means (in this case a business).  Vendors that took on too much debt and went to the well of venture funding time and time again now find themselves sinking slowly into the abyss with a millstone of expensive operations and stakeholder expectations sinking them to its depths.

However, those that ran a very conservative business are reaping rewards and seizing opportunity in the current economic environment.  Two such vendors that have publicly come forward with this are Archer Technologies andCompliance 360.  There are others succeeding as well, but there are far more that are treading water hoping some ship of acquisition passes by in the next few months.  Others are sinking with that millstone of debt and excessive expectations.

2009 will bring renewed focus on corporate governance, enterprise risk, and compliance management (GRC).  Organizations will continue to seek help from professional service firms to implement GRC and ERM strategies.  Further, in a tight economy, organizations will continue to implement processes and technology that assist in streamlining risk and compliance operations at lower costs.

Interestingly, while compliance will remain a priority I see enterprise risk management pulling ahead in 2009.  This is because of the economy and the fact that organizations need to have a transparent view of risk and performance across the organization.  It also is a result of the complexity and distributed nature of business as well as current challenges such as  Standard & Poor’s risk evaluations impacting enterprise risk strategy. This is driving the risk consulting market more than the technology market at this point.  I see a greater technology spend on enterprise risk management solutions/technology in the 2nd half of 2009.  Right now organizations are recovering from economy shock, a new administration (in the U.S.), and seeking advice on enterprise risk strategy.  My newsletters illustrate a broader trend in risk over compliance – I have a 10% higher read rate on my mailing list of 5500+ subscribers on the Ultimate ERM Platform than I did on the Ultimate Compliance Platform – despite the ERM newsletter went out between Christmas and New Years (bad-timing for a newsletter).

Compliance though remains a priority for organizations.  The SEC in particular has been very vocal that organizations should not cut corners on compliance.  Organizations are struggling to gain an understanding on how they can streamline processes for management of policies as well as communication of them.  There is increased interest in automating compliance and control monitoring within business systems and processes.  Further, organizations desire to get an enterprise view into loss, issues, and incidents – which is a necessity to truly manage and measure enterprise risk.

The single focus area of risk and compliance that will get the most attention in 2009 is managing risk and compliance across extended business relationships (e.g., 3rd parties, supply chain, vendors, outsourcers, service providers).  This focus area of risk and compliance has been my busiest over the last several months. I have had well over a dozen conversations with large international organizations trying to figure out how to manage employment/labor, code of conduct, anti-corruption, quality, safety, and security across extended business relationships.

This is just a quick summary of the complexity, challenges, and potential for the risk and compliance(GRC) market in 2009. For those interested, I will be doing an online 2-hour workshop on this topic February 2nd – 2009 Fundamentals, Trends, & Market Directions.

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INQUIRY: Among the companies you speak with, which organizational departments appear to have the most to gain GRC?

INQUIRY: Among the companies you speak with, which organizational departments (finance, operations, legal, HR, etc.) appear to have the most to gain from GRC automation?


RESPONSE: GRC is about collaboration across these roles – so all have a lot to gain from GRC technology enablement and automation.  However I would state that business operations has the most to gain.  The reason being is that it is the line of business that suffers most from a wide array of demands to assess, train, and respond to silos of GRC.  I have been in numerous organizations in which they are looking at GRC technology to bring together varied assessment processes for operational risk, business continuity, SOX, IT, compliance and others.  The reason being is that the business is fighting back – often stating that these silos of GRC are asking them similar questions every week. This week it is a Basel II operational risk assessment, next it is a business continuity assessment, then it is an IT risk assessment, after that is a SOX 404 assessment, and then compliance is sending something.  Business operations wants a single platform to harness information and stop them from responding to similar questions week after week.  Further, it is business operations that would desire a common portal into policies and procedures instead of a dozen different internal websites that store policies and procedures for varying functions.

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INQUIRY: What are the 3 most critical areas for further GRC automation in 2009 – and why?

