Embroker Team February 20, 2024 6 min read

Risk Management Guide for Software Companies

From Amazon to Zoom, the world runs on software. And businesses from the corner pizza shop to your local bank are increasingly reliant on software to fuel every aspect of their operations to remain agile, productive, and competitive. Having a strong software risk management plan in place is paramount to the success of any business.

In this environment, your company’s software is expected to process more and more data, faster, under increasingly challenging circumstances including “zero-day attacks,” compliance regulations, and ballooning cloud solutions that live rent-free in your head (but not on your balance sheet).

Cybercrime attacks alone are growing exponentially, fueled by the lingering pandemic, global economic instability, persistent supply chain issues, and financial uncertainty. According to the FBI’s Internet Crime Complaint Center (IC3), losses due to Internet scams in 2021 totaled $6.9 billion. Chief among the crimes are:

  • Ransomware attacks. Encrypting files and demanding payment for the decryption key.
  • Cryptojacking. Using other people’s computers to mine crypto.
  • Supply chain attacks. Hacker groups target mostly resellers and technology service providers with malware.
  • Cloud attacks. Stealing data from cloud storage.

Compounding the problem are the increasing complexities of software engineering itself, as the working model evolves from small groups coding a project on a single server to multiple, distributed teams each contributing a tiny, but critical, piece of a whole. With so many moving parts, it’s not surprising that when the software fails, whether it’s an overlooked bug, a source code problem, a system failure, or a full-on data breach, the harm can be so deep, painful, and costly, that some companies never come back.

How to integrate software risk management into your SDLC

Woman stressed out after falling victim to cyber attack because she doesn't have a strong software risk management plan

If you’ve spent any time in software development, you know that launching a successful product means following a strict Software Development Life Cycle (SDLC) – a highly structured workflow containing six discrete phases (requirement analysis, planning, software design, software development, testing, and deployment). Similarly, the process of risk management for businesses includes distinct phrases designed to detect and manage risk.

The challenge with risk management for software companies isn’t that your team can’t follow an orderly process – or even that it may resist uncovering risk. Far from it! In fact, the difficulty lies in integrating a comprehensive risk management process into an existing SDLC while maintaining your budget, your deadline, and your employees. This article offers a multi-pronged risk management approach for software companies including a step-by-step guide to tailoring a risk assessment for your unique needs and an overview of the most appropriate tech insurance policies to protect your company against risk.

What is risk management for software companies?

Woman using pointer to point to list of software risk management ideas

While some common SDLCs, such as the waterfall method, use a linear approach, many larger software companies rely on the spiral model, which bakes risk management into every step. In the spiral method, engineers build a small prototype of the planned software over and over until its complete. Risk analysis is applied continuously throughout each life cycle.

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On the other hand, the spiral model can be expensive, time-consuming, and unwieldy. If your software company is a startup or in its growth phase, we recommend starting with a standard business risk management process and adapting it specifically for your company’s concerns.

As you can imagine, this scenario involves all the high-level stakeholders of the company. And though the executives will ultimately make the business decisions, it’s also a good idea to invite team members to provide feedback since they have day-to-day working knowledge of the product and may even identify blind spots the executive leadership team doesn’t know about. However, you compose this team, make sure you’re all on the same page about how to integrate risk management into each phase of your software development. Here’s what it might look like:

Identification. This is the standard first step of risk management, where potential problems and threats surface. Standard risks include everything that could impact your business—legal risks, environmental risks, market volatility, and employees. For a software company, you’re also looking at potential errors in the software that could harm users, privacy breaches that expose user data, system failures that cause companies using your software to lose money, ransomware attacks, cybersecurity threats, fraud, theft, and more.

Analysis. In this step, your team determines how serious each risk might be. A fundamental tool in this step is the SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats. For a software company, your strengths would most likely be your intellectual property, code, and even strategic relationships. Weaknesses might be the difficulty in hiring enough computer programmers. Opportunities might be new markets opening up or expanding your core operations. Threats include everything you identified in step 1.

Prioritize. As you’re ranking the risks and how much damage they could do, think about them both qualitatively and quantitively. Qualitative risks are subjective, of course, but it’s still important to discuss them openly. Qualitative risks could include the impact on your company’s directors and officers if the software causes problems. Quantitative risk assessments are more objective, but they’re still difficult to deal with because you’re assigning a monetary amount to the potential risk. It’s best to use a risk management ledger for this because you’ll be balancing a lot of risks and rewards.

Take action. You must decide how to eliminate, reduce, or minimize risks. For software companies, that could include services that protect your software, such as threat detection tools, cyber security products, and even antivirus software. In addition, implementing best practices across your engineering operations is crucial. Here are a few things to consider: 

  • Constantly monitoring APIs for mistakes
  • Hiring an outside team to try to attack your systems
  • Randomizing code layout, so it’s harder to attack

Monitor. You won’t be able to eliminate all risks. And certain things, such as the environment or the economy, can never be fully managed. In addition to some of the actions named above, remember to proactively nurture a harmonious company culture. That’ll go a long way toward eliminating certain kinds of risk, and it also evokes trust with your employees so they’re incentivized to report potential problems.

What insurance should I get for a software company?

Man presenting list of software risk management coverage types

If you’re an unfunded software company, your risks grow along with your business. If you don’t have VC backing, your company is even more at risk of an employee claim or an error in your technology. These are the policies you need to protect yourself, your employees, your executives, and your product. You can read more about each one on our software insurance and SaaS insurance guides.

  • Directors & Officers. D&O protects the assets of your board of directors from lawsuits.
  • Employment Practices Liability. EPLI provides coverage for claims of harassment, wrongful termination, retaliation, or discrimination made by employees.
  • Tech Errors and Omissions. Tech E&O protects against claims that allege damages arising from your software.
  • Cyber Liability. Cyber insurance covers both first and third-party financial losses resulting from data breaches and other cybercrimes.
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Not funded? No problem. Get the insurance your company needs to run smoothly.

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While cybercrime and other digital threats continue to plague the software industry, there are more resources than ever to help businesses understand their risks and safeguard against them. Among these, the FBI, the Cyber Security Intelligence, and the International Interdisciplinary Research Consortium on Cybercrime are all working harder than ever to investigate, share information, and enact security measures. Integrating a solid risk management plan into your software development cycle and protecting yourself with good insurance will put you on the safest possible path to success.

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