Complacency, recognizing risk, and managing risk

In the June 7, 2010 edition of The Washington Post, Robert J. Samuelson has an opinion piece on how complacency affects our ability to recognize risk. (Read the full article here: Oil spill reveals the dangers of success.) While Samuelson begins with the example of the BP oil spill off the Gulf Coast, he notes that we’ve seen the same pattern in other “national setbacks,” like the recent financial crisis. He writes:

“Success tends to breed carelessness and complacency. People take more risks because they don’t think they’re taking risks. The regulated and the regulators often react similarly because they’ve shared similar experiences. The financial crisis didn’t occur so much because regulation was absent (many major financial institutions were regulated) but because regulators didn’t grasp the dangers. They, too, were conditioned by belief in the Great Moderation and lower financial volatility.”

Every year, our strategic planning teams work with clients to identify potential threats to their companies. There are two actions a team can take in response to a threat:

  • You can substantially reduce the impact and/or possibility of the threat actually happening. For example you can diversify your client and supplier base to minimize the impact of losing one big customer.
  • You can establish and sustain a recovery capability. For example you can create a sustainable IT disaster recovery plan that includes verified backups, and a backup site already configured with sufficient power and space.

One big challenge to a team’s thinking about threats is what Nassim Nicholas Taleb has labeled a Black Swan. A Black Swan is a highly improbable and unpredictable event with a massive impact that we can’t anticipate by looking at the past. Black Swans are hard to manage for because of their rarity, extreme impact, and unpredictability. Black Swan events our clients have experienced include:

  • A massive fire storm in California surrounded their manufacturing plant.
  • A Fortune 500 client suddenly went belly up, dramatically cutting revenue, losing a big chunk of receivables, and leaving a warehouse full of unsellable specialized parts.
  • A sudden economic collapse that cut revenue overnight by over 30%.

These events were rare, unpredictable and had the potential of major impact. Our clients survived each of these Black Swans. The catastrophic impact of a fire wiping out the corporate HQ was blunted by multiple strategies including storing a portion of the long-lead-time components in another office on the east coast. Over the five years before the Fortune 500 company went bankrupt our client diversified their customer base, reducing the F500 client from 80% of revenue to under 30%. Flexible staffing, accurate real-time production tracking, and effective automation enabled our client to be profitable in the face of a 30% revenue drop.Each of the elements critical to these firms surviving their Black Swans can be traced back to their strategic planning. That’s because strategic planning allowed them to recognize the threat, develop strategies for reducing the risk, and change the status quo by implementing those strategies.

As Samuelson noted at the end of his op-ed piece, “It is human nature to celebrate success by relaxing. The challenge we face is how to acknowledge this urge without being duped by it.”

A strategic plan developed and implemented by your executive team accelerates growth and can also keep a Black Swan event from destroying all your hard work.

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