 INQUIRY:  What are the 3 most critical areas for further GRC automation in 2009 – and why?



  1. The top of my list is what I am calling “Next Generation Policy & Procedure Management.”  This may not be on everyone’s radar – but it is a significant area to drive efficiency, consistency, as well as consolidate spending across the business.  The typical organization – large and small – is in a mess as to how they define, manage, and train on corporate policies and procedures.  Add to this the fact that regulators, new laws, and the courts (USSC) are pushing that individuals not only be aware of policies but that they be trained on them.  The typical organization has policies and procedures scattered across internal websites and no consistent approach to managing their life-cycle not concerted effort to train employees.  Best practice organizations that I am monitoring are beginning to consolidate dozens of different policy and procedure systems (typically intranet sites) into a single policy and procedure management platform owned by legal or compliance.  The best of these systems is able to present and communicate policies and procedures with the training courses delivered in the same user interface.  One single platform for managing corporate policies and procedures.
  2. Next on my list is the critical area of loss & investigations management.  Like policies and procedures, this is a mess of hodge podge systems – or even no systems at all.  To manage risk effectively, as well as manage sensitive investigations, it is time for organizations to consolidate on a single investigations, loss, event, complaint, issue management platform (you pick the term that best suits your organization).  A single platform for managing loss and investigations allows for greater transparency in where issues are across the organization and feeds the risk management process which needs to understand historical loss data to effectively build risk models.
  3. The third area of criticality is managing business relationships.  Organizations are complex entities that extend to hundreds or thousands of business relationships around the world.  These business relationships need to comply with your respective regulatory requirements, corporate culture, statements of corporate social responsibility/sustainability, and business practices.  Thus organizations need to use GRC technology to extend policy & procedure communication and training, assessments, and even investigations to their extended enterprise/relationships.  As I have mentioned previously, this is a significant opportunity for the Software as a Service/on-demand GRC solutions.
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INQUIRY: What are the 3 biggest misunderstandings about GRC-enabling technology?


INQUIRY: What are the 3 biggest misunderstandings about GRC-enabling technology? Why these particular areas are the most misunderstood outside of the IT organization and how can IT help clarify information?   


RESPONSE: There are several areas that are highly misunderstood in regards to GRC-enabling technology.  The following represent what I see as the most common misunderstandings:


1.      First biggest misunderstanding – GRC is not just about technology.  That is the first issue, if you do not have the process and organization structure down the impact of GRC enabling technology is limited.  GRC is not just about technology – it is about building a collaborative approach and framework for GRC across business functions.  This is also something to understand before investing in technology.  It is important the organization understand what they are trying to achieve before selecting a vendor or else they may be locked into a specific vendors concept and framework of GRC – and thus disappointed and limited.

2.      Second biggest misunderstanding – we have a lot to do still in the world of automated controls.  We have seen a lot of control enforcement and monitoring be successfully deployed for SOX, AML, OFAC, and other areas of compliance, but there are many other areas of GRC that this has not extended to.  In 2009 we see the world of automated controls move full scale across other GRC processes and become a holistic solution.  

3.  Third biggest misunderstanding – dashboards.  I have seen very few good GRC dashboards.  Don’t get me wrong, everyone has a dashboard in their product and that is great.  But very few are good business dashboards across GRC processes.  The issue is that many have not achieved or do not get the relationship between business performance and risk/control/compliance indicators.  An effective GRC or risk dashboard is a corporate performance dashboard that ties key risk indicators to key performance indicators of the business.



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INQUIRY: In 2009, what will be the least obvious/highest impact business or market trend resulting from GRC automation?


