Managing Risk in Uncertain times

Risk in Uncertain Times A approach to assess risk readiness, implications and risk mitigation MAY 2009

“there is nothing more dif/icult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system” - Machiavelli Risk in uncertain times Risk management today is no longer something that can be taken as a given -‐ that the tools, processes and procedures in place are doing their job. As we have seen, in recent =mes, risk management has failed in a spectacular fashion, arguably a major contributor to the global ﬁnancial crisis currently being grappled with. We hear on a daily basis about “ toxic assets”, about lack of understanding on “exo=c” ﬁnancial instruments, about the dubious ethical prac=ces on Wall Street and the corporate values absen=ng themselves from the boardroom. When common sense failures have played out on the front page of na=onal newspapers, it is clear that some organisa=ons did not just have a gap in basic risk assessment procedures -‐ these were symptoms of systema=c and cultural collapse manifes=ng themselves in less obvious ways. The most serious gaps being papered over did not relate to technology and models -‐ the tools that have been the mainstay of risk management, but rather the roles people played and the company decision-‐ making processes. At its most basic, catastrophic failure has its origins with people -‐ their behaviors, values, ethics and interac=on. If we believe that people are an important and oGen mis-‐aligned aspect of risk management, then we need to understand their role in managing the impact of change in uncertain business environments and mi=ga=ng the probability or impact of nega=ve changes that could occur in the future. “Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a more radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall - when Mother nature and the market both said: “No more” ” - Thomas Friedman Page 2

The new normal requires a new approach “Societies are said to swing like pendulums between alternating phases of vigor and decay; progress and reaction; licentiousness and puritanism. Each outward movement produces a crisis of excess which leads to a reaction. The equilibrium position is hard to achieve and always unstable.” - Robert Skidelsky It is becoming more apparent that the current downturn is fundamentally different from those of the past. We are not just experiencing another phase in the business cycle, but a fundamental restructuring of economies. So the old adage “hindsight does not lead to foresight” con=nues to ring true today. The tried and true methods, tools and processes of the past might not necessarily provide the solid founda=ons for risk management required for future growth. We need to embrace the uncertainty that we are grappling with today and look to new ways of understanding how to effec=vely include our people in new risk management frames and strategies. Today’s economic slowdown can serve as a catalyst for organisa=ons to take a more strategic perspec=ve on risk. It can create the impetus for organisa=ons to take a more intelligent, fact-‐ based approach to understanding their current and future risk requirements as well as providing the opportunity to iden=fy and fill gaps. Most importantly, it can drive the mandate for overall workforce transforma=on on views towards risk -‐ a rethinking of the work that must be done, the manner in which individuals accomplish the work and the role senior execu=ves need to play in helping the organisa=on assess and manage risk through difficult =mes. Emerging Op+ons has been working with Cogni+ve Edge in the use of “narra+ve techniques” to capture and understand the drivers of risk in Context. The approach is based on some core principles: • Faced with complex, difficult or intractable challenges, we prefer to find several people with appropriate exper+se and listen to their stories (generally known as fragments or anecdotes) form which new understanding and capability is synthesized. • It is not just key employees who manage risk; it is cri+cal to discover who has the ability to impact and influence risk and where it these ac+vi+es can occur. • Systems to support managing risk need to also support ambiguous enquiries, to reflect the way in which people have conversa+ons around the water coolers, par++ons or silos. Humans engage in “serendipitous encounters” with others, which can have an impact on percep+ons of risk. Page 3

Our approach to Risk Emerging Op=ons employees a three phase approach to the human face of Risk: Making sense The Human Identiﬁcation Risk mitigation of risk face of Risk of Risk areas & intervention implications This approach provides the ability to very quickly understand what people perceive about risk and how they approach addressing and mi=ga=ng risk issues. The workshops and processes used are not mutually exclusive, and are designed to sit alongside exis=ng risk management programs as an adjunct to and value added missing link. Iden*ﬁca*on of Risk areas Risk exists at four levels: • Strategic – risks ensuring business survival and long-‐term security or stability of the organiza=on • Program – risks involved in managing interdependencies between individual projects and the wider business environment • Projects – risks involved in making progress against project plans • Opera=onal – risks involved in the day to day running of the business Associated with each level of risk are the people aspects of the business that will impact on each level of risk and the rela=onships that exist between risk levels: • Values by which the organiza=on operates • Rela=onship networks • Trust • Stakeholder rela=onships • Transparency • Knowledge sharing Even the great neo-liberal ideological standard-bearer, the long-serving chairman of the US Federal Reserve Alan Greenspan, recently conceded in testimony before Congress that his ideological viewpoint was /lawed, that the “whole intellectual edi/ice” of modern risk management had collapsed - Kevin Rudd Page 4

