IT Risk Management

Management in business – Not a precision engineering

I observed few management team members  got into the trap of making management in business, a precision engineering.  Philosophically, I completely differ that management in business can’t be precise in a corporate environment. Due to office dynamics, politics, internal and external uncertainties, management in business is all about approximation but not perfection.

In most of the cases, the practical approach should be : “THINK BIG, START SMALL, RUN FAST”

Technically, management in business can be precise but it’s very expensive. I had read few dynamic programming papers published from Nasa on how the project schedule conflicts are resolved using various optimization theories. Those techniques were published as a research paper. While management in launching a rocket to outer space business need precision engineering but, for instance, when you create a draft project charter, you do not.  Corporation should not be spending their time to make it perfect when they you are dealing with uncertainities. I understand, plan is nothing but planning is everything. But when a project lacks clarity on its scope, don’t spend  time on planning but use it wisely to improve the clarity of the project.

IT Vendor Risk Management

IT vendor risk management is a component of over all IT risk management. In my previous blog on over all IT risk management, there is a comment from pmhut  to expand each component of the IT risk management.  Let me expand my thoughts on IT vendor risk management and provide a framework to develop the IT vendor risk management.

Steps to develop a IT vendor risk management plan:

  1. Develop a consolidated list of all IT vendors
  2. Categorize the vendors broadly
  3. Prioritize the vendors in each category based on the type of business you are in. For instance, if IT supports retail business, the Point of Sale is key functioin and the vendors supporting that line of business is very critical to the day to day operation. It will have top most priority than any other vendors.)
  4. Identify the potential risk of the vendors
  5. Analyze the potential risk of the vendors
  6. Develop residual risk matrix
  7. Monitor the residual risk matrix and repeat from step 4.
  8. Report the residual risk matrix to CIO office periodically.

Step I: Develop a consolidated list of all IT vendors

Get a IT vendor list from corporate purchase/procurement department. Make sure the following information are available

  • Account representative contact information – Office Phone, cell phone, snail address, email address
  • Investor contact information – Depends on the type of the company – corporate, partnership, properitary and etc
  • Client list

Step II: Categorize the vendors

Types of vendor involved in a typical IT organization.

  • Sourcing provider
    • Alliance provider (like out sourcing provider)
    • Human resource provider for in sourcing. It is generally for time and material model for 6 months to 1 year engagement
    • Consultant provider for insourcing. It is generally for time and material model for a specialized role for a very short time.
  • Software provider
    • Enterprise software system provider (like SAP, Peoplesoft, Fidelity and etc). Enterprise software system depends on the type of business.
    • Office software (like MS Office,and etc)
    • Specialized software provider  (for instance, in the financial industry, quantum is a specialized treasury software provided)
  • Service provider
    • Infrastructure service provider (in most cases, it includes all the system software like OS, database and etc)
    • Research consulting service provider (market research and etc – like gartner.com, executiveboard.com)
    • Specialized service provider (depends on type of business – credit score card development provider and etc)

Step III: Prioritize the vendors

Prioritize the vendors based on their dependencies to the core IT operation. It depends on the business you are in. If there is alliance provider to performing lights on support to an IT organization, then that provider play a vital role in IT operation. For an instance, if it is financial administration company (like financial out sourcing) then their enterprise application like SAP financial plays a major role to perform their core operation. 

 Lately, almost all organization utilizes the outsourcing company to provide lights on service to the core IT operation.

Step IV: Identify the potential risk of the vendors

Sourcing provider (includes alliance and out sourcing provider) is taken as an example and the associated risk are identified. The similar steps can be taken for other types of vendors.

Service level risk

Measure the performance of the provider against the objective set in the beginning of the engagement.  In some cases, the sourcing provider is selected to provide partnership or alliance to improve innovation or business consultation or value creation and few other cases, the provider is selected to provide the on going lights on support. In my example, I will assume the provider is selected to provide the on going lights on support. The typical performance measure for the lights on support are given below:

  • Service quality
  • Service delivery time
  • Missed service level
  • Response time
  • Resolution time
  • Problem repeatability rate

For an outsourcing engagements after the due diligence and contract and terms & conditions are agreed by all parties, there are two major phases. Transition phase and stabilization phases. The sample performance measure listed above will be used for the risk identification after the stabilization phase.