INQUIRY: In 2009, what will be the least obvious/highest impact business or market trend resulting from GRC automation?
RESPONSE: Tough question – but I am happy to play the prophet.  I would have to say it is the use of GRC technology to extend GRC processes to business partners.  There are more also areas of GRC technology such as automated controls and business rules engines that will see further growth in 2009.  The biggest value I am beginning to see is the extension of policies & procedures, training, and risk & control assessment to an organizations business partners.  Highly regulated organizations like life science companies already have to see that certain vendors have communicated and trained vendors/business partners and their respective employees on policies and procedures.  Liability and new regulatory requirements is seeing this grow.  Further, I am seeing many organizations begin to ask how they can leverage technology they have used for other areas to conduct self-assessments of controls to their business partners.  Typical contract language includes right to audit clauses which organizations with hundreds of relationships are not exercising.  This is an issue and the way out is the use of technology to push the burden on conducting self-assessments out to business relationships is the answer.  I was at an organization yesterday that is a software platform hosted on the web to push assessments of risk and controls out to thousands of business partners for environmental, health and safety, quality, and corporate social responsibility audits.  By the way, this is a huge boon to the GRC vendors that are Software as a Service (SaaS)/on-demand platforms as it is the easiest way to give access to policy & procedure communication and training as well as risk & control assessments to thousands of relationships without opening up your network to everyone.
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INQUIRY: What are the roles/responsibilities of a compliance officer?

QUESTION: What are the top three roles and responsibilities of a compliance officer? We are trying to define this job role very clearly before we determine we need one.

The top three roles and responsibilities of a compliance officer vary — it depends on what you are defining as a compliance officer. If you mean a true Chief Compliance Officer (CCO) that sits outside of IT, then the top three roles and responsibilities tend to be:

  • Policy and Procedure Management — this is the definition, communication, training and attestation to corporate policies and procedures.
  • Compliance Monitoring — evaluating and measuring the state of compliance across the organization.
  • Investigations — managing investigations into wrong doing and anything that violates regulatory/legal requirements.

These three functions are part of a broader set of seven elements that the United States Sentencing Commission (USSC) has established as what an effective compliance program looks like. Read these seven elements of effective compliance and ethics programs on the USSC website.

If you are referring to an IT compliance officer, the duties are similar but more focused on IT as opposed to broader compliance. An IT compliance officer also tends to focus more on automation of IT controls.

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The Ultimate ERM Platform

The New Year of 2009 is at our doorstep and with the global turmoil it is about time many organizations begin thinking of enterprise risk management

Today we explore the Ultimate Enterprise Risk Management (ERM) Platform. Many of you expressed deep interest in my Ultimate Compliance Platform earlier in December. This week, I am delivering the second of my ultimate platform role-plays looking at what the Enterprise Risk Officer/Manager desires in an ideal Enterprise Risk Management (ERM) platform.

Defining an ERM platform is not easy – just as defining ERM is not easy. For some unfortunate organizations, ERM is Sarbanes Oxley on steroids as it is nothing more than a deeper look into internal controls with some heat maps built on top of it. In this case it truly is no an enterprise view of risk. In fact, many organizations have been deceived by the likes of the COSO ERM framework – which tends to take an auditors view of risk and not a true risk officer/manager view of risk. Granted, the COSO ERM cube is an interesting model to get a conversation started. The document itself is hard to read, hard to apply, and takes an internal view of risk and largely neglects the external elements of risk that a business faces in its operations outside of its organization. I myself find more promise in the adoption of ISO 31000 (currently in draft and expands upon the AS/NZS 4360:2004 standard).

However, many organizations are keenly interested in ERM. Some of this comes from the emphasis that credit rating agencies such as Standard & Poor’s are putting on it. Others are seeking solace in ERM to help them drive through turbulent economic times. While many seek ERM to help manage uncertainty in a dynamic and distributed business environment that extends across complex global business relationships where a small mishap may significantly impact business operations and performance.

The challenge organizations face in truly managing ERM is the number of silos of risk management scattered across the organization focused on specific issues of risk. The goal of ERM is to tie all of these independent risk management programs in the organizations together into a broader and transparent view of risk permeating throughout the enterprise.

The issue organizations face – there is no single vendor that ties all of the elements of risk together into a comprehensive ERM platform. The Ultimate ERM platform, like the Ultimate Compliance Platform, is one that needs further work and integration. The best solutions come from a range of providers and not a single vendor.

