Risk Beyond Two(2) Dimensions
“All is fine until something happens that was avoidable.” - Jerry Durant
The application of risk principals is quite usefully practical. In its simplest and commonly applied form it is comprised of two dimensions, frequency and impact. But hidden within it’s simplicity is a much deeper and potentially useful set of considerations that create what would be best described as depth, or the inherent conditions by which the first two dimensions aptly apply.
In the Beginning
Frequency is often thought of, in the dimensional context, as the measure of width or the expanse by which a certain series of events happen. In consideration of impact it is then viewed as the depth influence that it has, given an expected frequency. But is there more?
Without losing you or boring you to death with such mathematical concepts as Kaluza-Klein and Bosonic String Theories coupled by 26 dimensional concepts and such topics as fermions and bosons simply consider the possibility of a Third (3rd) parallel dimensions that influence risk. This third dimension is both intrusive. Influential and dynamic as it relates to the fundamental of risk (impact/frequency).
How we got to this place in exploring this question of further refinement of the long standing risk model came about by assessed risk outcome deviations. In other words what was anticipated proactively ended up producing contradictory results. Our first knew jerk reaction was that impact and frequency were given arbitrary baseless consideration. But what we learned is that the level of even arbitrary consideration remained within the realm of tolerance. So what is causing this to occur?
Boo-Wah!
Risk in righteous form (width-depth) was being gravitationally persuaded by conditions of applicability. In other words a world in which the context of application as well as frequency of occurrences and impact consequences resides. To better understand this dimension we looked at how other use models were employed and whether they had similar or different experiences. What we discovered through this examination is that risk assessment (application) was being applied to a given state, condition, attribute or characteristic. For example, risk would be assessed relative to a given transaction type or applied toward problem remediation. This lead us to the question of whether the risk conclusion was too narrowly scoped and if so whether this was appropriate for more globally reaching conditions (globally meaning beyond our immediate local reach or market).
There is a third (3rd) dimension (provider of magnification clarity) that reflects the environment impact state, or the span of applicable influence that is applied. While recognizing that scope is narrow we aren’t suggesting that it be done on such as grand scale that much of it’s value is lost by far reaching factors. What is being suggested that the scope be expanded to a degree appropriate for operational conditions.
Beyond 2 Dimensions
The 3rd magnification dimension relates to the sphere of applied use. Our traditional thinking was such that all situations apply in all cases and therefore we feel prey to baselined normalistic thinking. In other words apply score considerations for frequency and risk, maintain in static form regardless of changing circumstances. As we seen by recent catastrophic disruptions our scored risks changed, not as it relates to the elements scored but because of the dynamics of the sphere in which it was applied.
If we expect and anticipate this to apply for all financial applications, that would be one possibility. But if it was appropriate only for financial investment activities than the sphere of application would change. Within the context of this example we would them establish what elements within the applicable scope would then be applied to each element that had already been appointed with impact and frequency scores. So to further this example if a financial transaction had a risk score of 5 (average impact and frequency) and it was only applicable to a investments (made up of several risk elements like scores, ratings, yield, maximum financial exposure, term and liquidity) which received a high risk score (ie. 10) the overall transactional would result in a elevated moderation (simplistically 7.5 out of 10.
The third dimension is an uncharted green field situation in so far as to having even a rudimentary degree of established knowledge established. In considering this situation we observed that the means by which initial risk assessments were address were commonly addressing conditions. In simpler terms the elements of risk assessments interest were given consideration for the circumstances that were involved. BUT, these 3rd dimension circumstances have embodied within them character conditions that individually examined contribute to conditional risks. Listed below is an example to illustrate this point.
1st-2nd Dimension Area 3rd Dimension Area
Outsourcing/Service Delivery Risk Vendor
Location Risk
Local Stability
Corruption Index
Currency Stability
Infrastructure Quality
There are however examples of companies who chose to address the 3rd dimension first. This is largely done because of its limited elements (inherent sphere limitations) and apply these conclusive observations to the much larger population of character objectives. This bottom up approach is partially useful for expedient one-time assessments. However this approach inhibits the use of dimension 3 dynamics as it is correlatively applied to traits and values (which are also dynamic). It is strongly recommended that for enterprises looking to advance their position towards the industrial revolution 4.0 (IR4.0) paradigm that both dimension three and top-down dynamic influences be the utilized.
To summarize the need for context sensitive risk assessment is predicated on the dynamics of conditions that effect the risk status assessed. Historical information, experience and conservative conduct assist in minimizing subjectivity. By further considering the environmental sphere conditions, as exemplified by the 3rd dimension, added risk awareness is provided. Finally, the true value a gain is derived from staying pace with the dynamics of every changing conditions. When ultimately enabled under an industrial revolution 4.0 (IR4.0) paradigm three dimensional risk management can take on a control dimensions. This gets carried out as a cohesive element that contributes to the rapid dynamics of analytics, industrial internet-of-things (IoT), supply chain and smart factory activities that leads to increased operational certainties.
Decision Points:
- Maturity of risk assessment and control activities.
- Degree of precision and whether used solely as a preparatory measure for determining choices or used proactively for loss prevention.
- Formal or informal subjective risk assessment endeavor?
- Readiness for advancing the risk assessment framework for us as a means of measuring dynamic effects leading to outcome control intervention.
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