The Research of Risk Management in Two Non-Independent IT System

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1 J. Sevice Science & Management, 00, 3, 8-85 doi:0.436/jssm Published Online June 00 ( 8 The Reseach of Risk Management in Two Non-Independent IT System Zhe in,, unfei Guo, Maosheng Lai * Depatment of Infomation Management, Peking Univesity, Beijing, China; Mathematics Depatment, anbian Univesity, anbian, China. yinzhe@ybu.edu.cn Received Mach 30 th, 00; evised Apil 30 th, 00; accepted May 3 st, 00. ABSTRACT Entepises use IT system in business secto/infomation management secto and poduction management secto on pupose of the opeation, which, of couse, is insepaable fom isk management. Two non-independent isk estimates functions ae hence founded in ode to eceive the infomation of isk easily, that is, the cash flow-based evaluation functions. Applying the logaithmic pobability-distibution function in the estimates function as well as giving an example by simulating, this essay has explained the affection of the uncetain factos to the entepise management such as the business teatment and so on. At last, it has commented the application of the estimates function in the isk management. Keywods: IT System, Non-Independent, Risk Management, Logaithmic Pobability-Distibution Function. Intoduction The ole of IT in business activities has been moe and moe impotant; besides, the amount of its investment is also inceasing. The key of opeating businesses moe effectively is to base on the opeating pinciples and to play the ole of IT systems. The application of IT systems can not only apply to business opeations and maintenance, but also to social sevices and business competition []. Japanese companies consulting fims Shigeu Inoue [] 000, poposed that the key of isk management is entepise isk quantification, so the intoduction of IT systems need to use the eoganization of business stuctues [3], and though the systematic of business pocesses to achieve business stategy and IT systems integation and quantification of oganic. UNISS Copoation Toshiaki Otsuka [4] also poposed isk management should go though the entie IT system development, testing and opeation cycle. When meeting a bad objective envionment, not only should we econstuct the system, but also give the isk management thoughout the system life cycle. In ode to cay out the isk management of the changes in the extenal envionment [5], this aticle deals only with a isk quantification, to detemine the pecentage of opeating losses, and to educe isk though infomation shaing. Fist, the cash flow-based evaluation function which can eflect the values of IT systems is embodied; and consideed the effects of IT investments and isk pediction of two non-independent IT systems such as knowledge management systems and intelligence pocessing systems. Knowledge management systems ae the IT systems of the opeational management levels, while intelligent pocessing systems fo of IT systems which ae fo the pupose of knowledge discovey, pesonalization-depth study of levels. This aticle gives the logaithmic pobability distibution function and poposes specific statistical methods of quantifying the isk. Ultimately, in ode to adapt to social changes in the extenal envionment, the application of the evaluation function in the isk management is also discussed.. The Role of Infomation Shaing As a manage of IT systems, thee is need to analyze business stategy and decision-making, and to detemine the system opeatos who will invest in IT systems and opeatos who can incease efficiency of the systems though the application of IT systems. The system esponsible fo CIO and the CEO positions of diffeent opeatos ae unlikely to adopt the same evaluation systems. In ode to fully shae infomation, using the same assessment system and the intoduction of discounted cash flow method [6] ae the pefeed methods of evaluation function. As the evaluation function, not only can Copyight 00 SciRes.

