International Policy Digest

Business /26 Sep 2020

COVID-19 and Achieving Risk Agility

The COVID-19 pandemic has served to highlight many of the existing vulnerabilities in the international economic system – some of which were lurking just beneath the surface while others were obvious for all to see. It turns out that many businesses were already close to having to declare bankruptcy, some sectors of retail were already in the process of becoming irrelevant, and growing wealth inequality was already on the precipice of leading to civil disturbance in rich and poor countries alike.

COVID-19 essentially hit the “fast forward” button on emerging trends in a variety of sectors of national economies, hastening the demise of the shopping mall, laying bare how unnecessary being physically located in commercial workspaces is, and sounding the death knell for numerous 100+-year-old brands that had failed to adapt to the blistering pace of change in the digital economy. Failure to contemplate and embrace the future is leaving carnage in its wake.

The onslaught of dramatic change that has accompanied COVID-19 reminds us that fragile systems crack when exposed to unexpected events while antifragile systems have the ability to resist shocks. The organizations that will survive this pandemic flourish on uncertainty, chaos, and disruption.

To thrive, businesses must develop resilience toward antifragility, become more agile, and expand their horizons. Instinctive decision making is rare in all but a handful of large organizations. The instinctive leader makes decisions unafraid of course corrections. Intuitive leaders may weigh empirical data and consult with peers and colleagues in the process, but in the end, they rely on their sense of smell and gut feeling to guide their decision-making process.

There is no real secret regarding what makes a good forecaster — it is a combination of a natural curiosity about the world, being informed, having an opinion, combining it with insight and instinct, and correcting course as necessary. More and more organizational decisions fall into a domain where little reliable information is available, or where a decision needs to be made faster than information can be reliably sourced, and the consequences are entirely unpredictable. That is when relying on instinctive decision making is really the only option.

No one — no matter how experienced — can know or anticipate precisely when a problem will arise. This is particularly true in the era of man-made risk. All we can do is make educated guesses based on what history teaches us and integrate what we have learned in the process. In the end, the ability to anticipate what the future will bring, using a combination of knowledge, insight, and a healthy sixth sense, can make all the difference. Listening to your gut and sense of smell are as important as all the other tools at one’s disposal. Good leaders know when to follow their instincts.

Risk agility implies the ability to master risk management, decision making under opacity, and a level of simplicity in the face of complex, heavily interconnected systems. Agility implies nimbleness, speed, and an intellectual acuity that often betray large complex organizations. The defining attribute of an agile enterprise is the ability to align all resources to enterprise-dependent decisions. Even in the best of cases, decisions are often made applying the 80-20 rule or other maxims that justify “permitted” uncertainty in boardrooms, executive committees, and government.

In a risk-ready firm, it is everyone’s business to remain in business, which requires a flat risk-response structure that leverages multidisciplinary risk management approaches.

Many risk management approaches unfortunately impose far too much complexity on organizations, making them a source of risk amplification rather than a source of risk abatement. Simplicity is a key attribute of an agile risk management framework. Some of the most enduring ways to avoid losses merely outline proscribed activities, as opposed to delineating every possible situational response. Greater simplicity is needed in risk management – and in decision-making systems – in order to be able to pivot quickly when necessary.

An inherent weakness of traditional risk management frameworks is that they may hamper agility by relying on historical data to drive decision making. The challenge of taking this approach is that it is not very effective against unprecedented, emerging, or never before seen threats. Despite all the rigor of statistical methods for many risk domains, such as cyber and reputation risk, the data set may be shallow and largely unreported. The omerta that follows a potentially embarrassing cyber risk or reputational exposure hampers the ability to fully understand the scope and the forces shaping these risk domains.

Risk agility and instinctive decision making are not about fearing the future but about respecting the speed with which things can fall apart as a result of unforeseen or unexpected events. Agile enterprises are transparent, trustworthy, entrepreneurial, and, above all, risk-takers. Those firms that embrace risk agility will be able to quickly reinvent themselves and establish frameworks and a company culture that recognizes when the enterprise is imperiled by a particular internal course of action, or by external forces.

This pandemic has demanded more from most of us than many of us ever imagined possible – a combination of supreme defensiveness, endurance, robustness, an ability to pivot quickly all at the same time, while remaining oriented toward an increasingly uncertain future. Many companies have already disappeared from the landscape this year, and many more will unfortunately do the same in the months and possibly years to come as a result of COVID-19. Achieving risk agility and relying on instinctive decision making will enable many firms to survive and perhaps even thrive. Will yours be one of them?

This article was originally posted in The Business Times of Singapore.