Magazine article Risk Management

E-Merging Risks

Magazine article Risk Management

E-Merging Risks

Article excerpt

Operational Issues and Solutions in a Cyberrage

Already, firms of every shape, size and industry are forging new relationships and value propositions with their customers and critical business partners through electronic networks. Soon companies will maximize all enterprise functions--human resources, procurement, supply-chain management and distribution, and legal--at lower costs through Web-based systems. Before long, everything that matters will be electronically connected.

While we all agree the Internet is having a dramatic impact on enterprises around the world, up to now, much of our attention has focused on popular business-to-consumer (B2C) e-commerce sites. As Internet risks become an increasingly significant component of businesses' operational risk and a growing concern for risk managers, they will also become the focus of regulators, tax auditors, customers, stakeholders, directors and officers. Accordingly, risk managers cannot afford to think that technology-related risks can be addressed by technology alone. Instead, they must try to understand these new exposures for what they are--complex and evolving business risks.

A growing number of risk managers are doing just that, recognizing the importance of understanding how technology is transforming the infrastructures of their businesses. These risk managers are playing a vital role in assessing, controlling, mitigating and financing the e-business risks their companies assume when they use Internet technologies and networks.

Critical Systems and Assets

In the past, an enterprise's critical infrastructure consisted of its physical plant, equipment and inventory. In the emerging technology-based environment, however, an enterprise's core operations depend on electronic information and computer networks. Although an intangible asset, electronic information, particularly knowledge databases and intellectual property, is a key driver of revenue and worth in today's economy. Electronic information assets include accounting information, intellectual property (e.g. trade secrets, know-how, patent information, design data, source code), key customer and supplier data, and competitive information.

The effective use of Internet technology is often associated with a low tolerance for data loss and the need for continuous availability of information and system applications. In certain B2C models, availability is critical at certain times of day or holiday seasons. Recovery over networks is measured in minutes, hours and days--not in the weeks, months or years applied to the recovery of physical assets in the traditional business model.

Today, not only is there the direct impact of an immediate loss of revenue, compensatory payments and future loss of revenue from business interruptions, there are numerous other intangible costs, including loss of productivity, damaged reputation and brand image and impaired financial performance. In a number of widely reported Web outages in 1999, the companies that suffered losses experienced immediate declines in their stock prices.

In the information age, network-related business interruption has also become more problematic due to the widened use of outsourcing. Web development and design, web hosting, telecommunications and managed service providers are independent contractors whose operations are critical to access, security and functionality. Input reports that Internet and intranet outsourcing is projected to grow 76 percent annually through 2003; this represents the highest growth of corporate outsourcing. Revenues of Web hosting services will grow by 25 percent this year to reach $4.04 billion, predicts Frost & Sullivan.

Identifying Cyberperils

The first step in e-business risk management is to identify and understand cyberperils. These perils fall into a number of major areas: security, Web site or network availability and connectivity, privacy, natural or weather-related disasters, intellectual property, content and advertising. …

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