WARNING – most vendors marketing ERM platforms end up being a replacement for spreadsheets and do not bring a full picture of enterprise risk.  If all the platform is doing is surveying people, they are just about assessing operational risk and controls.  Challenge vendors – ask any vendor how they are managing ERM by providing integration into financial, treasury, and commodity risks alongside a breadth of operational and regulatory risks.  Most will be stumped on this question. 

If I were to build the Ultimate ERM Platform I would combine the following:

  • Risk framework flexibility. The goal of ERM is to provide harmony across a range of frameworks, standards, and approaches that are currently being used across the enterprise. Different risk areas have their unique needs and standards they follow. A robust ERM platform will be able to harmonize and provide fluidity across these frameworks. To date the best platforms I have seen that provide a harmonized approach to integrating multiple frameworks is BWise, Cura, and Texert.
  • Risk intelligence. These days every vendor has a dashboard to model and report on risk. However, they fall down when it comes to direct integration with business systems and applications. Further, most of them do not integrate with corporate performance management. This goes against what risk management is about. Risk management, done properly, is all about managing risk in light of corporate performance. For every key risk indicator there should be corresponding corporate performance indicators. The best risk dashboard that provides an integrated view into corporate performance is SAP’s.
  • Risk management breadth & depth. Risk management is more than just managing the downside of risk; it is about optimizing risk taking in the organization to seize hold of opportunity and return to the organization. Organizations stuck in managing the negative and neglect the positive side of taking risk miss what ERM is about. A robust risk management platform will have sophisticated modeling capabilities that can demonstrate the positive return on risk taking and not just the downside. This requires depth in risk modeling and analytic capabilities to measure and model risk. Cura, MEGA, Strategic Thought, and Texert are vendors that I find leading in the breadth and depth of their risk management functionality.
  • Risk visualization. I for one am tired of heat maps. Nearly every vendor has latched onto heat maps as if they are the only way to visualize risk. Granted, heat maps can be useful – but they are not the end all of risk visualization. Good risk management requires multiple visualization models. A risk manager needs to be able to look at risk from different views and angles to identify intricacies, relationships, and exposure. Different pictures tell different stories. You take a photograph of a room and this tells you only one story, an x-ray tells another, and a thermal map tells another. The same is true with risk visualization – we need multiple ways to visualize risk to comprehend the full picture. The good news is that there are vendors taking some interesting directions. I particularly like the risk relationship diagramming that Neohapsis (acquired from Risk Governance) and Riskonnect are offering. I am also quite intrigued by what some organizations are beginning to do with fractal maps (such as what Fractal Edge delivers).
  • Risk process management. Enterprise risk management requires the flexibility of workflow and process management. Bringing together the many factions of risk management across the enterprise demands a platform that is easy to model business processes, workflow, and provides great flexibility and customization. The leading platforms offering the best risk process management capabilities are Archer Technologies, BWise, and MEGA.
  • Risk integration – herding the silos of risk. Enterprise risk management is like herding cats – different parts of the organization have implemented their own risk solutions that are particularly adapted to their specific needs. A good risk management platform will provide integration with specialty platforms that are managing specific areas of risk. These might include Modulo focused on the depth of I
    T risk management, the complexity of foreign exchange risk that FireApps manages, the intricacies of commodity risk management that Triple Point Technologies excels at, the complications of operational risk management that Ci3/Wolter Kluwer delivers, and legal/compliance risk that Axentis is focusing on with their risk driven compliance theme. Resolver is another vendor of interest as it provides a risk assessment and surveying technologies that simplify risk assessment processes. Of course, there are industry specific solutions managing the range and depth of risk for particular industries – such as Algorithmics, SAS, and Oracle Financial Services Software.

The Ultimate ERM Platform is not a one-stop shop at a single vendor – today it requires integration of several technologies. Many of these solutions show great insight and are executing on robust visions to deliver the best ERM platform for the future while delivering significant value to their clients today.