2 8 The Reseach of Risk Management in Two Non-Independent IT System it eflect thei own business pefomance, but also accuately can it eflect the isks to the business envionment. Theefoe, in ode to be pepaed to isk, it is also necessay to ventue into visual (though statistical tables and chats) besides quantifying, which can achieve a moe intuitive esult. 3. The Cash-Flow Consideed Evaluation Function In ode to show the effect of IT systems, we intoduce the evaluation function (the cumulative efficiency), which is composed of the IT investment costs, income and value-added. T F I { Cope( t) CR( t) t () CG( t)} f (, t) Opb Opi whee I: constuction costs of IT systems; Cope(t): maintenance costs of IT systems; CR(t): educed costs within the entepise; CG(t): inceased tunoves accoding to IT systems constuction; T: lifetime of IT system; Opb: added value of impoving the business envionment; Opi: eduction effect of business management isk; f (,) t : function of the cuent convesion efficiency ( = isk ate, t = time); The main idea of constucting evaluation function F is that the pofit is equal to the diffeence between input and income. Besides, the isk ate will change with the change of the time.so F is a dynamic function. and f(,) t ( ) t () When the pupose of IT investments in the maket is to impove the entepise s competitive edge, the system values is mainly in tems of inceasing the value of the amount of CG(t) and its business envionment the added value of Opb. And when fo the management puposes, the system pefomance in tems of cost eduction is in the amount of the value of CR(t). When in ode to impove the business envionment o to lay a good foundation fo business envionment, impoting IT systems to educe costs o impove entepise efficiency does not wok at all. The ole of IT systems can be changed as the business envionment to educe Opi (isk eduction) as its necessity. The value of Opb, Opi and t can be used as the efeence vaiable of the business envionment, which can be quantified by using options and othe methods. 4. An Empiical Analysis of Aisk Quantitative 4. Examples and Statistical Methods to Quantify the Risk Take medium-scale IT systems as an example, cost of the poject A has been shown in Table. Initial development costs ae million yuan, annual maintenance costs ae 50,000 yuan, the annual loss of initial cost is 30%, an annual incease of tunove is 0%, and value-added based on custome satisfaction is 00,000 yuan. Assuming that IT system life ae 7 yeas, the investment benefit evaluation function (expession ()) =.53 million yuan. Cost of the poject B is shown in Table. Thee is no poblem fom quantity to conside, then how much will the isks be? The isk of cumulative incemental value of opeating benefits (expession ()) can be expessed though the pobability distibution function, accoding to Paeto distibution theoy, cumulative incemental value of opeating benefits meets the log-nomal distibution. Suppose the best educed cost pe yea of poject A is 300,000 yuan, the minimum is 50,000 yuan, the maximum is 30,000 yuan, opeational efficiency expectations is 00,000 yuan, the standad deviation is 50,000 yuan; he best educed cost pe yea of poject B is 00,000 yuan, the minimum is 65,000 yuan, the maximum is 50,000 yuan, opeational efficiency expectations is 50,000 yuan, the standad deviation is 30,000 yuan, and the coelation coefficient of the two pojects = 0., the cumulative incemental value of opeating benefits meets the lognomal distibution. Table. Costing table of poject A Initial investment I million yuan maintenance costs s /yea Cope 50,000 yuan educed costs within the entepise /yea CR 300,000 yuan inceased tunoves accoding to IT systems constuction /yea CG 00,000 yuan isk ate (%) 5% added value of impoving the business envionment Opb Table. Costing table of poject B Initial investment Ⅱ maintenance costs s /yea Cope educed costs within the entepise /yea CR inceased tunoves accoding to IT systems constuction /yea CG 00,000 yuan 600,000 yuan 00,000 yuan 00,000 yuan 50,000 yuan isk ate (%) 4% added value of impoving the business envionment Opb 60,000 yuan Copyight 00 SciRes.

