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Risk management – intelligent decision making in a complex world

Following a crisis like Covid-19, it’s easy to think that risk management is just a distraction: after all, it didn’t stop the virus did it? In truth, nothing could be further from the truth. Many, if not all, of governments’ actions during the pandemic have been driven by risk-based thinking, and particularly by the trade-offs that need to be made between individual risks. For instance, we have had to decide between the need to protect public health and the need to protect jobs and the economy. Ultimately, a false step in either area could have serious impacts on our overall well-being, both individually and as a society.

It’s at times like these, particularly, that risk management really matters.

Decision making and risk

Risk management helps us to understand and influence what might happen. It follows that risk management is really all about effective decision making. This requires both discipline and knowledge, it needs the right people to make each decision and at the right time.

Moreover, it needs reliable, complete, timely and accurate information, plus insight from different perspectives, together with an understanding of cognitive bias. Alternatives need to be identified and the potential for harm or for reward weighed up. Finally, decisions need to be communicated in a way that is easily understood and makes sense to recipients.

So, both at times of disruption and during ‘business as usual’ as well, it’s important to consider all the risks, and work to achieve the right balance between them. After all, nothing in life is entirely risk free. What matters most, though, is to take appropriate actions, keeping in mind that dealing with one risk might inadvertently impact on another.

Complexity and interconnections

Risk management often sounds quite mechanistic in nature. After all, it’s about ‘engineering’ solutions to easily discernible problems, isn’t it? Consider, for a moment, the firm that chooses to buy in new designs, rather than invest in its’ own research and development. Whilst saving money in the short term, such a strategy would ultimately damage its long-term growth opportunities. Life isn’t always simple...

Mechanistic approaches work well in situations with high stability and low complexity. However, they are less effective in today’s world, where global competition and new technologies make all organisations more complex and less predictable. Leaders need to acknowledge this inherent complexity.
As the physicist Fritjof Capra once said, “The more we study the major problems of our time, the more we come to realise that they cannot be understood in isolation. They are frequently interconnected and interdependent.”

All organisations, therefore, need to map and understand the interconnectedness of risk. Scenario planning can help, as well as simulation exercises to walk through how risks might unfold. Bow-tie analysis is also invaluable, helping executives to think beyond proximate causes to root causes, and beyond immediate impacts to potentially broader ones.

Enterprise-wide thinking

Organisations, therefore, cannot manage risks in isolation. They need an enterprise-wide view that recognises the interconnections between risks, which requires both a top-down approach that considers objectives and the risks to them, as well as a bottom-up approach that looks at the details of each risk. Good risk management brings together detailed risk quantification with creative thinking on risk and its potential impact.

Organisations need to see the intricate relationships of objectives, risks and the organisation’s own ecosystem. Business today operates in almost a world of chaos. In chaos theory, the “butterfly effect” means that something as simple as the flutter of a butterfly’s wings in the UK can create tiny changes in the atmosphere that may ultimately impact the development and path of a typhoon in Japan. A small event develops into what becomes a major issue.

Likewise, Apple’s iPhone may be designed in California, but it contains parts from Ireland, the Philippines, China, Japan, Austria, Thailand, and- eighteen other countries. Just think of the complexity in that supply chain.

The years of simplicity in business are long gone. Rapid growth in technology, geopolitics, social expectations, environmental awareness, legislation, globalisation, supply chain business data and more, have changed the world for us all. Keeping business strategy, risk management, complexity and change in step is therefore one of the great management issues of the day.

Find out more about the latest qualification from NEBOSH and IIRSM: NEBOSH IIRSM Certificate in Managing Risk.