The Sweet Spot of Risk Governance

In baseball, the “sweet spot” refers to the precise location on a bat where the maximum amount of energy from a batter’s swing is shifted into the ball. It is an equilibrium—the best possible outcome proportional to the amount of effort the batter exerts. A similar concept exists in risk management. IT professionals want to find the best possible balance between risk seeking and risk avoidance. Too much risk seeking leads to an organization taking wild leaps of faith on speculative endeavors, potentially leading to business failure. Extreme risk aversion, on the other hand, causes an organization to fall behind emerging trends and market opportunities—cases in point: Polaroid and Blockbuster. Finding the right balance can move an organization’s risk program from an endless cycle of opening and closing entries on a risk register to a program that truly aligns with and promotes business objectives.

Risk Seeking

Risk is not necessarily bad. Everyone engages in risky behavior to achieve an objective, whether it is driving a car or eating a hot dog. Both activities cause deaths every year, but there is a willingness to take on the risk because of the perceived benefits. Business is no different. Having computers connected to the Internet and taking credit card transactions present risk, but not engaging in those activities presents even more risk: the complete inability to conduct business. Seeking new opportunities and accepting the associated level of risk is part of business and life.

Risk Avoidance

Identifying and mitigating risk is an area where risk managers excel, sometimes to the detriment of understanding the importance of seeking risk. This can be seen especially in information security and technology risk where the impulse is to mitigate all reds to greens, forgetting that every security control comes with an opportunity cost and potential end user friction. The connection between risk, whether seeking or avoiding, and business needs to be inexorably linked if a risk management program has any chance for long-term success.

Sweet Spot

Think of risk behavior as a baseball bat. A batter should not hit the ball on the knob or the end cap. It is wasted energy. One also does not want to engage in extreme risk seeking or risk avoidance behaviors. Somewhere in the middle there is an equilibrium. It is the job of the risk manager to help leadership find the balance between risk that enables business and risk that lies beyond an organization’s tolerance.

This can be done by listening to leadership, learning where the organization’s appetite for risk lies and selecting controls in a smart, risk-aware way. Security and controls are very important. They can mitigate serious, costly risk, but balance is needed.

Risk quantification is an indispensable tool in finding and communicating balance as it helps leadership understand the amount of risk exposure in an area, by how much security controls can reduce exposure and, perhaps most important, if the cost of controls are proportional to the amount of risk reduced. The balance is a crucial part of risk governance and helps leadership connect risk to its effect on business objectives in a tangible and pragmatic way.