Organisations today face a complex and evolving array of risks that require effective management. Some are inherently digital, while others are traditional risks amplified by technology. From cyberattacks to technical disruptions, these threats pose significant challenges for businesses, holding the power to impact operations, finances, reputation, and ultimately bottom line.
To safeguard their future, organisations must adopt a comprehensive enterprise risk management (ERM) strategy that integrates digital factors into the broader framework, all while closely aligning with overarching business objectives and potential impacts.
Understanding Digital Risk
As technology becomes increasingly integrated into every aspect of business, digital risk has emerged as a growing concern for businesses worldwide. It encompasses a wide range of potential negative outcomes stemming from digital technologies and processes. This includes:
- Inherently digital risks: Threats that wouldn’t exist without digital technologies, such as data breaches, ransomware attacks, cloud service outages, and AI algorithm biases.
- Digitally amplified traditional risks: Issues that have been present but are transformed or exacerbated by digitalisation, including reputational damage from social media, supply chain disruptions following cyberattacks, and financial fraud through digital channels.
The rapid evolution of digital risk distinguishes it from traditional threats. With heavily interconnected digital systems and an unprecedented scale and speed at which these risks can materialise, it’s critical for businesses to be acutely aware of the nuances of digital technologies and how they fundamentally change the whole risk landscape.
Integrating Digital Risk into Enterprise Risk Management
To effectively manage digital risks, organisations should:
- Align with existing ERM frameworks: Incorporate digital risk into frameworks like ISO 31000 or COSO, ensuring it’s considered alongside other risk categories (keep in mind that risks can be multi-labeled for instance).
- Establish clear governance: Assign roles and responsibilities for digital risk management for your organisation’s identification, assessment and mitigation plan management. Also, make sure to create cross-functional committees and ensure board-level oversight.
- Conduct comprehensive risk assessments: Perform regular digital risk assessments as part of broader risk assessment processes.
- Implement risk quantification: Adopt methodologies like FAIR (Factor Analysis of Information Risk) or SPICE (Scenario Planning to Identify Cyber Risk Exposure) to measure digital risks in financial terms.
- Integrate with business processes: Embed digital risk considerations into key business processes like strategy development, operational resilience, product design, and supply chain management.
Business-Focused Risk Assessment Methods
To align digital risk management more closely with business needs, organisations should adapt standard risk assessment methods:
- Business Impact Analysis (BIA) integration: Identify critical business processes and activities with their digital dependencies, determine the potential impact of digital disruptions, integrity alterations and confidentiality breaches, and quantify the financial, operational, and reputational impacts.
- Risk and Control Self-Assessment (RCSA) adaptation: Engage business units to identify digital risks specific to their operations, assess the effectiveness of existing controls, and prioritise risks based on their potential impact on business objectives. This will help to identify potential vulnerabilities and increased exposure due to policy or security baseline non-compliance, and how these factors influence the overall risk level.
- Bow-tie analysis for digital risks: Visualise digital risk events by mapping out causes and consequences, aligning consequences with specific business impacts, and identifying preventive controls and reactive measures.
- Digital risk appetite statements: Develop specific, measurable statements for different digital risks, aligned with overall business strategy and objectives.
- Key Risk Indicators (KRIs) linked to Key Performance Indicators (KPIs): Establish a clear link between digital risk metrics and business performance by identifying KPIs that could be affected by digital risks and developing corresponding KRIs.
- Scenario analysis and stress testing: Conduct scenario planning with a business focus. Involve business leaders in developing scenarios that demonstrate how digital risks could impact business objectives.
- Value-at-Risk (VaR): Estimate the financial impact of digital risk events over a defined time horizon using statistical techniques to measure and quantify financial risk within a firm or investment portfolio. Express the results in terms that resonate with business leaders. Begin with an assessment of the financial impact in terms of EBIT and Free Cash Flow based on a realistic use case.
- Digital Risk-Adjusted Return on Investment (RAROI): Incorporate digital risk considerations into investment decisions to prioritise digital initiatives and allocate resources effectively to support the business strategy.
- Business process mapping with different risk overlay: Create detailed maps of key business processes and overlay potential digital risks at each stage to identify critical points where digital risks could significantly impact business operations. Each risk can appear on several overlays.
- Balanced scorecard approach: Integrate digital risk metrics into organisational performance measurement by adding digital risk-related objectives and metrics to each perspective of the balanced scorecard.
- PESTLE analysis with digital focus: Adapt PESTLE analysis to highlight digital risks for each factor: Political, Economic, Social, Technological, Legal, and Environmental. Assess how these risks could impact strategic objectives.
