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RISKY BUSINESS

‘That which is necessary is never risk ’

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By Joseph Cervenak

Jean-François-Paul de Gondi, cardinal de Retz, a French churchman, writer of memoirs and agitator in the French civil wars, in this 17th century statement, likely used the words, ‘necessary’ and ‘risk’ as comfort words to describe events or situations that could cause harm. 

In the context of our businesses, ‘necessary’ suggests that which we must do to advance the business; and ‘risk’ suggests identifying an exposure to danger, harm or loss.

 Alternatively, and loosely defined, ‘risk’ is the chance of an occurrence or a situation of uncertainty that would cause harm to a business. And in the strictest sense business harm is the interruption or stoppage of goods, processes or services. A Tom Peters favourite: “There is no stasis [in business].”

Event probability, statistical probabilities and actuarial calculations aside, business practitioners face the reality (or imagine the likelihood) of an exclusive yet catastrophic event taking place. Recall the 2005 and 2007 Category 5 hurricanes that challenged the Caribbean, especially those in 2007 which had more than one landfall.

Catastrophic

History is well punctuated by a timeline of catastrophic events. Had we been around 4 billion years ago, according to the BBC’s Late Heavy Bombardment (LHB) web postings, we would have enjoyed “intense comet and asteroid bombardment”. Those would definitely cause our business harm.

Considering this history, as prudent business people we likely prepared or were required to create a business plan. Among the many subjects included was a plan for marketing, finance, operations and risk management, all foundational elements. And, to protect against damages from liability judgments, property and casualty claims and losses from business interruption, there was a comprehensive insurance contract.

So far we followed the cardinal’s tenet and the necessary was done and no risk taken.

However – and a terrifying ‘however’ it is – did we adequately protect our businesses from harm? In addition to LHB and Category 5 hurricane catastrophes, from where or how else do we have exposure to harm, read: risk?

In forming the answer, consider the following: since before the turn of this century, with the technology of virtual communications, we have been live witnesses to many of the following catastrophic events:

•911 terrorist attack in USA changes the world; 

•Japan’s earthquake and subsequent nuclear disaster nearly scuttles the country; 

•Haiti’s 7.0 Mw earthquake leaves 200,000 dead; 

•Iceland’s Eyjafjallajökull volcanic explosion disrupts air travel in 20 countries and covers much of western and northern Europe with ash; 

•32 persons die in the Costa Concordia disaster;

•Wildfires in the USA destroy over eight million acres of forests;

•Rivers Elbe and Danube flood, devastating areas of southern Germany, the Czech Republic, Slovakia and Hungary; 

•Savar Rana Plaza in Bangladesh collapses, killing more than 1,100 persons; 

•Snowstorms and hurricane Sandy paralyse the northeastern USA;

•Earthquake in northern Italy destroys medieval buildings and leaves thousands homeless;

•India’s power disruption, the world’s biggest blackout, affects 620 million people. 

More?

Consider political unrest in the Philippines, Argentina, Iraq, Darfur, Ukraine, Miramar, Iran, Bangkok, Libya, Greece, Spain, Turkey, Egypt – the list goes on. Pick a country.

Again the question: ‘Did we adequately protect our businesses from harm?’ Loss of life is immeasurable, but property and business loss is quantifiable. During the first three months of 2013 the Australian flood damage was estimated at US$ 2.5 billion; Jakarta flood damage at US$3 billion; agriculture damage and tourist curtailment due to a cold spell in Europe at US$ 1.8 billion; drought in China at US$ 1.7 billion, and losses from the Moore, Oklahoma, F4-F5 super-tornado are likely to exceed the damage from Hurricane Katrina, the single largest natural disaster in US history. 

Diligence

The noise of headlines, blogs, Facebook postings, Tweets, podcasts, newscasts, surveys, business and non-business writings, reports, commentaries and factoids of catastrophic events seems unending. Are we witnessing Armageddon? Is the only sane thing to do is to go to bed, cover our heads and wrap up in a blanket?

