Global Risk: Resilience & Interdependencies...

It's no surprise that spending will be up in 2007 on Operational Risk Management. In a recent AMR Research study, OPS Risk will increase dramatically:

The study reveals 46% of firms surveyed plan to implement or evaluate technologies for risk management in the next one to two years.

The emergence of risk management as a critical practice is based on the business need for global sourcing strategies, increasingly complex contract manufacturing relationships, and the greater number of natural and political events that can disrupt the supply chain, according to AMR.

Supplier failure and continuity of supply is the Number 1 risk factor for 28% of firms, the survey says. Events such as the Enron scandal, 9/11, health scares such as SARS and avian flu threats, the Asian tsunami and Hurricanes Katrina and Rita have forced companies to re-evaluate their preparations for catastrophes and unplanned events.

Other survey results include:

* 33% of firms have dedicated budget line items for supply chain risk management activities.

* 54% of firms plan to increase their budgets for risk management over the next 12 months.

* The top areas of application spending to support supply chain risk management are sales and operations planning, inventory optimization, business intelligence and supply chain visibility and event management applications.

After all, risk managers have figured out that a holistic Enterprise Risk Management approach with a firm discipline in Operational Risk is paying off. The strict focus on just compliance with SOX or Basel II is myopic.

Cristiana Báez-Safa, Managing Director in Marsh's FINPRO (Financial and Professional Services) Practice, noted: "Many large European financial institutions have changed the direction of their operational risk projects as often as two or three times since starting their compliance efforts."

"From simply taking a narrow view, 'what can I do to comply with Sarbanes-Oxley and Basel II?', for example, risk managers in the financial services sector are now asking themselves how they can help improve business process efficiency, reduce operating costs and mitigate the risks that concern the Board most."

She also indicated that "the longer-term trends in operational risk management are greater penetration and coordination of risk management across all facets of the business; more detailed scenario planning in key areas of potential exposure; and tailored risk transfer solutions for operational risk."

Local risks can become global risks depending on the severity and connectedness to other interdependencies. We have already witnessed the impact of such events as hurricanes on gas refining operations in the US Gulf Coast Region and the impact on transportation costs. Under regulation of sub-prime mortgages by the federal agencies may have a long-term effect on capital liquidity accross the globe.

And there are many others according to the World Economic Forum 2007 Global Risks Report, :

Economic
• Oil price shock/energy supply interruptions
• US current account deficit/fall in US$
• Chinese economic hard landing
• Fiscal crises caused by demographic shift
• Blow up in asset prices/excessive indebtedness

Environmental
• Climate change
• Loss of freshwater services
• Natural catastrophe: Tropical storms
• Natural catastrophe: Earthquakes
• Natural catastrophe: Inland flooding

Geopolitical
• International terrorism
• Proliferation of weapons of mass destruction (WMD)
• Interstate and civil wars
• Failed and failing states
• Transnational crime and corruption
• Retrenchment from globalization
• Middle East instability

Societal
• Pandemics
• Infectious diseases in the developing world
• Chronic disease in the developed world
• Liability regimes

Technological
• Breakdown of critical information infrastructure (CII)
• Emergence of risks associated with nanotechnology

These risks over the next ten years are the global in nature and have significant interdependencies. The breakdown of CII and Transnational Crime and Corruption are far more likely to occur than a Pandemic however not quite as costly in US loss exposure.

With all the talk about prioritization and upstream mitigation, how do you know that you spending your resources in the right place? When will the next incident occur? Finally, what interdependencies will come into play?

One approach is to improve resilience, allowing the system to cope with a range of unexpected manifestations. Such “downstream mitigation” recognizes that not all events can be predicted and prevented.

Enabling Global Business Resilience is the name of the game and those organizations who understand it and can implement effectively will be our next generations survivors.

operational risk