Receive the trend data for the performance measure and compare against the original agreement with the provider. Develop a variance analysis and repeat the cycle. If there is a negative variance in the measure for a prolonged duration then there is an issue. There is a risk that provider to continue under perform and impact the core IT operation.

Vendor Financial stability risk

I would not have come up with this as one of the potential risk item before Satyam scandal. I would not had  even considered it before the scandal. 

  • Participate in quarterly earning call
  • Study the provider balance sheet
  • Study the probability of liquidation or solvenacy
  • Identify your contribution percentage to the provider’s bottom line
  • Identify their auditors reputation. 

Vendor strategy risk

Request vendor to provide their corporate strategy and make sure their direction is aligned to your expectation of their service. If provider corporate strategy is to out of service business and sell software products, then organization currently receiving provider’s service need to know that. There is a risk that the provider will not focus on the service in near future and their service quality will deteriorate

Vendor cultural risk

It is a philosophical discussion. It depends on the philosophy you believe in. Few believes, same behavioural partners will lead into the strong longer marriage and few believe the opposite. I have an unpublished paper on “Q-learning algorithm for a quick and better mutal understanding of marital partners in the east Indian arranged marriage culture”. Two years after my arranged marriage (I saw my wife a week before my marriage) I wrote this paper. This paper assumes that both partners have commitment before the marriage that no matter what happens, they are going to make their marriage successful. 

I will leave the vendor cultural risk assessment up to your belief. Whatever your believe, the vendor cultural risk must be assessment.

Vendor Geo-political risk

Majority of the outsourcing players are from India. Geo-political risk for an outsourcing project has been a factor all the time. When it comes the analysis of the risk and probability of occurance, it used to score very low. In the recent past, as mentioned in my previous blog, it is elevated.

Vendor take over risk

In the financial world, when a small fish swims with strong cash gills, the big fish will swallow for good.

The above identified risks are  the major risks I could think of. There are few risks like provider employee retention and etc.. Those risk can be amplified based on type of organization you are in. I heard many times that business knowledge like electronic fund transfer knowledge will be lost if the provider keep losing their employees. In my opinion, those are very insignificant risk because eft can be learned by any programmer very quickly. However there are areas like 3D drafting package development out sourcing. Systems like this needs extensive analytical geomentry mathematical knowledge, programming language knowledge, device drivers knowledge and etc. It is very difficult to get people with all the skills. Mathematicians with extensive computer engineering hands on experience with executive level communication skills.  The initial training for these kind of development would take 8 – 10 months. These are rare cases and I’m not going to expand.

Step V: Risk analysis

All the above identified risk should have:

  • Probabaility of occurance
  • Cost of business impact if the risk becomes an issue
  • Risk treatment
    • Avoidance
    • Reduction
    • Transfer
    • Retention (accept it)
  • A plan for avoidance, redution and transfer risk treatments

Step VI: Residual Risk Matrix

The residual risk matrix is a consolidated vendor risk exposure to the organization.

Step VII: Monitor Residual Risk Matrix

A dedicated team and process to monitor the residual risk matrix of the organization.

Step VIII: Reporting

Report the RRM to the CIO, steering committe and operating committe of vendor management for a proactive informated decisions.

Enterprise Collaborative Quotient

Better collaboration within IT will

  • fetch more innovation
  • improve team building
  • improve effectiveness & efficiency
  • reduce the over all IT residual risk
  • improve organization attitude

The above are top 5 value added imperatives a better collaboration will bring to an IT organization. Each one of the above adds value to the core business, saves IT G&A and minimizes the IT risk exposure.

How the CIOs and other senior executives will manage and measure the collaboration within their organization. We all familiar with Intelligent Quotient (IQ) and it is a measure how smart a person is? Likewise, an organization must have a metric to measure the collaboration  within their organization.