Emerging Op=ons uses SenseMakerTM to capture large volumes of narra=ve from the organiza=on to unpack staff and management views on risk at each level, its impact on the organisa=on and areas where risk is not being managed well from the grass roots level up. Literally thousands of stories, anecdotes, pictures, ar=cles, verbal records and much more, can be captured at a minimal cost. Those who provide the stories or submit other sense making material answer a number of ques=ons that provide the indexing criteria, and subsequent repor=ng. Indexing is customised to each organisa=on’s risk profile and central to the Cogni=ve Edge Sense Making soGware’s ability to shown paWerns that could uncover emerging trends, issues or insights around risk that are not readily apparent with tradi=onal methods of data interroga=on. SenseMakerTM will allow for the uncovering of paWerns around risk and people’s appe=te for risk vs reward. The dataset collected, will also form the basis for the ongoing benchmarking of iden=fied risk drivers moving forward. The kind of complex organic database created, can help you find out who is saying what, and how a challenge or project is being handled. For example, six clicks of a mouse buWon can tell you all the stories told by an experienced staff member, facing a crisis, involving deep conflict and emo=ons, told from their point of view, with the inten=on of teaching. Depending on the number of queries you look at, you can narrow or expand your poten=al insight about what might be relevant and what might not. SenseMakerTM will provide the organisa*on with: • ability to allow mul+ple perspec+ves to be visible and recognized -‐ to make the “invisible voices visible” • ability to value dissent without requiring aRribu+on of blame • Providing perspec+ves and frameworks that enable people to take ac+on in addressing complex risk issues • Compliment and work in conjunc+on with exis+ng risk tools and processes • The use of narra+ve as a key component of collec+ng and understanding knowledge in context • a founda+on for risk benchmarking • The ability to uncover risk related issues origina+ng from changing workforce composi+on • A boRom-‐up approach to iden+fying issues masked through organisa+on hierarchy • A near real +me view of the organisa+on and how it manages risk • An understanding of areas that need greater focus on risk mi+ga+on Page 5

Making sense of risk implica*ons for the business Behaviours of personnel in the organisa+on can expose it to significant risk, be it through reputa+on, financial or ethical considera+ons. The second arm of the Emerging Op+ons approach to Risk assessment, iden+fica+on, and mi+ga+on is based on a two day workshop covering three key areas: 1. Future Backwards -‐ uncovering mul+ple perspec+ves on risk 2. Development of a Risk support framework 3. Archetype Extrac+on -‐ developing a shared understanding on risk The Future Backwards The Future, Backwards method was developed as an alterna+ve to scenario planning and is designed to increase the number of perspec+ves that a group can take both on an understanding of their past, and of the range of possible futures. It can be used to discover what entrained paRerns of past percep+ons of risk in an organisa+on are determining its future. It can be used to compare and contrast different perspec+ves as to the present and the future of risk. It can be used to generate mul+ple turning points or decision points for use in the social construc+on of the Risk Support framework outlined below. Page 6

Risk Support framework A Risk Support framework for each organisa+on will be developed by the workshop par+cipants. This framework is based upon the Cynefin complexity framework developed by Dave Snowden & Cogni+ve Edge Pte Ltd. The advantages of this framework include the ability to very quickly iden+fy types of risk that exist, and priori+se approaches to dealing with this risk. The framework….. At the heart of the approach is the Cynefin framework; an open systems model that enhances sense making and provides support for decision making. Understanding the dis+nc+on between ordered and unordered elements of a complex or intractable problem leads to the applica+on for different methods for diagnosis and interven+on derived from the different contexts. • Ordered systems are based on the belief that it was just a maRer of +me and resources before the rela+onships between cause and effect could be discovered in any situa+on • Unorder -‐ or emergent order. PaRerns are self organising and there too are mul+ple possibili+es and op+ons to discern a rela+onship between cause and effect. The many management tools and processes that we have available to address organisa+onal issues primarily assume that there is order-‐ a definable rela+onship between cause and effect that can inform strategy and interven+ons. In current complex and turbulent environments, it is increasingly obvious that these approaches do not serve us well when dealing with complex interac+ons. The Cogni+ve Edge methods provide the opportunity for iden+fying the different elements that need to be managed, and specific tools designed to support ac+on in the unordered domain. Underpinning concepts for using the Cynefin framework • Sense Making…. Unlike many management models and frameworks, the framework and the boundaries are not predetermined. The boundaries emerge through discourse rather than fi]ng predetermined categories. Sense making is exploratory, can detect weak signals and new paRerns, but is not a quick fix process . • Social Construc+on…. Using data drawn from par+cipants, the framework is socially constructed within an organisa+on using one of a number of possible methods. Consultants are responsible for providing the opportunity for sense making; but they are not involved as experts in the collec+on and ini+al ! analysis of the data. • Gaining perspec+ve….. The fundamental purpose is to enable a group of people to see things from mul+ple perspec+ves and therefore to gain new insights and ways to take ac+on. Page 7

