What is Business Risk?
By Josh Lefkowitz
Business risk is foundational to Business Risk Intelligence (BRI), but it’s also commonly misunderstood because its scope extends far beyond what security practitioners typically deal with. Broadly, business risk refers to the possibility of experiencing lower revenue or a profit loss due to some degree of uncertainty. Although there are many uncertainties inherent to running a business, most tend to fall under one or more of the following categories—which are also typically referred to as the five categories of business risk:
All forms of business risk can have financial ramifications, but financial risk relates solely to how a business handles money and financing. External factors, such as changes in interest or exchange rates, as well as company-related factors such as debt-to-equity ratio, are common factors that contribute to financial risk.
The penalties a business could face for failure to comply with industry regulations and/or legislation can vary from minor fines to serious legal action. But regardless of a business’s industry, location, size, and regulatory environment, threats that put compliance at risk may arise due to unforeseen circumstances such as data breaches, technical failures, or sudden legislative changes.
Strategic risk encompasses any potential loss a business could incur if an aspect of its strategy fails or becomes less effective. This may occur due to increased competition, demand fluctuations, technological shortcomings, or numerous other factors that hinder the efficacy of a business’s strategy.
The possibility of eroded trust and/or revenue losses resulting from events such as bad publicity, product recalls, lawsuits, and security incidents is an ever-present risk for businesses across all sectors.
Unexpected errors or damages caused by people, processes, or external events can significantly disrupt a business’s core operations, typically causing significant revenue loss and reputational damage. Operational risks can take many forms, ranging from natural disasters and physical infrastructure damage to fraud, cyberattacks, and supply chain vulnerabilities.
Anticipation and Preparation: The Keys to Reducing Uncertainty
When it comes to effectively navigating the threat landscape, being able to distinguish between the five categories of business risk and structuring your risk management program supported by BRI in a manner that addresses all of them is crucial. Business risk is fueled by uncertainty, so while BRI can’t fully eliminate the various risks businesses face, it can help organizations better anticipate and prepare for uncertain situations.
For instance, suppose an ecommerce retailer suffers considerable downtime as the result of a DDoS attack. In order to leverage BRI to prevent similar occurrences in the future, the retailer must first consider the impact of the attack across each category of business risk:
Financial Risk: No
The DDoS attacks had no effect on the business’s capital structure and thus did not impact its financial risk.
Compliance Risk: Yes
With GDPR now in effect, any organization that does business in the European Union must abide by its compliance requirements. Guaranteeing network availability is a crucial component of GDPR; as such, downtime as the result of a DDoS attack may lead to financial penalties, thus affecting a business’s bottom line.
Strategic Risk: Yes
The DDoS attacks did influence strategic risk because the retailer’s strategy is largely dictated by its e-commerce business model. Customers were unable to browse, shop, or make purchases on the retailer’s website during the DDoS attacks, thereby resulting in lost revenue. Since managing strategic risk should be seen as a long-term endeavor, this attack should indicate the need to invest in DDoS protection.
Reputational Risk: Yes
The DDoS attacks inconvenienced and upset customers who sought to access the retailer’s website during outages. Many such customers expressed their frustration on social media, attracting significant negative attention to the company, eroding consumer trust, and ultimately exacerbating revenue losses.
Operational Risk: Yes
The retailer was unprepared for the attacks and did not have adequate DDoS protection measures in place to protect its website from outages and resulting consequences. As such, the attacks did contribute to the retailer’s operational risk.
By evaluating each category of business risk in this context, the ecommerce retailer can make informed decisions pertaining to the direction and priorities of a BRI operation. In this case, the retailer’s BRI operation should focus primarily on addressing the potential compliance, strategic, reputational, and operational risks that could be posed by similar attacks in the future.
This type of exercise can help identify additional resources, stakeholders, or business functions that may be needed in the future to assess and manage risk. For instance, if the retailer learns another disruptive attack is imminent, a response based on business risk intelligence that encompasses business as well as cyber risk would mandate that network security teams as well as business leaders such as communications, legal, strategy, and finance be ready to respond.
This example reinforces a hallmark of BRI: because individual threats can affect all business functions across an enterprise, a BRI program must understand and account for the different categories of risk. And while even the most sophisticated BRI programs can’t fully eradicate business risk, they can reduce the uncertainty that fuels it through better anticipation and preparation.
Josh Lefkowitz is the Chief Executive Officer of Flashpoint, where he executes the company’s strategic vision to empower organizations with Business Risk Intelligence (BRI) derived from the Deep & Dark Web. He has worked extensively with authorities to track and analyze terrorist groups. Mr. Lefkowitz also served as a consultant to the FBI’s senior management team and worked for a top tier, global investment bank. Mr. Lefkowitz holds an MBA from Harvard University and a BA from Williams College.