Category: The GRC Pundit Blog

Unfortunately, organizations get locked into a static view of risk analysis and management.They are overly focused on heat maps generated from fairly static risk assessment processes. The era of SOX and control self-assessments has propagated this further.Organizations have often ended up with an enterprise risk management program that is nothing more than SOX and financial controls on steroids with little perspective of true enterprise risk management.

To manage and assess risk – whether at the enterprise level, or within specific business functions and processes – requires an individual to think outside of the box.There are ‘black swans’ (the completely unexpected) but there are many risks realized that should never be black swans and are just a failure in the organization to get a 360-degree perspective on risk.

When risk management becomes mundane and routine an organization ‘risks’ that their risk management may be ineffective.A simple two-dimensional view of risk (like that of a heat map) can easily lull an organization into thinking they are managing risk and be caught off guard.Particularly if the risk taxonomy and assessment process is static and does not provide for new inputs. Do not get me wrong – heat maps have their purpose but alone are not enough.

Look at the room around you.If you take a picture of the room you get one perspective.If you take a thermal image you get another.If you take an X-ray you get still another perspective.

Consider going to the doctor because something is ailing you.The doctor most likely will do a physical exam, might order some blood tests, and perhaps even do an MRI or some other investigatory procedure.

I remember evaluating a so-called ‘risk management’ platform from one of the leading software vendors in the industry and was shocked to find that it was a replacement for spreadsheets for risk questionnaires/assessments and nothing more.Specifically, it had no loss/event history.How does an organization begin to model risk and identify likelihood if it does not have any clue into the issues, events, incidents, losses, and investigations impacting the risk area?The vendor provided a beautiful heat map – but the information behind it was pure speculation from just a few inputs.

To manage risk effectively in an organization requires multiple inputs and methods of modeling and analyzing risks.This requires information gathering – risk intelligence – so that the organization can have a full perspective of risk and make ‘wise’ decisions (something more than just intelligence gathered from information overload delivers).

Effective risk management involves gathering multiple perspectives of risk information to enhance risk analysis.This includes gathering risk intelligence from the . . .

• External perspective.Monitoring the external environment for geo-political, environmental, competitive, economic, regulatory/legal and other risk intelligence sources.
• Internal perspective.Evaluating the internal environment of controls, audits, assessments, issues, events, incidents, corporate performance and risk indicators, and other internal data points.

Visualization of risk from multiple angles becomes important.Good risk management involves taking external and internal perspectives and modeling risk in relational diagrams, decision trees, heat maps, or even quantitative models involving monte carlo or value/capital at risk simulations.

As organizations build enterprise, operational, or other risk management programs it is important that they build this 360-degree multi-perspective risk analysis framework that allows an organization to think outside the box and look at risk from a variety of perspectives.

As a risk and compliance (GRC) pundit one gets invited to a lot of conferences. Some, like Compliance Week, are particularly interesting as the format, content, and high-level audience remains engaging year after year. Typically, technology vendor conferences are dull and mundane – Archer’s National Summit held last week in Orlando, Florida is a surprising exception.

• Matter Management is the core platform for both inside and outside counsel to document and manage all legal matters the organization is involved in. At its core it offers project, document, resource, and time management for legal matters. Leading matter management platforms today come from Bridgeway, Mitratech, Serengeti, and CT Wolters Kluwer. Other systems include CSC, EAG Case Track, LawTrac/LT Online, Legal Files, and PefectLaw.

• Discovery Management is a recent solution area that evolved out of the hailstorm of eDiscovery solutions in response to the revised Federal Rules of Civil Procedure in the United States. These platforms assist in managing the accountability, documentation, and process/workflow of fulfilling discovery requests. In one sense they are a natural extension of matter management platforms. Leading discovery process management solutions include Bridgeway, Exterro, Mitratech, and PSS Systems.

• Contract Management solutions manage the contracting process from a legal perspective in assisting in the writing, review, modification, negotiation, execution, and archiving of all legal contracts and obligations of the company. Legal contract management platforms that have had broader adoption in corporate legal departments include Compliance 360, EAG CaseTrack, Emptoris, Mitratech, and Selectica. Archer Technologies and Axentis have also been deployed for contract management – but have not seen the same level of traction within corporate legal departments.

• Investigations Management provides a platform for documenting all issues, events, investigations, incidents, and wrongdoing in the corporation. Leading enterprise investigations management platforms targeted at the corporate legal department include Archer Technologies, Axentis, Compliance 360, EthicsPoint, Global Compliance, Mitratech, and PPM 2000.

• Hotline/Whistleblower are more than a technology platform as they end up being a service to provide for reporting of incidents (many times anonymously) via the web or telephone hotline. Leading vendors in the hotline and whistleblower space include Allegiance, EthicsPoint, Global Compliance, and The Network. Several of these solutions also offer enterprise investigations management as a platform as well.

