Responding to risk involves many actions

When people talk about “managing risk” they often list individual “risks” and then choose an action to deal with each one. However, this approach is often too simple, and misses subtleties. That’s probably because what people call a risk is often an event which is much too narrowly defined, and hence the solution (the action) targets something which is unlikely to happen in reality, even if something related might.

I recently came across a useful perspective on this illustrated by Carolyn Fairbairn, Director General of the CBI. She was on the BBC’s Newsnight discussing Brexit (a rich source of material for those of us interested in risk and uncertainty) and in particular the possibility that the UK government would be unable to strike a sufficiently advantageous deal with the rest of the EU. This is the “no deal” scenario. And she described well what it means for businesses to act in the face of this uncertainty:

I think firms are preparing for the possibility of a No Deal […] They have prepared contingency plans. Some of them have pressed a few buttons, but what a number of them say to me is it’s not one button, it’s button every few weeks as they adjust to the new assessment of the risk.

Brexit is a particularly large uncertainty, and it warrants a proportionate response from large companies. But it’s a good example of changing the system to respond to uncertainty. In this case companies are saying “We don’t know what’s going to happen; we do know we might lose any advantages we may have in being part of the EU; therefore we will reshape our operations to not assume the current free conduit between the UK and the EU27.”

This shows how handling uncertainty is tackled well in a more holisitc manner, by changing the way the game is played. We need to step back, assess the situation more broadly and continuously, and act accordingly—looking to take multiple actions rather than looking for one action that will solve everything.

Photo by Dennis Skley