Structure in Threes: Integrating Finance and Engineering approaches to Risk
September 24, 2013 5 Comments
As I continue researching risk elements for designing and enterprise, it is interesting to see how implementing risk management translates differently depending upon your discipline. Finance focuses on of course financial risk; the various forms risk takes with regard to translating investments into returns in a monetary sense. While engineering disciplines focus upon risk that effects the degree of achievement to performance goals of a product or lately service. Both disciplines acknowledge the others concerns but often do not provide the linkage between these. Finance will often categorize engineering risks into buckets called operational and strategic/business risks. Engineering will lump the various economic risks into a single bucket called financial risk.
This is mirrored in how Business Continuity/Disaster Recovery(BC/DR) and Enterprise Risk Management (ERM) are implemented in most corporations. The BC/DR practices focus on the engineering risks of project, process and product, while the ERM practices direct attention to the financial aspects of the enterprise. What seems to be missing is the linkage between the two. The interrelationship between the two or cascading effects appear to be a neglected concern. This maybe due to the nature of our western culture or increased specificity of roles within corporations even in white collar positions now. The role of the generalist or systems thinker has been diminished or dismissed or possibly transformed. More and more of my systems thinking peers have become entrepreneurs, possibly because they do not fit the new organizational models or appear to be in direct competition with mid-level management. This is odd in that first line and mid-level management no longer have the time to consider various degrees of consequences of actions and decisions or alternatives, but is the stock and trade of systems thinkers. This may be one of the root causes to several of the catastrophic failures of the economic system, geo-political relationships and technology achievement misses.
Today’s research continues down the path of system dynamics and identifying the linkages between financial and engineering risk management. It may turn out that there is no true mathematical formula that links these and the best that can be achieved is to use Bayesian logic to create priorities for a balanced scorecard that reflect enterprise values and then monitor how these correlate to the ecosystem. Which brings me back to using system dynamic models and validating these with actual performance in the real world.
In my opinion , despite the emergence of BI and Big Data, application at this level is still years away. The majority of enterprises and thought leaders are still at a primitive level when thinking about exploiting such technology. Think of how sophisticated and how long it took to apply various influence and behavior models in the marketing community. Then consider the effects of having too much information, creating an information glut. While computers are great at dealing with volumes of data, we humans are not. We still need to deal with the limits of cognition. Despite all the hype about multi-tasking, the facts are coming out, something is lost when you try to focus on too many tasks at once. In fact you’re not actually focusing on them at once, you are switching attention between them rapidly (page swapping) and eventually you either reach a limit where you get nothing accomplished or a catastrophic event happens: Texting while driving during the Grand Prix is not a good idea. What this suggest is that it will take a long time to really sort through BI and Big Data’s potential into something practical verses creating more noise in the enterprise system.