• Board & Entity Management delivers a solution for the corporate secretary (typically in legal) to manage board papers, communications, and corporate reports/filings. This includes features for board calendaring and scheduling as well as documenting legal entities, structure, relationships, assets, and responsible parties (Executives, Directors). Vendors in this area include BoardVantage, Bridgeway, BWise, Computershare, CSC, ICSA, Mitratech, SAI Global, and CT Wolters Kluwer.

• Policy & Procedure Management involves a platform for defining, communicating, provide training, managing, and archiving of corporate policies, procedures, ethics, and code of conduct. Solutions in this space provide a central repository for managing the policy lifecycle. Vendors include Archer Technologies, Axentis, BWise, Compliance 360, Mitratech, OpenPages, QUMAS, and SAI Global. However, not all of these vendors offer the same features. Axentis offers the easiest to use – but complete – policy and procedure management solution. Archer Technologies, Axentis, and Compliance 360 can deliver training modules within their platforms. Mitratech just offers the management of policy lifecycles – but not the communication component.

• Training Solutions offer a wide range of legal, ethics, and regulatory training modules to be delivered in other GRC platforms (such as Policy & Procedure Management) or eLearining solutions. Vendors such as Corpedia, Global Compliance, Integrity Interactive, LRN, and SAI Global offer training solutions in this area.

• Legal Risk Management & Analysis solutions are designed for defining, managing, modeling, and monitoring legal and compliance risks in the enterprise. This is a relatively new area for technology solutions and is best done with solutions that support decision tree risk modeling to help an organization analyze legal scenarios and outcomes. Solutions focused on this capability include Mitratech and Riskonnect. Amenaza is another vendor but has not focused on the legal market.

• Compliance Management involves a platform for documenting requirements (laws, regulations, contractual), mapping them to corporate controls and policies, and providing for the assessment and reporting on the state of compliance. There is a wide range of vendors offering compliance management solutions – many of which grew out of the Sarbanes Oxley/financial controls space such as OpenPages and Paisley. Vendors that have shown particular traction within legal departments for managing compliance include Axentis, Compliance 360, QUMAS, Mitratech, and SAI Global. Other vendors offering compliance management – but do not have demonstrated traction within legal – are Archer Technologies< /span>, BWise, and MetricStream.

• Legal & Regulatory Intelligence is a particular feature set embedded in legal process management solutions that deliver efficiency and accountability in monitoring changes in laws, regulations, legislation, and court rulings that could impact the company. The leading innovator in this area is Compliance 360 as their solution profiles regulatory and legal interests and directly integrates with Lexis Nexis and Thomson Westlaw and routes new legal developments into a process flow. Mitratech has capabilities in this area as well. Axentis is doing similar management of the accountability and evaluation process – but does not have the integration with content providers. Corporate Integrity fully expects that Lexis Nexis, LRN, SAI Global, Thomson, and Wolters Kluwer will be building out solutions in this area to further leverage their content.

• 3rd Party Compliance Management involves platforms for communicating ethics, code of conduct, and policies across an organizations 3rd party and supply-chain relationships. Some of these platforms go further into managing self-assessments and audits of the vendors as well. Most companies buying solutions in this space seek a Software as a Service (Saas)/hosted platform for easy accessibility by 3rd party business relationships. Leading vendors in this space include Archer Technologies, Axentis, Compliance 360, and Integrity Interactive.

• Corporate Social Responsibility Management is a relatively new space of technology that is just emerging. While there are platforms out there for managing CSR – particularly from an environmental perspective such as Equilibrium – not many platforms have targeted the legal and corporate secretary role in CSR. However, some vendors that have engaged with legal are seeing their platforms retooled for CSR purposes led from the legal department. These vendors include Archer Technologies and Compliance 360.

• Information Management consists of applications for identifying and cataloging information assets across the organization. This category would focus on sensitive corporate information (e.g., personal information, corporate records, and even intellectual property) and catalog its location, controls, and policies. Archer Technologies is an example of a vendor that operates in this space.

• Intellectual Property Management consists of applications for cataloging intellectual property across the organization including includes ownership rights, regulatory requirements as well as renewal dates, governmental correspondences, and filing status. The focus of this area is on intellectual property (e.g., patents, trademarks, copyrights) and has vendors such as Anaqua, Cognocys, and IPDOX.

The legal process management has many niches – as illustrated above. The begging question – who does it all? Answer: simply no one. Though there are a few notables that provide a fairly complete enterprise legal process management platform. Mitratech and Compliance 360 are providing very complete platforms – but from different angles. Mitratech grew out of the matter management area and has expanded rapidly into other areas. Compliance 360 grew out of the corporate compliance function within legal (initially within healthcare and insurance) and has been expanding out. Other vendors appear to be aggressively focusing on the corporate legal department and providing an end to end solution – these include Archer Technologies, SAI Global, and Wolters Kluwer.

Friend,

Frédéric Bastiat in the 19th century could have been talking (see quote above) about the complexity of managing risk and compliance across business in the 21st century.  So often organizations look at the surface of a relationship and fail to see the significance and exposure that can cascade across the organizations causing severe damage to reputation and exposure to legal and operational risks.

