An Effective Risk Identification Framework
Risk is a hot topic for anyone looking to make sure their business survives. Risk (or failure to appreciate it) was at the heart of many a crisis and there are plenty of examples out there.
We can either look forward or backward. My view is that looking backward is for learning, whilst looking forward is
about preventing, mitigating or controlling. Whilst looking backward may help in deciding
what went wrong and what decisions contributed to this (and that can take a long time), we need to learn from past
mistakes and make sure that they never happen again, or at least the chances of
this are much lower.
Where to start? The
first thing to realise is that, unlike the last major recession, global markets
(both financial and non-financial) are much more closely interlinked thanks to
a variety of factors. With new financial
products and stock management techniques (e.g. “Just-In-Time” delivery and
“Business Process Outsourcing”), a whole new world of risk has opened up, and
we have been managing it using “old world” methods.
Risk management lies at different levels: the macro level (the "global" view), the industry level
(how your industry operates) and the internal level (how your organisation does things and its relative strengths and
weaknesses). These can combine in any
shape or form to cause a crisis. The
trap into which we so often fall is that we overestimate our knowledge of what
may happen as we don’t like to admit that we can’t be 100% sure all of the
time.
As a result, one sees “Black Swan” events from time to
time. Nassim Nicolas Taleb describes a
“Black Swan” event as “a low probability, high impact event that is impossible
to forecast or predict”. He goes on to
say that “we currently live in a world of opacity where knowledge is
overestimated and chance and uncertainty are underestimated.” In other words, we think we know it all, but
we don’t, and it’s no use pretending otherwise. This is the trap into which the banks fell...
This is no excuse for not attempting to manage what one
can. A great place to start is by using
well-known strategic review tools in the shape of “Macro Analysis”, industry
analysis and internal analysis and applying them to your own organisation.
Macro analysis
looks at the “global” scene on a political, economic, social/technological/
demographic, legal and environmental level.
From this, you build up a view of where world events beyond your control
may impact your organisation.
Industry analysis
looks at factors within the sector in which your organisation operates. These will give you an overview of your industry
and where potential problems may lurk.
The internal review
of your organisation looks to determine what your organisation does better or
worse than the competition. It links
this to the macro conditions that will either improve or harm your
organisation’s competitive position or profitability (or both). It will also look at how you do things and where the pitfalls may lurk.
For example, a UK-based manufacturer of goods imports
materials and parts from a number of countries including France, China, India
and Japan. They convert these parts and
materials into finished goods (say cars) and sell them locally and overseas,
and bill buyers in pounds sterling.
Some possible risks in this scenario are:
·
Tougher legislation on carbon emissions reducing
the market for the type of vehicle currently manufactured;
·
An increase in cost of parts/materials through
currency appreciation in the supplier’s country and/or shortage of commodities;
·
Higher import duties on UK-produced cars in
buyer countries;
·
Failure of a major supplier; increased costs of
shipping parts/materials to the UK;
·
Threat of competitors’ product winning market
share;
·
Trade barriers arising from diplomatic tensions
between the UK and other countries;
·
Risk of production line errors due to
insufficiently-trained staff resulting in recalls and damage to reputation.
There are more, and management’s job is to identify what
they are, the likelihood of their happening, and what they can do about them. This process is described as “looking at the
horizon” to see what may happen so that action can be taken. A useful analogy is driving a car: you look
ahead to see what the traffic is doing as well as close around and behind you
so that you can see what risks there are and avoid them if you can. Despite this, remember that you don’t always see the accident coming…
I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services. For strategic questions that you should be asking yourself, follow me at @wkm610.
Labels: Crisis Management, Productivity, Risk, Strategy
posted by William Martin @ 17:49
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