What do we mean by a company standing still?
Time in risk management is complicated. The future can mean anything from tomorrow to 10 years away. Each person and each company probably has a different definition. And there are multiple layers to this making it quite complex. So why discuss it?
Until now, April 2020, there has been little evidence for the third layer of risk management. Little use for discussing, or contemplating, speed and velocity. However, there are cracks appearing in risk management and people are slowly becoming aware of Velocity and questioning it.
We know that things are changing, and we know and talk about Industry 4.0 and the next industrial revolution. We all have heard of Moore’s law and we all have a feeling that things are moving too fast. I want to present my thoughts on this and the effect on opportunity appetite and why it’s important for risk managers to understand and advise the board and the C-suit on these concepts. It will make the difference between leading edge companies and commodity players in the future.
Risk management – because the speed of change is faster than our comprehension of the consequences
Its why risk managers need to advise on the strategy of where you need to be and not where you are going.
The need for opportunity managers in Industry 4.0.
Overall, the speed of innovation is increasing at a rate never seen before. This would imply that the interconnectivity of risks and the complexity of risk is increasing. This can be graphically represented by the following.
There has been a 100-year gap between the previous 3 revolutions. With hindsight we can say that the step change these revolutions brought were significant but each time larger than the previous changes.
Graphically this means that the diameter of the cone is increasing with a certain velocity, and this is increase from previous years getting faster.
A company lacking innovation, or not changing fast enough, will ultimately be capturing a smaller part of this future than other companies.
There are naturally areas of innovation that make other generations of industry, equipment, solutions obsolete. The markets vanish. (51/4-inch floppy disks, DAT players, cathode ray tubes).
The gap between what we know and don’t know, (emerging risks, the future, innovation) is growing. This is the increasing size of uncertainty.
So how can a risk manager advise management on this concept? The changes, both risk and opportunity, the need to be flexible and dynamic, agile and robust and ensure the company risk appetite is moving with the velocity needed.
At plant level this need is quite small and insignificant as plants tend to make what they are being asked to make and that is their speciality. There are R&D departments within plants and within companies which can look at their areas of speciality and create very interesting innovative developments.
There is one thing that plants have which corporate does not. Lots of People! People have ideas, they have solutions, they see what is possible and not possible from the shop floor level. They interact with equipment manufacturers and suppliers. Capturing ideas is one of the key elements of companies focusing on the future and being innovative.
Even if each person had only one idea per year and only 1% of those ideas showed potential then clearly the potential is there to move the company forwards.
From a risk perspective, if you conduct a simple risk mapping, and include these ideas, you will see that over the period of say 12 months, the mapping will change.
At the company level there is a need to continuously improve and offer new products, new solutions etc and these will mostly be focused on the company’s area of speciality. If all companies in this niche market continued in the same way, then innovative breakthroughs would be rare and we would have only finer divisions and fine tuning of existing solutions but nothing really new. There are naturally companies who have diversified, or simply seen something new, and have developed these ideas in parallel with their existing product portfolio.
From an Enterprise view point there will be risks that also change with time. The risk view being typically from an external standpoint but also from an internal one. But each view will be based on the same benchmark or reference stick. Ie where you see the market and industry today.
Here time horizon would be one to three years. This means that some plants will be sold and others acquired. The products being made by each site will change and investments will be made, or not, making the age of the assets important.
But the world is also changing. Some companies come and others go. Some are at the leading edge and others make commodities. Looking at each company separately then this influence on the whole is relatively small. Its only when a massive global shock occurs that you can see the last layer. Where risk managers need to be thinking and advising.
As each individual enterprise makes up the plethora of business sectors, and each business sector forms the business world we call “ market” then you can see that its actually more than “the economy”, or “the market”. Lets call it “Matrix” for want a better word.
Each enterprise adds change, a direction, a velocity to this matrix. The ability to advise directors and boards on how fast this is moving and the opportunities that it can provide is what the risk managers role is. It will give direction to the company, help frame the company objectives, define a strategy.
Putting this into a more visual perspective. The future sector transformation into a smaller, more specific, set of products means that even though the company is still within the sphere of influence one plant is fighting to stay alive. Its product range is being phased out and it will need to review its cost structure to remain competitive. In fact, the whole company will need to conduct a 360° review as certain product lines are running the risk of being obsolete very soon. The plant with a more innovative focus is still able to capture markets and remain competitive.
The competitor, who was less innovative, already having issues with its traditional cost structure has now lost the complete market and was not able to change fast enough. It did not see the market transformation and assumed that its products would remain viable. Business as usual.
When you overlay the industry 4.0 graphic over the typical company risk profile graphic you see that it is crucial to capture the opportunities and innovation to move forwards.
The current pandemic has moved this timeline forwards globally rather than by individual companies making small changes. The influence of one company failing is not noticed in this matrix. When a sector is lost or moved you might not see that either. But today, with the current pandemic, you see the total change.
Each company should now conduct a 360° review on where its going and where it needs to be.
The key to staying in the transformed business sector of choice, or even being able to move from one sector to another, relies on flexibility, agility and having the business model to be able to take risk. One that is robust and resilient.
This means, for short periods of time, a company needs to go beyond its traditional risk appetite and tolerance level in order to capture new markets. Change its traditional business sector. Clearly this risk level needs to be managed but it needs a control framework that is flexible enough to allow change to take place. It implies that for short periods of time the audit function will be playing catch up as it tries to formulate the needed control structure to handle this changing world. Its here were the risk culture plays a significant role. If correctly setup then the ability to make informed decisions, that take the company forwards can be made without the strict adherence to ridged guidelines. The risk culture is what keeps people honest.
The risk of having to rigid a control framework is that it can hinder innovation and change. The opportunistic control framework will look different to the risk control framework and this needs to be taken into consideration.