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Why Operational Silos Lead to Risk Management Problems

Operational Silos create operational holes for risks to overtake an otherwise successful organization.

Operational silos facilitate efficient processing of business concerns. In many ways, they appear to be an intelligent solution. But experienced managers and CFOs warn against operational silos for risk management. These operational silos can lead to a multitude of other problems from inadvertently missing big-picture risk management to duplicating risk management efforts. 

Without shared information and coordinated risk management, businesses risk everything from financial troubles and client loss to severe legal implications. Here are the points you need to convince other managers and superiors that risk management silos are often perilous for long-term business success.

How Risk Management Silos Work

To understand the problem with risk management silos, we need to understand the basic structure. Like agricultural silos holding grain in isolated towers, it is not uncommon for businesses to create specialized silos. This allows departments the depth and functionality for improved efficiency and broad-spectrum growth.

For example, the finance department will focus on credit, billing, interest, cash flow and liquidity risks. The information department will deal with security threats and privacy concerns. And customer service will deal directly with the end customer. 

In theory, this makes sense. The experts for each area are able to better detect the relevant risks. But this has two points of weakness, and when it breaks down, the consequences are disastrous. 

Risk Management Issues in Operational Silos

The two greatest points of weakness in operational silos are the lack of information sharing between departments regarding common threats, and the lack of big-picture overview.

Too Much Autonomy

In the silo model of risk management, each department will focus on localized threats. The finance department might note a cash flow issue, but not look at how that will affect the information department and their contractor network.

Likewise, the information department might detect a security threat that is not adequately conveyed to finance or customer service. This privacy risk can become a financial risk or litigation risk if left unchecked. 

In the worst-case scenario, in addition to a lack of communication between operational silos, each department might choose a different or contradictory approach to risk management. This leads to gaaps in the risk management, lack of a unified and systematic risk analysis, and slow response to system-wide risks. 

Lack of Big Picture Overview

When there is no comprehensive overview of risk management, information is not adequately shared over organizational boundaries, and major threats can go undetected. While each department might efficiently detect isolated risks, the big-picture implications of these risks for the company can go undetected.

Example 1: Customer Service Fallout

A company might decide to consolidate distribution and cut costs through concentrated distribution centers. At the same time, the product development team is launching several new products. As a result of these simultaneous, uncoordinated events, there will probably be delays in billing and order delivery. 

The end result is excessive pressure across customer service, product development and distribution, along with unhappy customers. In the case of publicly-traded companies it can lead to loss in stock value and public fallout as well. 

In this example, coordination between departments and assessment of the risk of the consolidation time of the distribution center could mitigate the problem.

Example 2: Security Threats

In this case, the information department notices a security threat related to the billing department. They isolate and fix the problem, while informing the finance department of the mitigated risk. However, they fail to detect similar threats that are already compromising the management software of the product line and exposing client data. 

In this case, the lack of company-wide coordination leads not only to delays and the inability to fulfill orders in a timely fashion, but also unhappy customers along with the possibility of litigation over data exposure. 

Solutions to Risk Management Problems in Operational Silos

In order to mitigate risks associated with operational silos there are two steps that companies can take:

  1. Standardize policies, reporting, and overview practices.
  2. Implementation coordination across departments and through workflows.  

By standardizing reporting practices and risk assessment, the company verifies the systematic overview of risk by department and silo. This eliminates the possibility for different forms of risk assessment and functional deficits in risk assessment.

By implementing inter-department coordination, bridges are created between the silos, further securing big-picture assessment. There needs to be a process in place to report critical risks to the CEO, CFO or other decision makers in a timely fashion, and for those risks to be conveyed to all departments. 

In Summary

Operational Silos create operational holes for risks to overtake an otherwise successful organization. The risks are not only from outside the company, but also through its internal functioning. Through coordination, oversight, and standardized risk management practices, an organization can effectively mitigate risk at every stage for sustained growth. 

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