Harvard Business Review: Complex Risk Management
Friday, 15 April, 2011 Leave a comment
I wouldn’t want anyone to get too excited and think that I have added Italian to my extensive repertoire of (one) language! I have to thank one of my colleagues at Ontonix for the translation of this article from Harvard Business Review, Italy. The author – whose Linkedin profile can be accessed from the link in his name (below) – is not a member of the Ontonix team but is extremely well qualified to put forward an informed opinion.
Supply Chain and Systemic risk
The article is not, exclusively, about Japan or Supply Chains. Nor is it about just about Ontonix but it IS about gaining some understanding of complexity: what it is; why it cannot be detected by conventional risk management; how it can impact and why ignorance can’t really be an excuse.
I have written numerous blogs and several articles on the frailty of, in particular, Global Supply Chains. With very good reason. Thankfully, not every event, like that which struck Japan last month, causes such vast devastation and loss of life. But many natural disasters and, increasingly, the man-made variety pose a huge threat to businesses that are already struggling to deal with a turbulent global economy and have “lean” business models that assume the greatest threat(s) to their success come from risks that they have encountered before so can (in theory) prepare for…
The tsunami of 11 March has brought to its knees, among many others, a factory in Onahama, on the east coast disaster in Japan. The factory is unique in the world to produce Xirallic, a pigment patented by Merck, which enters the pearly colours of many vehicles. Ford, Chrysler and slowly others are delaying deliveries of expensive SUVs, and since the restoration of production is not expected before June, the damage for many brands, both directly and indirectly to image, will not be negligible. A friend of mine in Milan has already beaten his order, one week old, a luxurious Jeep Grand Cherokee 2011. So here we go again: the butterfly flapping its wings in the Amazon and causes a tornado in Texas … We all understand very well that, with the advent of digital technologies and globalization, the world is becoming increasingly complex. (We discussed also in this same forum: http://alturl.com/89kx8). The environment surrounding our company is full of risks also much more subtle, less controllable, and higher than that of Xirallic.
What to do?
In a context of complex, interrelated and therefore tend to be unstable, the risk monitoring relies on more sophisticated techniques than traditional approaches that rest on a type of “divide et impera: estimate this risk, then I estimate that one, then adds them together … In ‘ current environment, many risks and influence one another in a growing number of cases, it becomes increasingly difficult to make use linear simplifications in which systemic risk is the sum total of the primary risks. The results in illusory are lurking, like a medical check-up that defines a perfectly healthy patient who turns out to terminally ill after a week. This happens in medicine (a domain known to be very complex) and now is increasingly the case in economics, including micro. We require holistic, integrated risk monitoring. The modern world continues to require us to analytical faculties, to break down problems into their constituent factors, but it also requires a system to comprehensively assess (from the Latin “complector” encompass, understand, unite under the same name) and anticipate emergent behaviours, namely those that occur without the conduct of the individual components of the system can foresee.This is a challenge that will require decades of development and science and technology. But that does not mean that in the meantime we are condemned to only indolence or talk. A tool for monitoring the overall risk that attracted me since its introduction is Ontonix software, developed by the homonymous company – which, mind you, I have no involvement, if not admiration for the genius of its founder, Jacek Marczyk.
What I like about Ontonix, whose approach also do not subscribe to 100% because I have subdued some methodological reservations, it is the pragmatic and quantity. Ontonix not “talk” of complexity, but the measure based on a conceptual framework in which it is seen as an intrinsic property of systems, such as temperature or pressure. The physical quantities, said Ontonix, scientific dignity when they become fully measurable. Epistemological objections can be raised concerning the definition of complexity and other methods concerning the algorithmic approach to the measure. But who cares about the hair in the egg, if he is offered an inexpensive tool that can provide, with an organizational effort surprisingly small and simple user interface, an assessment of the systemic risk of his business? That’s because I recognize in Ontonix breakthrough organizational status and the right to act as a first measure of “stability” rating “of a company.
This is not a software platform that can replace the “Enterprise Governance, Risk and Compliance” such as the Open Pages, Metric Stream, BWIs, Mega, Oracle or SAP, are able to link risk management to performance. Neither will be for decades to come, only one software to solve all issues relating to the systemic risk of a company immersed in today’s environment. However one has to start somewhere, right?
…financial meltdown, Geo-political unrest, terrorist attacks, floods, earthquakes, volcanoes, radiation, oil spills, toxic leaks, etc. THESE are the kind of unpredictable events that have made our world a much less certain place at a time when the inter-connectedness that brought us efficiency and wealth serves as the conduit for the “aftershocks” of events that, if you were lucky enough, were once so far removed as to have little or no impact upon you, your family, business or community. THAT IS NO LONGER THE CASE and such unpredictability can wreck carefully constructed financial forecasts with those who fail to identify where their vulnerabilities lie and DON’T build-in redundancy can fail, collapse and disappear, spreading and accelerating the impact of the initial event.
Black Swans ARE a huge danger but so are “blind spots”. One may not be a matter of Corporate Governance the other most certainly will, increasingly, be so.
I am sorry to say that, quite apart from the threat from damaged nuclear reactors, the full extent of the disaster in Japan has not been felt by our global economy. No-one can put a price on the human suffering. The insurance costs from property damage will be enormous but the insured costs of business interruption to companies across the planet could, on its own, top £ 7bn and the fallout will destroy companies burdened with high debt levels, heaping further pain those businesses, people and nations who are reliant upon them for their own survival.