A chain is only as strong as its weakest link . . . in the case of business relationships this could be an organization’s supply-“chain” or other business relationship such as vendors, outsourcers, and service providers that bring increased risk and exposure to the organization.

Today’s organization is a complex diversity of processes and business relationships that span the globe. Organizations struggle to identify, manage, and control Governance, Risk Management, and Corporate Compliance (GRC) across extended business relationships. Whether it is called 3rd party, vendor, or supply-chain – risk and compliance challenges do not stop at the traditional boundaries of the organization. Adding to this is the growth and focus of Corporate Social Responsibility (CSR) initiatives that are forcing organizations to determine if their business partners hold the same values and ethics that the organization communicates to its stakeholders and customers. Further, there are specific pressures within vertical industries to formally manage 3rd party risk (i.e., the FDIC released guidance this past summer requiring banks to manage 3rd party risk).

The issues organizations face in managing risk and compliance across business relationships include:

• Code of conduct. Communicating and validating that the business partner and its employees share the same values and ethics as the organization.
• Labor standards. Managing adherence to a complex array of international laws while validating that the business partner has proper controls to ensure compliance to policies on working hours, forced labor, child labor, wage, discrimination/harassment, and benefits.
• Corporate social responsibility. Ensuring that the business partner is communicating and reporting similar corporate values on social, environmental, and financial practices (e.g., global reporting initiative).
• Anti-corruption. Conveying policies and training while validating compliance to anti-corruption and bribery statutes and standards (e.g., Foreign Corrupt Practices Act, OECD Anti-Bribery Convention).
• Operational risks. Identification, assessment, management, and monitoring of operational risks across business relationships and their impact on the organization.
• Supply-chain risks. The management and monitoring of specific risks within supply-chains and their impact on the organization and its products.
• Environmental. Ongoing monitoring of business partners commitment to environmental standards as well as compliance with laws and regulations that impact environmental responsibility.
• Health and safety. Ensuring that business partners are committed to safe working environments free from hazards.
• Security. Validating that business partners are meeting obligations to protect the physical and information technology environments.
• Privacy. Enforcing privacy requirements on personal information as well as sensitive corporate information across business partner relationships.
• Quality. Providing for ongoing monitoring to ensure that quality and/or service level agreements are met in adherence to contract and expectations of the business relationship.

The ultimate platform to manage risk and compliance across 3rd party relationships has the abilities of:

• Definition and modeling of relationship, risks, compliance issues, and controls across extended business relationships;
• Communication and attestation of policies, procedures, and code of conduct;
• Delivery of training on code of conduct, compliance, policies, and procedures;
• Integration of risk and compliance intelligence that alerts the organization to new developments and issues that could impact specific relationships and/or geographies;
• Self-assessment by each business partner of the risk and compliance requirements within that particular business relationships;
• Providing for independent audits to validate controls, risk, and compliance to laws and contractual requirements; and,
• Scoring of risk based on the business relationship and status of assessment and audit findings. 

Large organizations around the world struggle and are actively looking for solutions and service offerings to answer these 3rd party risk and compliance obligations. Just in the past few months Corporate Integrity has interacted with over two dozen of the Fortune 500 looking for solutions and professional services to assist them in their 3rd party risk and compliance strategies. Within one organization, I have sat on a social accountability advisory board aimed at managing international labor standards, workplace safety, and code of conduct across 5000+ vendors in a global supply chain. 

This is a particular golden opportunity for technology providers that provide a Software as a Service (SaaS) offering allowing organizations to have a software platform hosted on the Internet and not open up internal networks to hundreds or thousands of business relationships. 

Specific solutions in the 3rd party risk and compliance space include:

• Outsourced GRC process management. Organizations such as Intertek are providing a full-service offering to outsource management and monitoring of 3rd party/supply-chain risk and compliance. This includes a software platform hosted in a SaaS model to communicate policies, deliver training, and assess risk while also providing for independent validation through onsite audits.
• Code of conduct and policy communication. Communication, attestation, and training on code of conduct and specific policies is critical to managing compliance across business relationships. Axentis offers the strongest platform for
  the ongoing communication and training of policies and procedures. Integrity Interactive is another vendor offering a subscription platform
• Compliance & risk assessment. To manage risk, organizations need a platform that allows it to push self-assessments on risks, controls, and compliance to business partners. This is further enhanced by allowing independent auditors also use the platform to assess business relationships. Archer Technologies, Axentis, and Compliance 360 have focused solutions to manage a full risk and compliance process across 3rd party relationships.

Third party risk and compliance issues are significant, overwhelming, growing, getting more complex, and not going away. Corporate Integrity sees 3rd party risk and compliance management as one of the most challenging GRC issues facing organizations across industries over the next 18 months.

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 31000, AS/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.,Algorithmics, AON, SAS). 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 BWise, CURA, MEGA, OpenPages, 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.

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

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.