The relationship ‘risk’ has with strategy is manifold:
- Has it been factored in?
- What is the risk our strategy will be blown off course?
- How much risk can the organisation tolerate?
- How do we calculate all the risks that we face?
Your average Risk Assessment is not going to be robust enough to answer these questions. We live in a VUCAH world:
- Volatile
- Uncertain
- Chaotic
- Ambiguous
The strategic plan that took two years of committee meetings, arguments between finance and…well, everybody….and several rewrites, is already out of date by the time it has been manoeuvered onto the launch pad.
An individual’s perception of risk is a complicated cocktail of millions of years of evolution, a few decades of experience and this morning’s hormone levels. We think in terms of ‘probable’, ‘maybe’, ‘OK-ish’ – not numbers. Put that through the brains of several dozen people and ask them to translate it into a strategic plan and it is no wonder risk doesn’t usually make the cut. It simply can’t be worked out to the satisfaction of the senior management team (especially when they have to get it past the board).
That, however, is not a valid excuse.
The rapid changes in technology, environment and operational functions brought about by globalisation means that organisational decision makers are increasingly facing unfamiliar and complex problems which require solutions at an ever faster rate. The choices made all contain risks to a greater or lesser degree – risks of failure, of unforeseen consequences, of discovery by competitors or even regulators.
The appetite for, the tolerance of and the response to risk is something that needs to permeate the entire organisation in a consistent way. What risk is and what the response to it needs to be clearly understood so it becomes an integral part of decision making at every level – part of the organisation’s culture.
There is a relationship between the tolerance an organisation has for risk, the appetite its senior managers have for risks and the long term performance of the organisation. The better managed the ‘Risk Universe’ is, the more likely the organisation is not just going to survive, but also to thrive. (The Institute of Risk Management (2011). Risk Appetite and Tolerance Guidance Paper. London.)
In this ‘VUCAH’ world, that is more important than ever before.
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