The Risk of Familiarity
The preservation of the status quo can create blind spots for you and your business. Commitment to situational awareness can be critical to organizations and vital to the area of risk. As situational awareness builds, a framework that supports the categorization of risk should be established to help address each according to its nature, magnitude and probability.
An excellent framework of risk categorization employed by the military to addresses counterinsurgency, known as VUCA, which stands for volatility, uncertainty, complexity and ambiguity, may be embraced or modified for your specific needs. As it is applied, risks become categorized and addressed in an appropriate and uniform manner, rather than in an ad hoc manner. Here’s a brief description of VUCA and what can be done to manage risks for each category.
Volatile Risks
Occurrences that can cease operations for unknown periods of time due to natural disasters or other occurrences that cannot be forecasted.
Mitigation Approach – Develop an actionable disaster recovery plan with executed contracts that are activated only in the event of an emergency. Include in the plan a designated chain of command and communication paths to executive management.
Uncertain Risks
These could possibly occur, and cause and effect are often understood. These include latent risks that could occur, such as failure of infrastructure assets, supply chains or competitor actions.
Mitigation Approach – Have a process for continual monitoring, analysis and validation. Conduct audits on maintenance records, physical condition, term of usage versus expected life, and audit key suppliers, and monitor competitor behavior. Build a model for financially and physically preserving assets, replacing vendors or reacting to competitors.
Complex Risks
These risks are extremely difficult to analyze and predict due to their inherent “cause and effect” nature. They can be internal or external in nature, and their mitigation cannot be done by addressing individual components, but must instead be addressed holistically and strategically.
Mitigation Approach – Create desktop scenarios and exercises regarding the cause and effect of each possible dynamic. Focus on logical responses under each scenario and quantify responses based on cost implications, market share, employee welfare, product quality and process efficiency.
Ambiguous Risk
These are the unknowns. Often these are the product of new business approaches, markets or other forms of organizational experiments.
Mitigation Approach – Before acting, make certain you have done whatever due diligence possible regarding potential risks associated with corporate experiments. Create an incremental approach regarding new markets and products to gain understanding of realities and associated risks.
As you categorize risks and build situational awareness, you can also help build organizational resilience. Your goal to develop the capability to respond rather than react to the risks that arise will be built into your process. As part of developing situational awareness, align the purpose of your organization with the functions it performs. Identify the critical functions you must excel in to thrive, and consider outsourcing non-core functions to reduce risks. By doing this you will help apply your focus and resources to your critical functions while building resilience. In the end, this can help increase organizational competitiveness and help eliminate what some consider the greatest risk of all – solvency.
