Home Features The Importance of Business Risk to the Enterprise

The Importance of Business Risk to the Enterprise

by Brian Sims

Business risk is foundational to business risk intelligence, but it’s also commonly misunderstood because its scope extends far beyond what security practitioners typically deal with on a daily basis. Broadly speaking, asserts Josh Lefkowitz, business risk refers to the possibility of experiencing lower revenue or a profit loss due to some degree of uncertainty. Although there are many uncertainties inherent to running a business, most tend to fall under one or more of the following categories – financial risk, compliance risk, strategic risk, reputational risk and operational risk – which are also typically referred to as the five categories of business risk.

All forms of business risk can have financial ramifications, but financial risk relates solely to how a business handles money and financing. External factors, such as changes in interest or exchange rates, as well as company-related factors like debt-to-equity ratio, are common factors that contribute towards financial risk.

The penalties a business could face for any proven failure to comply with industry regulations and/or legislation can vary from minor fines through to serious legal action. Regardless of the industry in which a company operates, its location, size and the regulatory environment, threats that put compliance at risk may arise due to unforeseen circumstances such as data breaches, technical failures or sudden legislative changes.

For its part, strategic risk encompasses any potential loss that a business could incur if an aspect of its strategy fails or becomes less effective. This may occur due to increased competition, demand fluctuations, technological shortcomings or numerous other factors that hinder the efficacy of a given business’ strategy.

When it comes to reputational risk, the possibility of eroded trust and/or revenue losses resulting from events such as bad publicity, product recalls, lawsuits and security incidents is an ever-present risk for businesses across all sectors. Further, unexpected errors or damages caused by people, processes or external events can significantly disrupt a business’ core operations, typically causing significant revenue loss and reputational damage. Operational risks can take many forms, ranging from natural disasters and physical infrastructure damage through to fraud, cyber attacks and supply chain vulnerabilities.

Anticipation and preparation: keys to reducing uncertainty

In terms of effectively navigating the threat landscape, being able to distinguish between the five categories of business risk and structuring your risk management programme supported by business risk intelligence in a manner that addresses all of them is crucial. Business risk is fuelled by uncertainty, so while business risk intelligence cannot fully eliminate the various risks businesses face on a day-to-day basis, it can help organisations better anticipate and prepare for uncertain situations.

For instance, let’s suppose that an e-commerce retailer suffers considerable downtime as the result of a DDoS attack. In order to leverage business risk intelligence to prevent similar occurrences in the future, the retailer must first consider the impact of the attack across each category of business risk as follows:

Financial Risk: No

The DDoS attack had no effect on the business’ capital structure and thus didn’t impact its financial risk

Compliance Risk: Yes

With the European Union’s (EU) General Data Protection Regulation (GDPR) now in full effect, any organisation that transacts business in the EU must abide by its compliance requirements. Guaranteeing network availability is a crucial component of the GDPR. As such, downtime as the result of a DDoS attack may lead to financial penalties, thus affecting a business’ bottom line

Strategic Risk: Yes

The DDoS attack did influence strategic risk because the retailer’s strategy is largely dictated by its e-commerce business model. Customers were unable to browse, shop or make purchases on the retailer’s website during the DDoS attack episode, thereby resulting in lost revenue. Since managing strategic risk should be seen as a long-term endeavour, this attack should indicate the need to invest in DDoS protection.

Reputational Risk: Yes

The DDoS attack inconvenienced and upset customers who sought to access the retailer’s website during the outage. Many such customers expressed their frustration on social media, attracting significant negative attention to the company, in turn eroding consumer trust and, ultimately, exacerbating revenue losses.

Operational Risk: Yes

The retailer was unprepared for the attack and didn’t have adequate DDoS protection measures in place to protect its website from outages and resulting consequences. As such, the attack did contribute to the retailer’s operational risk.

Evaluating each risk category

By evaluating each category of business risk in this context, the e-commerce retailer can make informed decisions pertaining to the direction and priorities of a business risk intelligence operation. In this case, the retailer’s business risk intelligence operation should focus primarily on addressing the potential compliance, strategic, reputational and operational risks that could be posed by similar attacks in the future.

Josh Lefkowitz

Josh Lefkowitz

This type of exercise can help to identify additional resources, stakeholders or business functions that may be needed in the future to assess and manage risk. For instance, if the retailer learns that another disruptive attack is imminent, a response based on business risk intelligence that encompasses business as well as cyber risk would mandate that network security teams as well as business leaders (such as those tasked with looking after communications, legal, strategy and finance) be ready to respond.

This example reinforces a hallmark of business risk intelligence. Given that individual threats can affect all business functions across an enterprise, a business risk intelligence programme must understand and account for the different categories of risk.

While even the most sophisticated of business risk intelligence programmes cannot fully eradicate business risk, such programmes can reduce the uncertainty that fuels it through better anticipation and preparation.

Josh Lefkowitz is CEO at Flashpoint

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