Risk management
As well as reconsidering their operations in Russia, many businesses are rethinking their supply chains, particularly if they are over-reliant on single sources, principally manufacturing locations in China. “Even before Russia’s invasion of Ukraine, underlying macrotrends such as technology and resource nationalism, the redrawing of supply chains, concerns over the US and China decoupling, and broader deglobalisation forces were putting into question cost- benefit analyses of investing into China,” says Ilardo. “Now, the many ambiguities of Beijing’s stance with Moscow are building on these pre-existing concerns and increasing investor hesitancy.”
“A similar crisis concerning China would not only see
Western governments pursuing punitive actions,” he continues. “Companies would feel strong pressures to follow suit, thus accelerating the decoupling that many of them had so far tried to limit. Russia’s invasion of Ukraine may become an important precedent to understanding and anticipating emerging risks in the rapidly shifting geopolitical landscape.” Nevertheless, Ilardo believes that businesses have,
so far, dealt well with the short-term impact of the war. “Global businesses are showing good resilience capabilities in face of some of the indirect economic implications of Western sanctions against Russia such as supply chain disruptions, commodity shocks, and fragile confidence,” he says. “In part this is due to the experience of the pandemic and its relative proximity to this crisis. This experience broadened risk managers’ strategic perspective beyond more immediate and specific threats.”
Rethinking risk management The aftermath of Covid and the impact of the war in Ukraine are causing risk managers to reconsider not only the kind of risks they include in their analyses, but also how to create the flexibility to deal with the unforeseen and unexpected.
“They need the agility to respond quickly to change,” says Andersen. “Regulatory requirements come out of a control-based mindset that can’t handle the uncertainties that come upon us. We need other approaches to foster resilient adaptation.” “Global value chains have been managed to optimise through outsourcing to access lower factor cost, so business leaders have had a tendency to look at short- term economic gains, often at the cost of reduction in flexibility,” he adds. “So, when the systems are rocked they don’t work well.”
The standard approach means outliers are included in the risk profile but, while acknowledged, are not met with a concrete plan.
“Risks are put on the radar but no measures put in place because future events are considered unlikely,” Andersen continues. “So, companies often deal with short-term operational things they can observe, but recording thousands of risks creates a bureaucracy
Finance Director Europe /
www.ns-businesshub.com
that detracts from the really important things. The most important aspect of risk management is that it should help you to think. It should support and challenge your thinking.”
Scenario planning can bring an organisation’s leaders together to discuss how a business can deal with change and where its weaknesses are. A theoretical stress test of the supply chain, partner relationships and other potential vulnerabilities is good for the whole business, not just for managing catastrophic risk. “For me,” says Chadwick, “Covid re-emphasised the importance of a flexible and agile approach to risk. It specifically underscored the criticality of actively tracking emerging risks and regularly reviewing and updating your risk assessment; recognising when to expedite preparatory measures; having a high-level plan and framework and capable team to manage high impact events.”
“Covid re-emphasised the importance of a flexible and agile approach to risk. It specifically underscored the criticality of actively tracking emerging risks and regularly reviewing and updating your risk assessment.”
Tim Chadwick
The big stumbling block, however, is that this requires long-term planning.
“Firms can choose to have good managers who are seriously committed to their firms’ long-term survival who are then prepared to hire good people to address these risks seriously,” says Dowd. “But many firms merely pay lip service. All the firms I have worked with claim they want quality, but few are willing to pay for it and I take anything they say as just the usual corporate guff.”
Building resilience, creating a holistic approach to risk, making agility a core characteristic of a business – all these are essential for dealing with the unknown, but they depend on a view of risk and strategy that looks beyond the next quarter’s earnings report. ●
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The Covid-19 pandemic re-emphasised the importance of preparing for risk.
Zigres/
Shutterstock.com
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