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Supply Chain Risks

Vendors May be Weak Link

Companies prioritize operational risk management, but many do not believe their vendors are doing the same.
By: | July 25, 2014 • 3 min read
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Vendor risk management is often too overlooked by Fortune 1000 companies.

Three-quarters of supply chain executives said operational risk management is important for dealing with unpredictable events such as disasters, geopolitical risk, and demand volatility, according to “Don’t Play it Safe When it Comes to Supply Chain Risk Management,” a survey of more than 1,000 companies conducted by Accenture.

At the same time, 65 percent of executives at Fortune 1000 companies do not believe vendors are doing enough to minimize risk, according to another recently-released survey from the Consero Group, which focused on shared services.

The findings are indicative of one of the most volatile business environments seen in the last 15 to 20 years, as reflected by indices such as the Chicago Stock Exchange index, according to Mark Pearson, managing director of Accenture’s operations strategy consulting practice, and an author of the study.

“But this phenomenon is not just about the downside, because it has an upside as well, in that there is an opportunity to take market share if a company has the right tools in place to manage that risk,” he explained.

Business trends in recent decades have increased the importance of supply chain risk, Pearson said.

“We’ve spend the last 25 years globalizing supply chains, and applying concepts like just-in-time manufacturing, making our supply chains pretty lean, but also fragile,” he said.

To address the vulnerability, companies have developed strategies to respond to interruptions in the supply chain, with planning, analytics, and better visibility, Pearson said. Such strategies have included the creation of supply chain control towers.

According to Capgemini Consulting, a supply chain control tower is a central hub that captures and uses supply chain data to enhance visibility for short and long term decision-making that aligns with strategic objectives.

“These control towers,” Pearson said, “are fairly physical, and the concept is becoming very popular, due in part to some very good and well developed examples, coming out of the high-tech industry, such as Dell, for example.”

However, such control towers normally involve significant investments that run into the millions of dollars spent on technology and personnel, he said.

Executives also recognize the importance of vendor risk in shared services centers, which have increased in importance to organizations: 72 percent of leaders have increased their budgets over last the year, while 66 percent increased staff size, according to the Consero 2014 Shared Services & Outsourcing Data Survey.

Shared services executives rely on a host of vendors, ranging from law and accounting firms to software and other products.

“If vendors are unable to deliver the products or tools required, it creates difficulties,” said Paul Mandell, founder and CEO of Consero Group, based in Bethesda, Md.

“In addition, all kinds of legal risk exists when you have vendors handling data, if they’re not attuned to appropriate data security protocols. Another area of legal risk is rule violations by vendors, if they are making bribes across international lines,” Mandell said.

“Some commercial carriers offer insurance to cover supply chain risk, and compliance risk, but that will often only go so far when it comes to intentional violations of law. There may be financial compensation of some kind, but the damage to your relationship is hard to quantify,” Mandell said.

“Insurance companies are starting to build supply chain insurance products,” agreed Pearson, “but they don’t have a lot of experience. Whether it’s a soft or hard market, it’s a new market,” he said.

John Otrompke is a financial journalist. He can be reached at riskletters@lrp.com.
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Risk Insider: Eamonn Cunningham

Buying Cyber – Consider Carefully

By: | July 25, 2014 • 2 min read
Eamonn Cunningham is Chief Risk Officer for Scentre Group. He was chief risk officer of the Westfield Group, which was restructured in 2014, when he became CRO for Scentre. A member of the board of The Risk and Insurance Management Society Australasia Limited, he can be reached at ecunningham@scentregroup.com.

The threat arising from cyber security is real.  If it is not already, I suspect this threat will shortly be one of the most significant risks that companies face.

Given its significance, the cyber threat needs a comprehensive integrated response with risk transfer being just one element.

As a risk manager I cringed when I heard another risk manager declare at a RIMS annual conference session, “Yep, I bought cyber risk insurance last year.  I did so because everybody else is doing it and also because my director thought it was a good idea.  To be honest, I must admit that I am not really sure exactly what I bought.”

That risk manager may have done the right thing but definitely for the wrong reasons.

Some risk managers adopt a “risk flavor of the month” approach when considering, indeed purchasing new insurance products.

When you purchase an insurance product you are, as we all know, actually engaged in the practice, or should I say, sometimes the art form of transferring risk to the marketplace.  This seems pretty clear, or is it?  You should only engage in the practice of risk transfer after you have:

1. Carried out a thorough investigation of your business in order to identify all relevant original or “raw” risk(s).

2  Identified the controls that exist within your business to mitigate the risks identified.  In doing so, you also need to assess the effectiveness of the controls in place to treat the identified risks.

3. Considered what other new or augmented existing controls could be established to deal with the risks on a cost effective basis.

4. Assessed the residual risks arising after applying steps 1 – 3 above and determined whether they are within your risk appetite or not.

Some risk managers adopt a “risk flavor of the month” approach when considering, indeed purchasing new insurance products.  Cyber risk insurance is one such product that has been flavor of the month for quite some time.

The social/peer pressure to buy “cyber” is unrelenting.  It is egged on by the myriad of studies that for example state, x percent of entities now buy cyber insurance and that this will grow to y percent within 12 months.

Do you want to be the brave insurance manager who bucks this trend?  I am not suggesting that you be that person; what I do suggest is that you go about the process of evaluating whether or not this risk in your company needs to be insured against in a very disciplined, dispassionate manner.

The advantage of adopting the above is that you will end up with:

1)       A very detailed description of the risks you face.

2)       A comprehensive assessment of your suite of controls.

3)       Absolute clarity as to which element of your risk you will seek to transfer to the insurance marketplace because by doing so, and if you do buy you will end up with a product that precisely fits your needs.

When you make that decision to buy cyber you will feel better as a risk management professional for having done so after following the above.

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Sponsored Content by ACE Group

5 & 5: Rewards and Risks of Cloud Computing

As cloud computing threats loom, it's important to understand the benefits and risks.
By: | June 2, 2014 • 4 min read
SponsoredContent_ACE

Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.

ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:

5 benefits of cloud computing

1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.

2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.

SponsoredContent_ACE

3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.

4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.

5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).

SponsoredContent_ACE5 risks of cloud computing

1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.

2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.

3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.

SponsoredContent_ACE

4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.

5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.

The takeaway

Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.

Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.

To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?

This article was produced by ACE Group and not the Risk & Insurance® editorial team.


With operations in 54 countries, ACE Group is one of the largest multiline property and casualty insurance companies in the world.
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