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Using Economic Downturn Magnitude And Duration Forecast To Manage Your Future
 

Using Economic Downturn Magnitude And Duration Forecast To Manage Your Future

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Using Riskope’s Economic Downturn Magnitude and

Using Riskope’s Economic Downturn Magnitude and
Duration Forecast to
Manage your Future
Rational and sustainable risk management requires quantitative understanding of scenarios

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    Using Economic Downturn Magnitude And Duration Forecast To Manage Your Future Using Economic Downturn Magnitude And Duration Forecast To Manage Your Future Presentation Transcript

    • 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
    • Because we know this is manageable we made it our mission to build the most effective approach. 25 minutes Months if not Years...
    • 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.
    • Generic Phased Crisis Model Triggering point for the emergency plan Controlled crisis Uncontrolled crisis…may evolve to catastrophic consequences One crisis cycle (time) Event Intensity : from emergency to crisis Emergency that does not evolve into a crisis Phase 1 Potential Phase 2 Latent Phase 3 Acute Phase 4 Return Phase 1 Potential Desired Level of Service Tolerated level of disservice (minor emergency) Max tolerated disservice limit (max emergency) Crisis Catastrophic crisis
    • 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…)
      • … thus a Risk , as Risk=probability x cost of consequence.
    • 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
    • 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
    • The future lies in using Risk to weigh decisions, rather than just guiding mitigation.
    • Scenarios can be prioritized by their intolerable part of risk. A clear road-map becomes available for rational and sustainable RM/ERM.
    • * A mathematical model is used Bar graph for the Intolerable portion of the scenarios Of the 14 initial scenarios, seven are above tolerability, but only three are top attention priority.
    • Case Study Several mid-sized companies face the present economic downturn
    • Hazard Analysis
      • Let’s define probability and “magnitude” of the hazard of this “economic downturn”.
      • 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
    • 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
      • 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
      • 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] example in Italy, US, under the “war on terrorism” cover
    • 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.
    • 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.
    • Crisis Forecast, November 2008
    • Consequence Definition
      • These will be different for every client/industry or organization
    • 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
    • P C 5 M/years 0.20 0.25 0.55 Tolerable Intolerable Persistent Significant Worsening Critical Evolution 7 M/years 2 M/years Risk: 0.4 Risk: 1.25 Risk: 3.85 Intolerable: 0.07 Intolerable: 0 Intolerable: 1.53 Sometimes a risk assessment confirms intuitive “feelings”!
    • 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
    • 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 donwturn has critical evolution , i.e. 1 M/yr
    • P C 3 M/years 0.20 0.25 0.55 Tolerable Intolerable Persistent Significant Worsening Critical Evolution 6 M/years 1 M/years Intolerable: 0.16 Risk: 0.75 Risk: 0.55 Intolerable: 0 Intolerable: 0 Risk: 1.2 Status quo may mean, quite surprisingly, highest priority!
    • 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
    • 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
    • P C 4 M/years 0.20 0.25 0.55 Tolerable Intolerable Persistent Significant Worsening Critical Evolution 6 M/years 3 M/years Intolerable: 0 Risk: 1.5 Intolerable: 0.01 Risk: 1.65 Risk: 0.8 Intolerable: 0.24 Highest risk does not necessarily mean highest priority!
    • 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!
    • 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.
    • 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