Roger Perry

Managing Director, Bevington Group

An uncertain world

We live in a world where geopolitical tensions are a fact of life. Trade tensions remain unresolved, natural disasters are increasingly likely and economies behave in poorly understood ways such as persistent low inflation and low wages growth.

Ominously, our anxiety is amplified knowing that we might not be able to predict and consciously mitigate for the shocks. Most of the world did not anticipate the GFC, nor the prevalence of COVID-19. 

Fortunately, we do have strategies to manage known risks, which are those we anticipate, and unknown risks, which can arise unexpectedly.

When dealing with known threats, we can diligently deploy contemporary risk management techniques. Unknown risks, however, require us to think much bigger.

Organisational resilience means building businesses that can adapt in times of crisis. As this article shows, it is important to develop strategies to manage all types of risk, including the unforeseen.

Managing for known risks

Classic organisation and program risk management can effectively address known dangers. The risks are defined, with the probability and impact assessed before mitigating actions are taken.

1. Reduce the probability of it occurring;

2. Reduce the impact of the risk by fortifying the organisation, such as strengthening buildings in an earthquake zone so they can survive a major quake, or having a balance sheet that can withstand a financial earthquake in debt markets;

3. Build a contingency plan, such as a backup data centre or a plan to switch off services that are burning cash in a financial crisis;

4. Increase the chances of detecting a problem early. The sooner you see it coming, the more likely you will be able to deal with it.

Knowing how to manage risk does not guarantee that we do it well. Harris Scarfe faced known risks, including online shopping growth and low retail growth, yet it was unable to plan for and mitigate these risks.

Japanese electrical authorities also understood that earthquakes were a risk. But they did not properly fortify the Fukushima nuclear power plant because they did not thoroughly consider the consequences, such as a tsunami taking out a low-lying backup generator.

Preparing for the unexpected

How do you manage for unknown risks? There are two related techniques:

1. Fortify the organisation. This involves similar precautions to those you’d use for specific risks but with more generic strategies, such as reserve cash to buy you time.
2. Increase organisational adaptability. When facing an unexpected challenge, the organisation can develop and implement plans to survive and even thrive.

It is critical to note these two strategies are very closely tied, as fortifying an organisation can buy you time to adapt to what might be a new long-term environment.

If you really want to ensure that your enterprise is not fragile, you need to fortify and improve your ability to adapt. Of the two strategies, ‘improving adaptation’ is least understood.

Improving adaptation

Fundamentally, improving adaptation means enhancing your operating model, which is the way your organisation is constructed to deliver on its objectives, including structures, processes, technologies and, critically, decision-making methods.

If you want to improve your adaptability, the research (Zolli and Healy, 2012; Bloom, 2014) indicates the following uncomfortable truths:

• Decentralised organisations are more robust because they can make faster and more appropriate decisions concerning their market context;
• Firebreaks between organisational units are essential to ensure that malady does not spread. For example, corporate structures should ensure that one unit going bankrupt does not bring down the whole enterprise;
• The ability to sense changes in markets or other contexts is key. Adaptive organisations can ‘smell a change in the air’ early;
• Less bureaucratic decision making is key. It should be fast, data-informed and highly accountable; and
• The ‘corporate centre’ must be lean and focused on allocating ‘crisis’ resources to leadership teams that most need it and can realistically benefit from it.

Adaptation in action

Stanford Business School’s Nicholas Bloom conducted a 2014 study which clearly showed that decentralised enterprises coped much better in tough times. However, this does not mean a free hand for decentralised units.

Take McDonald’s for example. It is decentralised by country, and even down to the decision making at individual store level. Yet strict disciplines must be employed.

This ‘loose-tight’ model is often used to ensure the advantages of scale and scope in areas such as procurement, health and safety standards, systems and processes, without losing the potential to adapt to change at a local level.

Nestlé has a similar model, with the Japanese arm operating very differently from the Australian division. Yet both share lessons and experience, taking advantage of scale where appropriate.

A final word on adaptation and resilience

Two key lessons can be drawn from this article.

Firstly, traditional risk management is useful but needs to be thorough to avoid your own version of Fukushima.

Secondly, to prepare for and deal with risks that are not apparent you need to create an ‘adaptive organisation’ with some financial contingency. This will allow space to adapt if, and when, a crisis emerges.

Of course, the best time to create an adaptive enterprise is well before you really need it. Now is a good time to start.