Corporate risk: plan to be surprised

17/04/2018

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From a risk perspective, the past decade has been traumatic, from the global financial crisis to election shocks of tectonic proportions. Professor Daniel Ralph of Cambridge Judge says not to expect the next decade to be any better, instead – plan to be surprised.

Daniel Ralph, Academic Director of the Cambridge Centre for Risk Studies and Professor of Operations Management at Cambridge Judge Business School, gave a webinar on the management of corporate risk on 27 March. The event took a historical perspective of risky eras dating back to the 1640s, with an eye to making sense of the current situation. Professor Ralph shares his thoughts in this blog post:

Anyone in the risk business will look back at the last decade, to adapt an expression from Queen Elizabeth II, as a decas horribilis – set off by the global financial crisis of 2008, marked by civic resistance to state austerity – and punctuated by the Swine Flu pandemic of 2009 as well as natural catastrophes such as the 2011 tsunami in Japan that killed 26,000 people and triggered the Fukushima nuclear meltdown, and Hurricane Harvey in 2017, whose $90 billion in economic losses to Houston and surrounds is second in history to only Hurricane Katrina in New Orleans.

Not to forget the crash in oil prices, when the cost per barrel fell from a peak of $115 in June 2014 to less than $35 by February 2016, or the political surprises of Brexit and Donald Trump, followed by months of nuclear missile posturing between North Korea and the US.

Looking ahead to the next decade, 2018-2028, the optimist in me thinks “things can only get better” – to quote 1990s pop – but then the pessimist inside my brain says, “don’t count on it!”

While many experts believe that the past decade has been filled with more than its fair share of surprises, every period of time has its own challenges. I’m certainly not betting on a quiet decade to come.

The trends that stoke disruption, such as climate change and the rise of populism, aren’t going away – in some cases, their impacts may only intensify in the 2018-2028 period. Cyber threats are on the rise, and what is more uncertain from a risk perspective than the potential use of cyber as a weapon of crime and war? Still in their infancy, digital currencies and distributed ledgers may become highly disruptive either in the mainstream or as a subversive tool. The nexus of artificial intelligence and automation is especially fast-moving, with “The Fourth Industrial Revolution” already provoking fears over massive shifts in employment practices, with societal impact in every part of the connected global economy.

All of these changes pose the danger of a systemic shock, in which a local event can cause immediate knock-on and cascading effects – for instance, the 2011 Bangkok floods disrupted the global electronics industry for months by knocking out a large portion of the world’s production plants for computer hard drives. The floods also stunned the global insurance industry, which paid far more to compensate firms outside Thailand for lost production, due to supply chain disruption, than for physical damage in the country itself.

At the Cambridge Centre for Risk Studies, however, we preach neither prediction nor despair. Instead, we say, “plan to be surprised!” Companies and other organisations that take the time to understand their strengths and weaknesses can quantify risk and adopt appropriate strategies to maximise their resilience to crises. The starting point is to admit that just because your organisation hasn’t encountered a particular problem recently, if ever, doesn’t mean it’s not exposed to it.

A simple thought experiment is to look at your firm’s revenue: which types of threat, external and internal, pose the most concern to your firm’s receipts; which locations in the supply chain and consumer markets are exposed to the most revenue risk; and could you say, across all threats and locations, what is the chance of a shock that causes substantial revenue loss – perhaps 10 per cent or more – next year? A recipe for nightmares, maybe. But confronting all of your nightmares is the first step to building a breakwater to minimise the harm that may come your way.

A closing thought from the Cambridge Centre for Risk Studies: although it’s impossible to predict when your firm will next be surprised, it is possible to foresee the consequences of future shocks to your firm. The latter is about quantifying your firm’s exposure to “all” shocks over time. And by quantifying consequences, you can prioritise resilience measures that provide the best protection or enable rapid recovery – and change your outlook from horribilis to tractabilis.

Find out more

The 2018 Risk Summit, on Risks Beyond Boundaries, 20 June 2018 in London, is the annual meeting of the Cambridge Centre for Risk Studies.

Professor Daniel Ralph and Kishore Sengupta, Director of Executive Education at Cambridge Judge Business School, are among faculty who will be participating in an Executive Education programme on 15-17 October 2018, entitled “Leading Strategically through Risk & Uncertainty“.

To read more information, click here.

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