Technological innovation has paved the way for tens of thousands of entrepreneurs to dream up–and run–cutting-edge tech-based companies. But according to our research, one area where tech leaders could use some help is properly assessing and quantifying business risk.
While it may not hold the same kind of fascination as the latest killer app, website, software, or tech startup, proper risk management is the foundation that supports the building, growth, and future of tech-fueled companies. This article is a guide to the essential steps of technology risk management: identification and analysis, quantification, and the decisions you’ll need to make to properly cover your risks.
Two Sides of the Risk Management Equation
The theory behind risk management involves reckoning with two sides of an equation: “unrewarded risk” and “rewarded risk.” Unrewarded risk is basically the price of doing business – paying your taxes, complying with employment law, and getting the bills paid on time. Unrewarded risk simply protects your company’s value.
On the other side of the equation is what most tech leaders consider the fun stuff — the gambles you take to grow your business, such as adding employees, buying equipment, and making strategic investments. Rewarded risk creates value for your company – and it can potentially offset some of your company’s tech-specific risk exposure. Keeping both sides of the equation in mind enables you to be both strategic and responsible in your leadership.
Of course, you can’t get anywhere without a solid understanding of your entire company’s risks and rewards. And these vary depending on your industry. You may be providing a direct product or service or acting as a third-party supplier. Examples of companies with tech-specific risk management concerns include:
- IT consultants and technology service providers
- Communication companies
- Electronics or hardware manufacturers
- E-Commerce stores
- SaaS Providers
What makes risk management especially challenging for any tech company is that advancements in technology invite brand new risks – some of which you can’t yet fathom as your technology evolves. Balancing these variables requires an initial upfront investment of time – and yes, money – to conduct a full and honest accounting of your business’s risks.
Why Transparent Risk Management Policy Pays Off
But rather than shy from potentially uncomfortable conversations, it’s really smart to address your company’s “known unknowns” head-on. Why? Beyond the obvious — protecting yourself — being honest and transparent about your business’s risk-management plan allows you to bake risk management into your entire company’s culture. This empowers employees at all levels to think critically about the impact of their work and their decisions. (And empowered workers are far less likely to engage in harmful practices such as employee theft.)
A solid risk management plan also engenders trust and respect from clients, customers, and investors. (Bonus: You can add all of these to the “rewarded risk” category.)
Risk Management Identification and Analysis for Tech Companies
The first step in technology risk management is the identification and analysis of your risk. Essentially, this is an audit of all of your company’s hardware, software, procedures, and even physical hazards that could cause harm. This step also includes your company’s current responses to these risks. Ideally, you’ll keep a record of this information and review and update it regularly.
For this process, it helps to use a risk register – basically a spreadsheet that lists the risk by name, priority, and status. You can download a risk register template to start the process.
Some examples of the specific risks of tech companies include:
- Data breaches (hacking, malware, theft of information)
- Cyber extortion (when online criminals demand payment to stop their own attack)
- Social engineering fraud (phishing scams, baiting tricks)
- Security and privacy breaches and leaks (when sensitive information gets into the wrong hands)
How to Quantify Risks
After identifying your company’s risks comes the evaluation phase, where you literally total the costs of your risk exposure. For this step, it’s important to factor in your company’s existing strategies for managing any of the above risks, as well as how well-equipped you are to scale your responses as your company grows. Plenty of tech companies neglect to plan for what happens when products and services are retired. If your company still has dated products and services out in cyberspace, you could be liable for problems stemming from old technology.
The Relationship Between Risk Management and Insurance
The good news is, today’s technology risk management has spawned insurance services designed specifically for the risks technology companies face. These products go way beyond standard professional liability policies by protecting companies – and their leaders – from problems arising from tech services or products, cybercrime, data breaches, and more. Some examples of the specific types of coverage technology companies need to cover their risk exposure are:
Directors and Officers Insurance. Called D&O, this type of insurance protects past and current company directors from lawsuits and litigation.
Technology Errors and Omissions Insurance. Referred to as E&O, this is one of the most important policies for tech companies because it protects you if your product or service does not perform the way it’s supposed to. Standard product liability insurance doesn’t cover the specific types of errors and omissions covered by tech E&O.
Cyber Liability Insurance. This covers first-party costs associated with a data breach, as well as third-party lawsuits involving network privacy and security-related losses, cyber extortion, and more.
Employment Practices Liability Insurance. While this kind of insurance isn’t state-mandated, it’s a wise investment as it provides protection against employee claims related to issues of wrongful termination, harassment, and discrimination.
For tech leaders who may downplay the role risk management plays in their company’s overall success, there’s another compelling reason to prioritize it. Today’s risk-management scenarios are powered by the same kind of innovation as the technology itself: data. And as any tech leader knows, the better the data, the better the result.