Risk Decision Making in an Interconnected World

Globalization and advancements in digital technologies have fundamentally eliminated barriers to doing business. Today, the world has become so interconnected that we are now able to carry out business with any organization across borders anytime of the day.

The opening of global markets which were once impenetrable for individuals, smaller enterprises and organizations is presenting significant growth opportunities to this group. At the same time, threats and complexities abound.

Given this current state of the world, it’s increasingly imperative for business leaders to understand the implications of an interconnected external environment on strategic and operational decision-making, and the achievement of enterprise objectives.

Companies are having to deal with business opportunities and threats that transcend borders. Global volatility is on the rise. From geopolitical tensions, Brexit, US/China trade conflict, rising economic nationalism and xenophobia to epidemic diseases, environmental disasters, and climate change, the world is experiencing significant uncertainty.

Surviving and thriving in this environment requires the organization, through its leaders, to manage for success by making better informed and intelligent risk decisions that drive business performance.

This means looking beyond risk management primarily as a loss prevention process, but rather a key process that supports effective decision-making. Since volatility, uncertainty, complexity and ambiguity have become the norm, it can be tempting for decision makers to entirely focus on the negatives, what might go wrong, and miss on emerging opportunities.

Faced with these uncertainties and not having clarity of their impact on the attainment of stated business objectives, many companies switch into the protective mode.

Although it’s important to be mindful of value preservation, a sole focus on this is not sustainable for the long term success of the business, especially in the current highly competitive environment where innovation is a key driver for rapid and profitable revenue growth.

Business leaders also need to be mindful of how the company will continuously innovate and create unmatched value for all stakeholders. And more often than not, this involves the business entering uncharted territories, and experimenting with new ideas which most of the time is counter to the traditional role of risk management in the business.

As the business ecosystem increasingly gets interconnected, new risks or uncertainties emerge. Thus, a holistic approach to risk and opportunity assessment is critical.

While a number of organizations do spend time analyzing emerging risks or threats to acquire some foresight about their impact on decision making and business performance, not enough is spent on understanding how current risks are intertwined.

Building an integrated view of the different risk factors or sources of uncertainty across the business is therefore critical since a change in one area has cascading effects that impact the entire ecosystem.

Many organizations still rely on the risk register to track and monitor critical risk factors capable of thwarting the successful achievement of enterprise objectives. For the greater part, these risk lists are a product of “top risks” research findings by consulting firms, academic, and other research institutions.

The mere fact that a risk factor has made top ten list of key risks to watch does not necessarily imply that you should attach the same value judgement for your company. Remember, the findings are from a representative sample whose business and operating model are most likely dissimilar to yours.

Should we therefore ignore these findings? Simple answer, no. Rather, we should use these resources as a guide to understand different sources of current and emerging threats and opportunities to the business, including the economy at large, and evaluate the recommendations in the context of the organization’s broader strategy and performance objectives.

For instance, let’s assume the main focus of your existing business strategy is to grow and expand internationally into the USA, Asia Pacific and European markets. Although important and connected, risk factors such as local regulatory changes, rising household debt levels or a slowing down economy will, in this case, likely be of minimal consideration.

What might be of heightened importance is rising nationalism and policies such as “America First,” in the USA, Brexit and the impending new trade policy with the EU, and future US/China trade relations and its impact on the entire Asia Pacific region.

On the reward side, taking Asia Pacific as an example, the region represents the largest e-commerce market and more than half of the world’s mobile subscribers are based here. By 2025 it is estimated there will be 3.9 billion smartphone connections and 11 billion IoT connections in Asia Pacific.

This alone is a huge opportunity for any type of business currently operating or planning to set shop in this region to tap into this large market and meet current and emerging customer needs through digital technologies or solutions.

Thus, relying primarily on outdated risk registers or lists, which in most cases are infrequently reviewed, to support critical business decisions in today’s fast-changing and uncertain environment is insufficient. Just as the internal and external environment continue to change, your business strategy also need to evolve in light of new and emerging opportunities and uncertainties.

Explore different future scenarios and evaluate how your organization is most likely to perform under each possible scenario. Even though it’s not possible to predict the future with certainty, or the timing and severity of any particular event, planning for unpredictable events can be an effective component to your company’s risk decision-making approach.

Effective risk decision-making in an increasingly volatile, uncertain, complex and interconnected world is about considering all scenarios that might play out in the future, good or bad, and proactively making better informed decisions that improve business performance and increase the odds of success.