Manage the risks you can’t foresee

Risk management is a strategic tool which enables organizations to systematically identify and assess the key risks they face.

But even the most sophisticated #risk #management system cannot prepare an organization for everything. Some risks seem so remote and unimaginable, that organizations do not have them on their radars. Such distant threats are sometimes referred to as NOVEL RISKS.

What are NOVEL RISKS?

There are a few key characteristics that are typical for NOVEL RISKS and explain why they are usually not identified by organizations:

1. The triggering event which causes a NOVEL RISK to materialize is outside the realm of the organization’s imagination – sometimes called a “Black Swan” (e.g. a risk that materializes far away)

2. Multiple routine breakdowns happen simultaneously and combine to trigger a major failure

3. The risk materializes rapidly and at an unexpected scale

Examples from recent history

Consider the development of Boeing’s Dreamliner 787. For this particular plane, the company introduced new materials (among other significant changes in design and hydraulics) and required its first-tier suppliers to take unprecedented responsibility (red flag!).

After the launch of the Dreamliner, several incidents forced authorities to ground the plane for several months resulting in huge financial losses for Boeing. The risk materialized and Boeing recognized that they had done too many changes at the same time and probably overestimated their suppliers’ ability to cope with the additional requests.

How do we identify NOVEL RISKS?

The most obvious red flags for NOVEL RISKS are anomalies, or, in other words, things that just don’t make any sense. Getting back to above example – a risk manager at Boeing could have spotted a NOVEL RISK here. The potential for multiple routine breakdowns existed due to the large number of changes. Additionally, the development of the Dreamliner required first-tier suppliers to perform tasks they had never done before. These observations combined raise the question – does this make sense? If the answer is no, you got your NOVEL RISK.

What are the obstacles?

To identify NOVEL RISKS, we need to use our imagination, creativity and common sense. Failures to pick up red flags are often rooted in biases: Organizational culture can be an obstacle to speaking up because employees might not dare to challenge management decisions openly. At Boeing for instance, the changes in design of the 787 were certainly questioned by individual engineers. But did they speak up? If so, were their concerns considered? 

Standard procedures at organizations can certainly be useful but in some cases, they can be an obstacle to creativity and to acting on NOVEL RISKS. 

In 1998 a Deutsche Bahn high-speed train derailed in Germany. Just prior to the accident, a passenger had seen a large piece of metal emerge from the floor into a cabin (later determined to have been a section of a wheel). Instead of pulling the emergency break immediately, the passenger went to find a conductor (a large warning sign had prevented the passenger, who was afraid to be fined, from using the emergency break). Instead of stopping the train, the conductor insisted on inspecting the metal piece personally – by this time it was already too late. The train derailed, killing more than 100 people in one of Germany’s most catastrophic train accidents in recent history. The conductor survived and was later sued by Deutsche Bahn for negligence. However, he successfully defended his actions referring to an established rule which required him to visually inspect issues before triggering an emergency stop.

Knowing these obstacles will help you overcome them by improving your organizational culture where required, by encouraging employees to use common sense and empowering them to speak up.

Together, you will identify NOVEL RISKS that may need to be managed to avoid a massive impact on your organization in the long-run.

Thank you to Prof. Kaplan, Prof. Leonard (Harvard Business School) and Associate Prof. Mikes (Said Business School) for the inspiration.