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Supply Chain Risk

It’s Time for Scenario Planners and Enterprise Risk Managers to Join Forces

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Scenario planning—a powerful method for communicating and examining uncertainty—is once again in vogue as a result of the COVID-19 pandemic. Despite the growing interest in this approach, however, its use is still limited, deployed predominately by the intelligence, business, and military communities.

In 2007, virologists warned that SARS-CoV-like viruses and other novel viruses were “time bombs” that should not be ignored. The U.S. Government, in the unclassified and well-distributed report, 2012 Global Trends 2030: Alternative Worlds, wrote that an “easily transmissible” novel respiratory virus could kill millions around the globe in six months or less. And, in 2015 a noted and well-respected global vaccine advocate with deep roots in the technology world warned that deaths due to a future global pandemic would far outweigh those caused by ongoing regional wars and civil strife. The catastrophic fallout from COVID-19 threatens to thrust nearly 100 million more people across the globe into extreme poverty, especially in developing countries where health care infrastructure is limited and governance is fragile. This will be the first increase in poverty since 1998, with almost half of those projected to be newly poor in South Asia and more than a third in sub-Saharan Africa.

The difference between uncertainty and risk is subtle yet important. 

As scenario planners get busy generating ways to examine the uncertain consequences of COVID-19, they are finding much in common with another group of experts—risk managers. The difference between uncertainty and risk is subtle yet important. Scenario planning arose as a modern and formal discipline after World War II in response to a U.S. Air Force request for a planning tool that could examine options and check assumptions underpinning future American military strategies. What, they asked, might our adversaries do in the “new nuclear age,” and what kinds of immediate responses should the U.S. be prepared to deploy? Lacking precedent, scenario planners needed to develop a range of plausible futures without the benefit of data, trends, or prior experience. 

Risk management, by contrast, arose from the business community. It traces its history to the attempt by major companies in the 1930s and 1940s to estimate perils to their bottom line, including factors like accidents, property loss, fraud, and corruption, so that these risks might be transferred to insurance companies or, if not transferred, to have internal company plans in place to control those adverse financial possibilities. Historical data from numerous sources over many years made risk estimation possible and valuable to executives, financial rating agencies, and shareholders alike.

One way to think about the difference between scenario planners and risk managers is that the former are developing future possibilities in highly ambiguous and complex situations, where the number of unknowns may easily outweigh the number of knowns, and for which prior data is weak or non-existent. Uncertainty prevails when a significant future event cannot be easily calculated or its probability empirically determined. In contrast, risk managers are reviewing and identifying a broad range of threats to an organization’s goal and relying mainly on historical data analysis, along with forecasting and modeling, to minimize or eliminate the threats. Risk is when a significant future event can be measured or estimated but only within the bounds of prior experience.  This distinction between uncertainty and risk is hardly new. It can be traced back nearly 100 years to the economist Frank Knight, who used the distinction to illustrate for budding business strategists the highly imperfect knowledge about what lies over the horizon.

An examination of COVID-19’s primary and secondary impacts spotlights two critical reasons to combine scenario planning and risk management into a single foresight/futures capability for any development or other organization:

1) Expand Scenario Planning’s Analytic Reach: We are likely to see more fast-moving and highly impactful events bearing similarities to COVID-19 in the developing world, given the increasing level of global connectedness (notwithstanding a slight drop predicted for 2020). Connectedness is a desirable outcome because increasing trade among nations almost always brings sizable benefits to lower-income households. Decision-makers no longer want to only know about possible alternative futures (scenario planning)—they are demanding to know more about the analytic landscape, the downsides and opportunities associated with the disruptive event in quantitative terms,  and explicit approaches to mitigate and control any threats and optimize any advantages (risk management).

2) Strengthen Risk Management’s Toolbox: Risk managers are always on the prowl to identify risks that might undercut organizational goals. They look at the root causes of risk, catalogue and prioritize them, and develop mitigation and control strategies. Rather than looking at individual risks one-by-one, today’s risk managers deploy “enterprise risk management” (ERM), an approach that is designed to address the full spectrum of risks by developing an interrelated risk portfolio. At the U.S. Agency for International Development, for example, risks have been identified as running the gamut, from state failure, armed conflict, narco-terrorism, and natural disasters, to more traditional enterprise risks such as fraud and corruption. Other aid and non-aid global organizations also share this diverse risk burden. By limiting the application of risk management tools to more proximal operational activities and shorter term strategies, which is still the case in many organizations, risk managers may be missing out on identifying significant future risks and opportunities linked not just to today’s pressing challenges, but to what is coming next. Deploying scenario planning methods to support ongoing ERM will strengthen and complement its already vigorous approach in a world of growing complexity and uncertainty.

Steven Gale leads the Futures/Foresight Team at the U.S Agency for International Development (USAID). He is author of the award-winning book on over-the-horizon development scenarios and blogs regularly at the Wilson Center’s New Security Beat. The views expressed are those of the author and do not necessarily reflect those of USAID or the U.S. government. The author thanks Anne Ralte, USAID Senior Program Analyst, for her input on Enterprise Risk Management.

Sources: American Society for Microbiology, Discover DHL, KPMG, Massachusetts Institute of Technology, National Intelligence Council, USAID, Ventiv, Wall Street Journal, World Bank

Photo CreditPalm trees affected by hurricane winds, Star Beach, Phu Quoc island, Vietnam, courtesy of Shutterstock.com, All Rights Reserved. 

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