Using Economic Downturn Magnitude And Duration Forecast To Manage Your Future

Using Riskope’s Economic Downturn Magnitude and Duration Forecast to Manage your Future (Based on Nov. 2008 Forecast by Riskope) Franco & Cesar Oboni Riskope International Rational and sustainable risk management requires quantitative understanding of scenarios Riskope International SA ©, 2008-*, www.riskope.com 1

Because we know this is manageable we made it our mission to build the most effective approach. Months if not Years... 25 minutes Riskope International SA ©, 2008-*, www.riskope.com 2

Our Lives, Corporations, Projects Can be seen as a never ending succession of cycles of growth, peace, turmoil, i.e. cycles of great changes we call crises. Fast growth can be seen as a positive crisis: in some cases it can, however, suddenly turn into a negative crisis. A crisis is a decisive moment, particularly in times of danger or difficulty. Riskope International SA ©, 2008-*, www.riskope.com 3

Generic Phased Crisis Model Phase 3 Phase 1 Phase 2 Phase 4 Phase 1 Acute Potential Latent Return Potential Emergency that Event Intensity : from Desired Level of Service does not evolve into emergency to crisis a crisis Triggering Tolerated level of disservice (minor emergency) point for the emergency plan Max tolerated disservice limit (max emergency) Controlled crisis Crisis Uncontrolled crisis…may evolve to catastrophic consequences Catastrophic crisis One crisis cycle (time) Riskope International SA ©, 2008-*, www.riskope.com 4

Each point of the “crisis trajectory” has: • A probability of occurrence • An associated cost (loss, consequence…could be positive or negative, but let’s focus on the negatives for the moment…) 0.2 Probability per Annum • …thus a Risk, as 0.1 Risk=probability x cost of consequence. 0 0 10 20 Million $ Riskope International SA ©, 2008-*, www.riskope.com 5

It is in the Latency Phase that the best returns are to be expected from: • Analyzing what could go wrong, and how much it would “cost” the company: Risk Assessments • Analyzing the means to bring the risks towards a tolerable level in a sustainable way: Risk Management • Analyzing how to behave when a residual risk hits, i.e. Crisis Management Riskope International SA ©, 2008-*, www.riskope.com 6

ERM excellence criteria: •Risk/reward optimization •Enterprise wide view of risks •Control processes for risks including: •Hazard identification •Risk evaluation •Risk management and loss control •Benchmarking against predefined risk tolerability criteria Riskope International SA ©, 2008-*, www.riskope.com 7

The future lies in using Risk to weigh decisions, rather than just guiding mitigation. Riskope International SA ©, 2008-*, www.riskope.com 8

Scenarios can be prioritized by their intolerable part of risk. A clear road-map becomes available for rational and sustainable RM/ERM. Riskope International SA ©, 2008-*, www.riskope.com 9

Bar graph for the Intolerable portion of the scenarios * A mathematical model is used Of the 14 initial scenarios, seven are above tolerability, but only three are top attention priority. Riskope International SA ©, 2008-*, www.riskope.com 10

Case Study Several mid-sized companies face the present economic downturn Riskope International SA ©, 2008-*, www.riskope.com 11

Hazard Analysis Let’s define probability and “magnitude” of the hazard of this “economic downturn”. Riskope International SA ©, 2008-*, www.riskope.com 12

Crisis Forecast, November 2008 Duration Probabilities : •30% less than 1.5 years Spring 2010 •80% less than 3 years Fall 2011 •10% longer than 6 years past 2014 Magnitude Probabilities: •20% present situation will persist •25% significant worsening •55% critical evolution of disservice Riskope International SA ©, 2008-*, www.riskope.com 13

Measure of the Depth of Recession: “loss of service and control” in the country system, for which we can build a scale as follows, by drawing examples from the past: Level 1:Persistance, or Status Quo, i.e. generalized budget cuts in the non- key services, for example starting with culture, arts, then going to education[1]; some protests[2]. [1] cuts are already being performed in various countries, France, Italy etc. [2] also in act, Russia, Japan, etc Riskope International SA ©, 2008-*, www.riskope.com 14

Significant Worsening, i.e. Level 2 & 3. Level 2:Generalized Poverty, unemployment up to 12%, vanishing maintenance of civil systems, reduced health programs, salaries of public officers in decline, protests, criminality, and some violence[3]. [3] already reported in some G20 countries including recent riots in Greece etc. Riskope International SA ©, 2008-*, www.riskope.com 15

Significant Worsening, i.e. Level 2 & 3. (cont'd) Level 3:Severe Impoverishment unemployment over 12%, severe reductions of public transportation offer[4], gradual replacement of police forces with armed forces[5], reduction of retirement plans, protests and criminality, high violence. [4] example: reduction of RR network and service [5] examples in Italy, US, under the “war on terrorism”, or “war on violent crime” cover Riskope International SA ©, 2008-*, www.riskope.com 16