I was searching to find out what kind of metric is available to measure it in the industry. Based on my research, I could not find any metric to measure it. So I innovated a metric called enterprise collaborative quotient (ECQ)

What is collaboration?

Group of people working towards the same goal.

Why collaboration is needed?

IT has an organization goal every year (which is aligned to the IT strategy which supports the business strategy which supports the competitive strategy) and every member of the organization works towards the goal (Strategy focused organization). When a group of people working towards the same goal, to avoid duplication and ensure full coverage, collaboration is required within the organization.

What is the Enterprise Collaborative quotient?

Even though I prefer to have more mathematical way to calculate it, in reality, the formula approach will not work in management science. My famous saying is, it is not \pi r^2

However, a methodical approach is proposed to calculate the enterprise collaborative quotient. Let me make sure we understand why are we measuring this? To measure how the organization is working together towards the organization goal.

The structure to the problem is, what are the factors involved in measuring it. The factors are

1. Understanding of

  • the organization goal (theme),
  • the overall IT strategy (targets, performance measure,strategic objectives),
  • who is who (theme managers, initiative owners)
  • overall business bottom line
  • core values and company’s mission and vision

2. Frequency of

  • formal face to face meetings/discussion
  • informal face to face meetings/discussion
  • Impromptu face to face/phone/chart meetings/discussion
  • proposal of new suggestion/ideas for a target set for a different team
  • brown bag sessions
  • huddle meeting
  • skip level meetings
  • team meeting
  • town halls
  • 1:1 meeting with direct reports
  • special interest groups (boat club, motor cycle club, quantum cafe club,womens forum)
  • lunch meetings
  • dinner meetings
  • group activities (like community services)

3. Willingness to

  • Share knowledge
  • Listen
  • Challenge the obvious
  • care for others
  • be open

Based on types of the organization, the above factors can be used and information can be garnered by interview or survey. The weight factor can be applied based on the core function IT supports.

IT Risk Management – An Elevated view

Risk management is part of any management science. (period) Any good project managers do have a risk management plan of a project, team, organization and etc . Risk management plan is part of any management science (yes, I’m repeating myself to stress the point).

CIO‘s are part of the management team and any good (or even an ordinary) CIOs do have a risk management plan for the over all IT organization.

It is a basic principle of business, more risk more profit. At the same time, business is not pure gambling and some time it is calculated gambling. When it comes to gambling, it is taking the chances. When you take the chances blindly, then it is gambling and when you take chances after your due diligence then it is business. May be, I’m over simplifying it but that is the simple definition. If a bank wants to AVOID risk, the ONLY best way to avoid risk 100% is NOT to do business. That is, not performing steps towards their organization goal, mission and vision. Philosophical interpretation is, if you want no complaints then be nothing and do nothing.

Are we not take chances every day? Yes, we take chances every minute. I know some one do not agree what I’m saying. There is a risk of rejection from someone. To avoid it, the best approach is to stop expressing myself. By doing so, I can completely avoid the risk of rejection of my opinions but I can not accomplish my mission (Blog as much I can). The point I’m trying to make is, risk is part of any management science and it should be managed better.

How to manage IT risk better?

Residual risk matrix (RRM) for an IT organization risk is one of key metrics a CIO should have to have a clear picture on probability of exposure. Before I jump into the RRM, let me explain what are the key components of enterprise IT risk management?

Components of enterprise IT Risk management

  • Compliance Risk
  • Infrastructure risk (including data center and business locations)
  • Project Risk
  • Security Risk
  • Financial Risk
  • Technology Risk
  • Process Risk
  • Competency Risk
  • Vendor Risk (service providers like infra service, right sourcing, etc)
  • License Risk
  • Open source Risk
  • Business Risk

Steps to create an enterprise IT residual risk matrix (IT RRM)

  • Identify the known & known unknown risk for each components of the IT risk management
  • Device a mitigation plan for each identified risk
  • Identify the cost of the mitigation plan
  • Identify the probability of the risk occurrence
  • Calculate the risk at exposure (risk exposed to the organization after the mitigation plan)

IT Residual Risk Matrix provides an elevated view to the executive management on the exposed IT risk.