PART 1
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One where the nature of risk has fundamentally changed.
For decades – centuries, even – organizations faced different forms of risk.
They sought to understand those risks. To anticipate them. Prevent or mitigate them.
Build resilience. And unlock the opportunity on risk’s flip side.
New risks emerged over time. Each new risk that appeared on the scene was studied and gradually understood.
Resources were applied against the risk, models built. The number of risks may have multiplied,
but the underlying formula largely stayed the same.
What happens, though, when individual risks begin to feed off each other?
When one risk meets and multiplies another risk – to produce an entirely new set of challenges, often unforeseen?
Now structural trends like globalization, digitization, fragmenting regulatory environments,
climate change, and changing consumer expectations are colliding with low probability, high-severity flashpoints.
And it’s creating challenges locally, nationally, and internationally – across digital, physical, and sector operating environments.
Organizations, sovereigns, and market participants must now contend with cyber-attacks, operational failures,
supply chain bottlenecks, growing geopolitical tensions, and environmental and social pressures.
May 2021: Colonial Pipeline, which operates a major pipeline for refined oil products in the U.S. Northeast, shuts down in
response to a ransomware attack.
The shutdown severely limits the flow of fuel to industry and residents in the Northeast. Shortages develop. A cyber issue –
affecting one company – has now exposed supply chain risk across multiple companies, entire industries, towns, cities, and states.
As the shortage plays out, cities begin drawing up plans to reduce public transportation. This creates another potential risk:
workforce disruption for companies whose employees can no longer get to work. Airlines curtail flights, further restricting the
free flow of people and goods.
Petrochemical and heavy manufacturing industries – dependent upon refined oil products and fuels – begin planning to reduce
production. That, in turn, creates another wave of supply chain disruptions. Now, companies operating in other parts of the U.S.
– or outside its borders – are facing a business continuity risk... that began with a cyber breach at one regional energy company.
Organizations and nations now find themselves increasingly vulnerable to a risk “domino effect.”
A single risk, affecting a single company or country, that triggers other risks over time — both within the entity itself and beyond.
Rare is the risk that now exists in isolation. Any risk – large or small, new or longstanding –
likely connects to other forms of risk. And the aggregate risk can be much greater than the sum of its parts –
with cascading effects for creditworthiness, access to capital, insured and uninsured losses, valuation, and profitability.
The result for companies and countries that are caught out: surprise, disruption, and loss. But for those who anticipate and act quickly,
the Era of Exponential Risk promises a new era of opportunity.
In a single week in 2022, Moody’s sent more than 9,000 alerts on supply chain vulnerabilities, ranging from fraud to human trafficking risk, that could affect companies’ bottom lines and licenses to operate.
For leaders, this new form of risk creates a fresh set of considerations: the need to look at risk in a different way.
It is convenient to evaluate risk in silos and daunting to consider all the complex interactions; in a reasonably stable world, that may have been sufficient. Today, that’s not enough. In this new era, though detailed analysis of individual risks remains necessary, evaluating the interactions between risk domains has become imperative.
Leaders now need to base their decision making on a 360-degree view of what’s coming next, getting ahead of emerging risks to build resilience, fully understanding their supply chain and customer base, and protecting and creating growth opportunities. They need to be able to see both the trees and the forest.
Thankfully, leaders now have access to a level of risk assessment and understanding that was unavailable to anyone as recently as five years ago. Massive data sets, powerful computing, and a growing understanding of exponential risk, together, provide — for the first time — a detailed view of RiskN – Exponential Risk.
Looking ahead, it’s clear: this new era isn’t going to fade away. In fact, the number of risks — and the ways they interact with each other — will only multiply. For those in c-suites, boardrooms, or seats of government, understanding exponential risk has become a necessity.
How leaders can navigate exponential risk
How leaders can navigate exponential risk
Separate out the signal from the noise by accessing larger data sets — beyond your own organization — to focus on high-impact and interconnected risk areas.
Break down risk planning silos by bringing different teams together to explore overlapping risks and emerging issues.
Identify any single points of failure - such as a facility, software, or component - and bulk up resiliency and redundancy.
Create a poly-crisis team equipped and empowered to act decisively in the face of multiple shocks.