Archetype extrac*on Archetype extrac+on is an approach to deriving meaning from a body of anecdotal material either gathered in advance or created in the workshop. The results are cultural constructs (known as emergent proper*es, these are expressed as archetypes, values, and themes) and can be used directly or contrasted with espoused values, or with the construc+ons of emergent meaning from different groups (how do managers see risk themselves, how is risk seen by employees etc). Archetypes are constructs of shared meaning that encapsulate and ar+culate social understandings about "the way things are" for a community. Archetypes are not generally about things everyone can easily talk about, but are usually about things that are not well ar+culated in any other way. The process of deriving archetypes is about disclosure, discovery, and understanding. Archetypes are not stereotypes We use three heuris+cs to dis+nguish archetypes from stereotypes. Archetypes are uni-‐dimensional extremes, caricatures that could never describe a real person or issue or situa+on. Part of their u+lity is in their extremity, that they help us to discuss the boundaries of experience, which are usually the places we are most concerned with coping with. Everyone and everything can be iden+fied with archetypes in some way; but nobody and nothing fits a stereotype. Stereotypes divide but archetypes integrate. A group of archetypes together represents a "family" of forces within a community or with respect to a subject. Thus one archetype doesn't "work" in isola+on but must always be understood in the context of the collec+ve representa+on of a community and a concern. A stereotype has few if any connec+ons and is defined more by its isola+on than by its rela+onships. Uses of archetypes Once derived, archetypes provide a means of developing a common language with which to address issues that are important but not always easily surfaced. For example: • People may use archetypes to help two groups understand their differing perspec+ves on risk. • People may use archetypes to organize narra+ve historical data so that they can quickly find meaningful analogies to a risk situa+on they are facing today. • People may use archetypes to design new approaches to risk mi+ga+on by tes+ng new procedures against the reac+ons of a family of archetypes which represents features of the organisa+on / customer community. Page 8

Risk mi*ga*on & interven*on The first two phases of our approach to risk will have provided insight into peoples views, a]tudes and approaches to risk in an organisa+on. We will also have iden+fied specific risk issues present, and some similari+es / differences that exist across divisions. A key pool of risk issues will have been iden+fied in the complex domain of the risk framework that need further explora+on. The focus of the third phase is on the development of specific risk mi+ga+on interven+ons to address those highly complex risk issues iden+fied. Complex risk issues cannot be dealt with in the same manner as those where there is a rela+onship between cause and effect. Truly complex risk issues need to have interven+ons developed through small scale probes and experiments. If a specific interven+on is successful, then its applica+on can be amplified. If it has liRle or no effect, then that approach can be discounted. This approach provides for the development of high impact, low cost interven+ons in short +me frame. A one day workshop with key stakeholders and representa+ves of the business will provide for the development of an interven+on strategy and implementa+on roadmap to address complex risk issues. Page 9

About us: Emerging Options are a consulting network specialising in complexity and ways of helping organisations and groups understand the world in which they participate in order to act. Vivien Read is a founder of Emerging Options. Viv has over 30 years experience as a consultant and manager in organisational strategy, change management, industrial relations, leadership development, and action learning. She has co facilitated 4 Cognitive Edge accreditation programs, in Australia and South East Asia. She is currently involved in projects using the Cognitive Edge tools and processes in Australia and Singapore. Viv is a frequent presenter at conferences, seminars and professional groups including knowledge management societies, facilitator networks, and training and development groups. Chris Fletcher is a co-founder of Emerging Options. Prior to starting Emerging Options, Chris was the Asia Pacific Director for Knowledgement Management at Deloitte. He has over 20 years experience working in Marketing, Business Development, Strategy and Knowledge Management - predominantly in the professional services sector. His current focus is on using Cognitive Edge tools and processes to help organisations and groups understand complex issues, connect people and develop networks. Chris is a regular speaker at conferences and seminars in the Asia Pacific region. For more information on this project or to express interest in participating, please contact: Viv Read email: viv@emergingoptions.com.au Phone: +61 414 294 339 Chris Fletcher email: chris@emergingoptions.com.au Phone: +61 402 308 403 Page 10

ATTACHMENT A Sensemaker output Quantitative & Qualitative Data Sensemaker provides hard and soft data for actionable results Narrative fragments Sensemaker uses fragments to uncover patterns not readily visible Page 11

Sensemaker Reporting Page 12

Managing Risk in Uncertain times

by Chris Fletcher on Jun 28, 2010

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