Risk Ownership and Accountability
A crucial step in aligning digital risk management with business needs is establishing clear risk ownership to the appropriate individuals within the organisation. A risk owner should be someone with the authority to accept the responsibility for the risk’s financial implications. Typically, this role falls to a business leader rather than a technical specialist.
Key traits and responsibilities of a risk owner include:
- Decision-making authority: Business leaders have the power to make strategic decisions about risk acceptance, mitigation, or transfer.
- Financial responsibility: They control the budget that would be impacted by a risk event or used for mitigation efforts.
- Business context: They understand the full business implications of the risk beyond just technical aspects.
- Alignment with business objectives: A business-side risk owner ensures that risk management aligns with overall business goals.
- Proper resource allocation: When the risk owner holds the P&L, they’re incentivised to allocate resources efficiently for risk mitigation.
- Holistic risk view: A business leader promotes a more comprehensive view of risk, considering how cyber threats interact with other business risks.
- Improved communication: They can translate technical risks into business terms for other executives and the board.
- Accountability and culture: Facilitating this approach fosters a culture of risk awareness throughout the organisation.
Collaborative Approach
While business leaders should own the risks, they must work closely with technical experts. It’s important for the application owner or IT security team to provide technical expertise and implementation support. This collaboration ensures a balance between business needs and technical realities. With regular meetings and established communication channels between business and technical teams, effective alignment and risk management can be achieved.
Implementation and Continuous Improvement
To successfully implement this business-aligned approach to digital risk management, businesses must:
- Engage stakeholders: Involve business leaders, IT teams, and risk management professionals in developing the approach.
- Pilot programs: Start with a critical business unit or process to test and refine the methodology.
- Implement training and foster communication: Ensure all relevant staff understand how to apply these methods and understand why they’re important.
- Review and update regularly: Continuously refine the approach based on business changes and emerging digital risks.
- Enhance executive reporting: Develop concise, business-focused reports that clearly show the link between digital risks and business performance.
Overcoming Challenges
While a proactive and comprehensive approach enhances overall resilience, organisations may face some challenges during implementation, including issues with knowledge gaps. It’s not uncommon for business leaders to lack deep technical understanding of these risks. That’s where targeted training can support growth in these areas and ensure strong collaboration with technical teams.
When enforcing such a change, some leaders may resist taking on such a large responsibility, but clear communication about the importance of this approach, potentially tying it to performance evaluations, or hiring specifically for the role can help businesses overcome this challenge.
Another consideration to address is handover. Transitioning from technical to business ownership can be complex. To support members of the team taking on this role, businesses should develop a clear risk ownership transfer process and provide ongoing collaboration to support smooth transitions.
Conclusion
With these strategies in place, organisations can strengthen the alignment between digital risk management and business objectives, helping to improve the effectiveness of risk management and enhance its strategic value within the organisation.
The key benefits of this business-aligned approach include:
- Better informed risk decisions
- Optimised resource allocation
- Improved communication of risks to senior management and the board
- A stronger security posture aligned with business objectives, so the security can become a business enabler
- Enhanced regulatory compliance
- A more risk-aware organisational culture
Ultimately, this approach leads to a more resilient business, better equipped to navigate the complexities of the digital landscape while pursuing its strategic goals. As digital technologies continue to evolve and reshape the business environment, organisations that successfully align their digital risk management with their business strategies will be better positioned to thrive in an increasingly digital and VUCA world.
Towards Operational Business Resilience
As we’ve explored the intricacies of aligning digital risk management with business objectives, it’s clear that this approach is part of a larger, more comprehensive concept: operational business resilience.
The integration of digital risk management into core business processes, coupled with business-led risk ownership, lays a strong foundation for an organisation’s ability to withstand, adapt to, and thrive amidst disruptions. This ability is at the heart of operational business resilience.
Operational business resilience goes beyond traditional business continuity and disaster recovery. It encompasses an organisation’s capacity to:
- Anticipate potential impactful events through comprehensive threats and maturity assessments
- Align risk management with business strategies through a holistic risk management approach
- Detect, investigate, and respond to events that can have an impact on the business through incident and crisis management
- Resist the impact of these events through robust risk mitigation strategies combining security and operational means
- Recover quickly and effectively when events do occur through recovery strategies
- Adapt and evolve in response to changing risk landscapes and business environments
As we move forward, it’s essential to recognise that operational business resilience is not achieved through a single implementation. Businesses must continuously develop and refine to maintain critical functions, protect assets, and continue delivering value to stakeholders, even when faced with significant challenges. As technology rapidly advances and businesses become more interconnected than ever, the distinction between organisations that merely survive and those that thrive will soon become clear.