3 The Reseach of Risk Management in Two Non-Independent IT System 83 Accoding to expession (), the 7-yea total cumulative incement economic benefits of poject A is 60,30 yuan, 60,748 yuan and 77,80 yuan espectively when the educed cost of poject A is 50,000 yuan, 300,000 yuan and 30,000 yuan, espectively, and the coesponding natual logaithm, is, espectively,.79558,.7775 and The standad deviation of nomal distibution ln (5) =.600; the 7-yea total cumulative incement economic benefits of poject B is 5,54 yuan, 9,86 yuan and 6,43 yuan espectively when the educed cost of poject B is 65,000 yuan, 300,000 yuan and 30,000 yuan, espectively, and the coesponding natual logaithm, is ,. and.5348, espectively, The standad deviation of nomal distibution ln (3) =.00. The logaithmic of cumulative incemental of economic benefits of poject A in the inteval [.79558,.87545] meets the nomal distibution, and the logaithmic of cumulative incemental of economic benefits of poject B in the inteval [ ,.5348] also meets the nomal distibution. We need only to find the pobability of colo pat in (Figues and ). Fom px ( u) [( u) / ], u t / () u e dt We can obtain p( ) { p(.590)} { p (.87545)} { [( )/.6]} { [( )/.6]} { } { 0.958} = Similaly, we can obtain p( ) % We can see that the pobability that the logaithm of benefit evaluation function of poject A takes a negative value is 8.96%, that is, the pobability of investment losses is 8.96%; the pobability that the logaithm of benefit evaluation function of poject A takes a positive value is 9.04%, that is not difficult to find the pobability that investments can yield esults is 9.04%; the pobability that the logaithm of benefit evaluation function of poject B takes a negative value is 3.08%, that is, the pobability of investment losses is 3.08%; the pobability that the logaithm of benefit evaluation function of poject B takes a positive value is 86.9%, that is not difficult to find the pobability that investment can bea fuit is 86.9%. Pobability Pobability Logaithmic of cumulative incemental of economic benefits of poject A Figue. Nomal distibution of poject A Logaithmic of cumulative incemental of economic benefits of poject B Figue. Nomal distibution of poject B Finally, we poceed to study the isk of the two poject, that is the isk situation of. The two pojects A and B ae elevant, we can see that the pdf (pobability density function) of Z x e whee, ~ Na, b;, ; xab, Copyight 00 SciRes.

4 84 The Reseach of Risk Management in Two Non-Independent IT System p Z Poof Since, ~ Na, b;, ; p x, y x exp x a x ay b y b exp z a z ax z b x z b dz Let v xab and u za We can obtain that x Besides u exp du u u vu vu uv u v u v u uv u Let v v So p Z t u v v exp t x e dt Since v xa b and t e dt x e xab So E ( ) EE p( ) % 4. Result Analysis ou can see isks educe when the two pojects elevant negatively fom the above example, without consideing the effects of envionmental change, isk eduction OPi. Futue eseach should take Opi into account. In paticula, with the case of the ecent stock maket volatility of the situation, the impotance of isk management has eceived consideable attention. Risk management can be divided into the diect decision-making oppotunities fo isk management and indiect isk management whose pofit has nothing to do with diect one. Both ae closely linked into entepise efficiency and business. The pomotion of local management capacity can play though egional o global isk management into opeations activities. As long as we handle of elations between local inteests the global economic coectly, the objectives can be achieved by shaing esouces, educing isk, and the best opeation and management puposes. 5. Conclusions Investment in IT systems is the key to quantifying of the economic indicatos duing the application. Since the Copyight 00 SciRes.

5 The Reseach of Risk Management in Two Non-Independent IT System 85 top-down management style, is vey difficult to foecast the futue assessment of copoate efficiency, this pape pesents the loss pobability calculation method of isk quantification and easily shaing of isk infomation method. (Figue, Figue ) can play a function of pofit and loss evaluation of the effectiveness of visualization. Futue eseach pupose is the establishment of IT investsment and un-time system, eal-time investment evaluation system in ode to educe investment isks. REFERENCES [] R. L. Nolan and F. W. Mcfalan, Infomation Technology and the Boad of Diectos, Havad Business Review, Vol. 83, No. 0, 005, pp [] S. Inoue, Risk Management, Unisys Technology Review, Vol. 67, No. 6, 000, pp [3] J. F. Sowa and J. A. Zachman, Extending and Fomalizing the Famewok fo Infomation Systems Achitectue, IBM System Jounal, Vol. 3, No. 3, 99, pp [4] T. Otsuka, Softwae Testing Technology, Unisys Technology Review, Vol. 93, No. 8, 007, pp [5] J. Liu, Intoduction to Risk Management [M], China Financial Pess, Beijing, Septembe 005. [6] T. L. Patton, J. F. Wang tanslated, Entepise Risk Management\CFO Management & AMP; Poducts [M], China Renmin Univesity Pess, Beijing, 007. Copyight 00 SciRes.