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November 08, 2008
Managing Knowledge for the Transition to ERM
Today I have brought some interesting points to keep in mind for Knowledge Management (KM) and its application to Enterprise Risk Management (ERM):
Professor John S Edwards from Aston Business School in the UK and I have been working for months on the understanding of the application of KM to ERM. In this journey we have identified many interesting points of commonalities and support that KM can provide to ERM. For example, the general problem is to pass from a simple RM point of view to an ERM view. This is to pass from the particular to the general and from the individual to the group. Please read the following description of Risk Management (RM) and then read the ERM description and keep in your mind the differences.
RM description
• Silo, individual view of risk
• Specific risk analysis
• Tactic orientation
• Related to control and minimization
• Organization specific, department or business unit, concentrated on business events
• Disaggregated methods for risk analysis
• Responsibility on the functional managers
• Performance evaluation concentrated on the particular problem solved
• Protection of adverse financial effects of bad events. Earnings volatility protection from the source
• Reactive
• Specific control of section or division expenditures
• Individual risk analysis
• The priority in the portfolio and individual sources
ERM description
• Global, holistic view of risk
• Risk analysis across the organization
• Strategic orientation
• Relationship to competitiveness
• Individuals, business units and the complete organization. Corporate view
• Aggregated methods
• Governance/stakeholders responsibility
• Risk performance evaluation enterprise wide and based on risk
• Organization stability protection. Decision making process based on risk
• Proactive
• Reviews and reduction of duplication of risk management expenditures
• Interdependent risk analysis
• Priority can be in portfolio structure, assets modification, strategic movements
Lam ,2000; Cumming & Hirtle, 2001; Dickinson, 2001;Meulbroek, 2002
With the identification of these attributes the first thing that we are doing is testing the validity and value of some factors affecting a Knowledge Management System (KMS) to support ERM. The reason is that our hypotheses are related to the capacity that a discipline as KM has in order to solve issues that are needed in the transition from KM to ERM. Issues such us:
• Algorithm design to compete and support multiple operations in financial risk
• Communication in the head office, with the branch offices, with brokers and customers
• Pulse check of the environment and simulation of the current states and trends of important factors affecting risk, those communicated to the groups doing risk assessment, for example
• Language of communication and potential contradictions of document content, similar content from different authors, no updating process, different messages. Review of the value of the documents from the users perspective
• Means to standardize content, reports, data, and information structures in order to share content and to get consistent results
• Inclusion of attributes of the business processes related to people’s expertise in order to select people using an expertise locator. Incrementing capacity to provide independent answers to different knowledge consumers or to create undifferentiated solutions
• Adjustment of document formats and presentations for identification and extraction of pieces and sections of those documents fundamentally for sharing
• Structuring of naming conventions and taxonomy for storing and retrieving documents. Using tags to differentiate and support knowledge selection that is part of the same document and is required to use independently
• Changing of the practise of users and issuers to understand that knowledge is based on the capacity to share it, managing a better connectivity among different pages in order to find the correct document
• Creation of prototypes for the definition of solutions and for communication with the programming group and organizing data in order to give access to different tools for analytics and support to decision making and problem solving processes
In summary, kindly take into consideration the previous list when you are thinking in ERM and send us your comments and issues where you can find that a structured information system that supports knowledge transfer, collaboration and a better enterprise-wide view (this is a KMS). It will be great and we will be able to provide guidelines to future design of better tools that support ERM. The reason is that it seems that one of the biggest issue in banking crisis and probably in other affected areas is the silo culture and the lack of good knowledge transfer, reduced capacity for early warning systems that foster and support actions.
References
• Lam J 2000 “Enterprise-wide risk management and the role of the chief risk officer”, white paper, ERisk.com , March 25
• Cumming C and Hirtle B (2001) “The Challenges of Risk Management in Diversified Financial Companies”, Federal Reserve Bank of New York, March , pp 1-17
• Dickinson G. 2001 “Enterprise Risk Management: Its Origins and Conceptual Foundation”, The Geneva Papers on Risk and Insurance, Vol. 26, No. 3, pp 360-366
• Meulbroek L 2002 ”The promise and Challenge of Integrated Risk Management”, Risk Management and Insurance Review, Vol.5, No. 1, pp 55-66
Research Space
Today, I have merged this section with Your model and my model section. The reason is: there are very important questions to answer in my model of conceptualization-risk-knowledge as part of the management that we need in this new economy: first,is it more important to have a boss with recognized experience and knowledge in the field of the work or is it more important to have a leader even with limited knowledge? Second, is it better the communication when the boss knows more about the field? Third, is better the problem solving process when the boss knows more what the impact of the decisions is in the business processes? Fourth, do you believe that the middle management should be the best, this means to have the most experienced and knowledgeable people there instead of junior people? Fifth, take some combinations of the answers to 1-4 and tell me what the best combination is for you.
Mathematical Circle
I was reading the book " The Age of Spiritual Machines" from Ray Kurzweil (Pinguin Books 2000) and given that one of the big areas of applied mathematics is Prediction I decided to bring some points to my blog. These wonderful points that I found in the book invite us to reflect about the prediction modelling process and its understanding or better the knowledge creation from prediction exercises, read these pearls:
"Heavier-than-air flying machines are not possible" Lord Kelvin 1895
"I think there is a world market for maybe five computers" IBM Chairman Thomas Watson 1943
" 640000bytes of memory ought to be enough for anybody" Bill Gates 1981
" The Internet will catastrophically collapse in 1996" Robert Metcalfe inventor of Ethernet 1997
In these days of paradigm changes or possible crisis we have to be more cautious about our future views. There is a responsibility in reducing chaos and to be more precise and possible to add more rigour to our views. The assumptions have to be clearer and stronger in the mathematical modelling process for example. More experienced knowledge is required in applied mathematics, not just logic, we need to understand more what could happened if the assumptions are not reached. Management must be proactive in contributing to the assumptions definition, not just ask for the result or questioning the assumptions and stop there, but providing valuable input to the process of products and knowledge creation and the assumptions. A bad product-knowledge creation can be the beginning of a monster-model that is only understandable by the creator (we hope). The issue is that management will use for competing without the understanding of what the potential "monster" or "beauty" are or will do(this is not very far from our current crisis and reality).
Thank you
Eduardo Rodriguez
Principal IQAnalytics Canada
www.iqanalytics.com
eduardo.rodriguez@iqanalytics.com
Posted by edrota at November 8, 2008 11:44 AM
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