The answer is an unequivocal ‘no’. Instead, we practise due diligence and contract for insurance policies. On a cautionary note, however, many policies are not all-risk. Often there are depreciation, exclusions (force majeure and civil disturbance) and deductibles. Reading the fine print is a must.

Have we done the necessary? Considering that we live in a globalised and integrated world with a ‘misfortune history’, a macro observation suggests the likelihood is that an event in the not-too-distant future will disrupt a company’s ability to operate. This begs the question, where do we focus our concerns for a probable event? On scales of magnitude? For example, should we prepare, if preparation is possible, for a predictable, small risk, high consequence event such as a volcanic eruption? Or do we prepare for the metaphorical ‘black swan outlier’ event such as the 2001 World Trade Centre attack? There is no simple answer.

As we are in an inherently risk-sensitive world, we need a protective hedge against a broad spectrum of risk exposures. But where? In its survey, ‘The Ripple Effect’, Deloitte Consulting LLP claims it has identified and documented over 200 sources of significant supply chain risk – remarkably, only supply chain risk.

There is an encouraging ‘however’. All is neither hopeless nor apocalyptic if we do the necessary. If we’ve taken on a defensive, robust, holistic and ongoing risk management practice, we are doing the necessary. 

Disruptions will always exist and many events will be undeniably out of our control. However, we do have control over our ability to act on the imperative to resume business as quickly as possible and with strategic intent. There can be no stasis in business. Ours is to create, review, update and rehearse a strategic plan for resuming business. Then we can embrace these disruptions with their ambiguities and uncertainties knowing that not all is as difficult as imagined.

Notably, we can follow one of two recovery paths: either laissez-faire, wait and see what happens; or a pro-action, don’t wait, make it happen path.

In his 2008 book `The Spider’s Strategy – Creating Networks to Avert Crisis, Create Change and Really Get Ahead`, Amit S. Mukherjee devotes a chapter examining the dissimilar paths taken by the brands Nokia and Ericsson respectively in their quest for RF chips. In 2000 a 10-minute fire at its main supplier Royal Philips Electronics’s plant in Albuquerque, New Mexico, severely impacted its product lines. In addition, there is the choice for the re-entry process to be a ‘first to market’ or a ‘fast follower’ to decide the re-entry strategy. Each has merit and both have inherent risk. 

Consider, first to market submits to Voltaire’s precept, ‘Don’t let the perfect be the enemy of the good’. Imperfectly resuming business quickly trumps perfection. When you have the advantage, go on the offence. You may preempt or even destroy the competition: recall Nokia’s success.

‘Fast follower’ strategy is illustrated by Toyota’s success in the ‘go green’ automotive world of hybrids and its Prius brand. The ‘first to market’ or ‘early adopters’ as described by Patrick J. Howie in ‘The Evolution of Revolutions – How We Create, Shape and React to Change’, offers that ‘early adopters’ attempted to incorporate ‘incompatible priorities’ of fuel efficiency and power into their autos. Toyota saw these ‘first to market’ competitors have these incompatibility problems and in turn followed with the Prius as a “small, lightweight car with limited horsepower and torque to maximise fuel efficiency”. Thus, Prius became ‘the most popular hybrid’.

A laissez-faire ‘wait and see what happens’ or a pro-action ‘don’t wait, make it happen’ path, as well as ‘first to market’ or ‘fast follower’ strategies, are all serious considerations.

Whatever our risk management strategic plan, we need to accept that we are in risky businesses and disruptive events will continue throughout our lifetimes. Businesses will be interrupted and acceptance of risk is implicit to forming a risk strategy. A re-entry strategy forces the choice of options with speed as the accelerant. All businesses are risky business. And the timing of and degree of risk to take on is not always clear. Sagely as usual, Warren Buffet offers, perhaps, some solace: “You don’t know how much risk you have taken until you have taken too much.” 

Joseph Cervenak is Managing Principal of Kemper-Joseph LLC. www.kemperjoseph.com

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