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Do We Need a New Approach to Accounting for Business Risk?

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As I was waking up Friday morning in the Bay Area, the skies were yellow, and the air was extremely unhealthy and smoky. The winds from the Dixie fire had shifted to the southwest. Now to be fair, fire season has become a part of life in California. But fires that are manmade are a different thing and have had, without question, far greater consequences.

A few years ago, before COVID 19 and after the Paradise Fire in Northern California, I traveled to Germany. I was at, of all things, an enterprise architecture event. By happenstance, I sat at a table of executives from Germany’s largest public utility companies. I asked the table a simple question: Why is it that the electric lines in my neighborhood are buried but the lines delivering electricity to my area are all above ground?

I had heard previously that buried lines corrode easily and have other technical issues resulting from ground moisture. The executives looked at me dumbfounded and said in Germany we have buried lines for years.

So, with this said, I asked them one more question. How efficient is your Grid? In the US, our grid is around 33% efficient. This means that only 33% of the energy put on the wire actually reaches the customer. Most of the power created is lost!

They again looked at me again dumbfounded. Our power loss numbers are much better and proudly told me about how they are taking electricity generated from wind turbines located in the North Sea to Munich over direct current with 95% efficiency. Only a 5% loss.

Deciding to Invest

In the wake of the Dixie Fire, PG&E hastily announced that it is going to bury 10,000 miles of lines in high wind areas. After the Paradise Fire, PG&E initially jumped on a less expensive solution based upon Internet of Things technology and smart sensors. This involved sensing a wind event and then turning off power to everywhere thought to have a wind risk. Clearly, the less expensive solution did not pan out.

Earlier this year, I asked a former US power executive about this. He said, “Myles, it is all about dollars and cents. And burying power lines is going to cost billions of dollars. And it is still hard to justify making the capital investment, even after Paradise.”

Unfortunately, electric power is not the only area where organizations poorly judge technology risk and fail to invest in needed enabling infrastructure. Several years ago, after the Target breach, I asked CIOs why had the breach occurred. At the time, the fixes were known.

One CIO said to me, exasperated, “the CIO and other IT leaders were not stupid. The fact is it is harder to justify investment in cybersecurity to company CEOs and boards than marketing investment that will drive top line revenues.”

And cybersecurity isn’t the only infrastructural investment that CIOs have had difficulty making the business case. CIOs have told me repeatedly that it is a hard sell to investment in eliminating the tech debt that limits business agility and the ability to respond to digital disruption.

A New Way of Accounting for Business Risk Needed?

Businesses have all kinds of business risks. The fact is probabilistic hurdle rates may just be failing the enterprises that use them.

Or maybe it is our use of probability to calculating the potential for a risk event. According to branding expert, David Aaker, a businesses’ brand has a clear impact upon a business’s financial results. And to be clear, negative events can negatively impact a company’s brand equity and thereby its revenues.

As important as brand is, the life of public companies has become shorter and shorter. This fact makes the need to respond to digital disruption more and more critical. This should bring building agile digital business to the forefront of the business agenda. Hopefully, things have changed after COVID-19. CIO Deb Gildersleeve says, “most organizations need to really take a step back. This process should start by prioritizing enterprise agility, resiliency, and continuity.”

This means as well planning for future business risks. Doing this requires moving from what Russell Ackoff calls reactive or inactive planning to a planning that is interactive, participative, and future oriented. One expert says that he worries that for too many organizations are, “as suggested by Marshall McLuhan, looking at the present through a rear-view mirror.” Hopefully, COVID-19 has modified how organizations consider business technology risk and make investment decisions.

CIO Martin Davis claims that “COVID-19 has helped companies I know realize they were very dependent on technology to work wherever people are and the importance of properly planning for risk, and the real cost if you are not prepared for a crisis.” CIO Paige Francis, agrees and says “COVID 19 taught our organizations what many CIO already knew, technology is everything. As well, it showed that IT risk is not your standard business risk. And it’s a top priority now.”

Parting thoughts

If one thing is clear from the multiple tragedies of the last several years, we need new models for calibrating and thinking about business and technology risks – I call this a re-accounting of business risk.

We need leaders that can see beyond the immediate dollars and cents of a decision. We need leaders that can consider the impact of risk and consider when a risk is just unacceptable.

CIO Melissa Woo puts it this way, “I’m not sure the COVID-19 crisis has changed how the IT organization views risk, but hopefully it has changed how our overall organization views risk instead.”

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