External Risks And Shocks – How Resilient Is Your Organisation?

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The fact that today’s businesses are global is not news, but the extent of the globalisation of trade and commerce – and the risks it presents – are far from understood. In an increasingly interdependent world, organisations are often on the frontline when it comes to systemic shocks, catastrophic events or unanticipated political upheaval. The recent Brexit referendum in the United Kingdom produced a far from united outcome, with global repercussions of uncertainty and risk.

Whether it is political and policy uncertainty, abrupt currency shifts, energy price shocks, cyber attacks, sudden changes in supply arrangements or unexpected staff absences due to pandemic health issues, there is an implicit demand that organisations are resilient to global risks. Organisations need to have the ability to anticipate, to adapt and recover from shocks, whether local or global in origin.

The resilience of any individual business depends heavily on the resilience of its suppliers and purchasers, particularly when those supply chains span many countries. From environmental to economic and political risks, companies are vulnerable even if they have no immediate presence in the geography where the risk arises. For example, following the Fukushima Daiichi nuclear disaster in 2011, although just three percent of total companies were directly affected, this figure increased to 50–60 percent for second-order companies and to 90 percent for third-order companies. After the Brexit referendum, UK companies immediately faced higher import costs as the pound sterling dropped in value against other currencies to a lower point than at any time during the global financial crisis. Workers also saw a corresponding reduction in their buying power for imported goods from Europe. It raises the question of how many organisations had or have plans in place for such an outcome.

Clearly, businesses need to strengthen their planning capacity to analyse complex and often uncertain interdependencies – even if the uncertainties seem unlikely – if they are to build resilience to external and global risks. In particular, scenario and emergency planning are essential attributes. To assess and evaluate an organisation’s resilience to global and other risks requires defining such risks in their most appropriate organisational context. It is important here to understand the qualitative distinctions among the types of risks that organisations face. Drawing on the work of Harvard Business School Professors Robert Kaplan and Annette Mikes, three types of risks need to be distinguished:

  1. Preventable risks, such as breakdowns in processes and human error
  2. Strategic risks, which are undertaken voluntarily after weighing them against the potential rewards
  3. External risks, which are beyond one’s capacity to influence or control

As noted by Kaplan and Mikes, the first two types of risk can generally be approached through traditional risk management methods, focusing mostly on organisational culture and strict compliance with regulatory, industry or institutional directives. Such approaches contribute to the overall resilience of an organisation. However, given the exogenous nature of external risks, cultivating resilience is the preferred approach for this last type of risk.

Two questions can help to categorise risk and to identify a way forward. First, how predictable is its likelihood and potential impact, and how much is known about how to deal with it? If it can be predicted and a lot is known about it, such as where it emanated, specific strategies can be identified to anticipate the risk, mitigate its effects and minimise losses. However, it is not as straightforward when risks are difficult to predict and/or where there is little knowledge about handling such risks. The lack of preparedness in the UK for a majority ‘leave’ outcome of the Brexit referendum is staggering and demonstrates the lack of foresight and lack of planning to maintain the resilience of commerce, trade, the community and government. It is a salutary lesson for all organisations to be resilient by having the ability to anticipate, to adapt and recover from local or global risks – in all their forms.

 

Dr Rita Parker is a consultant advisor to organisations seeking to increase their corporate and organisational resilience and crisis management ability. She is an adjunct lecturer at the University of New South Wales at the Australian Defence Force Academy campus where she lectures on resilience and non‑traditional challenges to security from non‑state actors and arising from non-human sources. Dr Parker is also a Distinguished Fellow at the Center for Infrastructure Protection at George Mason University Law School, Virginia, USA. She is a former senior advisor to Australian federal and state governments in the area of resilience and security. Dr Parker’s work and research has been published in peer‑reviewed journals and as chapters in books Australia, Malaysia, the United States, Singapore and Germany and presented and national and international conferences. Rita holds a PhD, MBA, Grad. Dip., BA, and a Security Risk Management Diploma.

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