Level 4:Critical evolution of disservice (Disruption of Order and Quality of Life), generalized rioting, wide spread criminality and sacking, and total loss of control. Riskope International SA ©, 2008-*, www.riskope.com 17

Apparently some countries in the G20 group have already passed the Status Quo level, but as we are developing this study for a “theoretical” country within the group, we will not bother with these particular cases here. Riskope International SA ©, 2008-*, www.riskope.com 18

Crisis Forecast, November 2008 Riskope International SA ©, 2008-*, www.riskope.com 19

Consequence Definition These will be different for every client/industry or organization Riskope International SA ©, 2008-*, www.riskope.com 20

Example 1: a company that builds specialty motor vehicles could have: • Reduction of 20% of routine paying services revenues, if the downturn is persistent, i.e. 2 M/yr • Reduction of 50% of overall sales if downturn worsens significantly, i.e. 5 M/yr • Reduction of 70% of overall sales if downturn has critical evolution, i.e. 7 M/yr Riskope International SA ©, 2008-*, www.riskope.com 21

Sometimes a risk assessment P confirms intuitive “feelings”! Intolerable Critical Evolution 0.55 Risk: 3.85 Intolerable: 1.53 Tolerable 0.25 Significant Worsening 0.20 Persistent Risk: 1.25 Risk: 0.4 Intolerable: 0.07 Intolerable: 0 C 2 M/years 5 M/years 7 M/years Riskope International SA ©, 2008-*, www.riskope.com 22

a company building special motor vehicles will focus it efforts to mitigate in this order: 1) Critical evolution 2) Significant worsening 3) Persistent Mitigative scenarios, possibly including diversifying etc. will have to be studied Riskope International SA ©, 2008-*, www.riskope.com 23

Example 2: a Discount Retailer • Reduction of 60% of routine services if the downturn is persistent, i.e. 6 M/yr • Reduction of 30% of overall billable if downturn worsens significantly, i.e. 3 M/yr • Reduction of 10% of overall billable if downturn has critical evolution, i.e. 1 M/yr Riskope International SA ©, 2008-*, www.riskope.com 24

P Persistent state may mean, quite surprisingly, highest priority! Intolerable Critical Evolution Risk: 0.55 0.55 Intolerable: 0 Significant Worsening 0.25 Persistent 0.20 Risk: 0.75 Tolerable Risk: 1.2 Intolerable: 0 Intolerable: 0.16 C 1 M/years 3 M/years 6 M/years Riskope International SA ©, 2008-*, www.riskope.com 25

a Discount Retailer will have the focus it efforts to mitigate in a different order: 1) Persistent 2) Significant worsening 3) Critical evolution Mitigative scenarios, possibly including a line of top quality items etc. will have to be studied Riskope International SA ©, 2008-*, www.riskope.com 26

Example 3: a company that services motor vehicles could have: • Reduction of 40% of routine services if the downturn is persistent, i.e. 4 M/yr • Reduction of 60% of overall billable if downturn worsens significantly, i.e. 6 M/yr • Reduction of 30% of overall billable if donwturn has critical evolution, i.e. 3 M/yr Riskope International SA ©, 2008-*, www.riskope.com 27

Highest risk does not P necessarily mean highest priority! Critical Evolution Intolerable Risk: 1.65 0.55 Intolerable: 0.01 Tolerable 0.25 Significant Worsening 0.20 Risk: 1.5 Persistent Intolerable: 0.24 Risk: 0.8 Intolerable: 0 C 3 M/years 4 M/years 6 M/years Riskope International SA ©, 2008-*, www.riskope.com 28

a company that services motor vehicles will have the focus in this order : 1) Significant worsening 2) Critical evolution 3) Persistent Even thus the risk of the critical evolution is higher, the intolerable part of the significant worsening is more critical. Possible mitigation: advertisement and lowered prices right now! Riskope International SA ©, 2008-*, www.riskope.com 29

Scenarios will be prioritized by their intolerable part of risk. Therefore a clear road-map becomes available. Transparent decision can be taken leading to a rational and sustainable RM/ERM. Riskope International SA ©, 2008-*, www.riskope.com 30

Details available upon request via contact page at http://www.riskope.com These results can help building rational risk management strategies. Contact us, Franco & Cesar Oboni Riskope International Riskope International SA ©, 2008-*, www.riskope.com 31

Using Economic Downturn Magnitude And Duration Forecast To Manage Your Future

by Oboni Riskope Associates Inc. on Jan 29, 2009

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