The author highlights why companies must move from risk management to resilience thinking
As technological progress happens at a breakneck speed, businesses are facing a volatile landscape. What works today may be obsolete by tomorrow, what is right at this moment, may be wrong in the next one, and there is no way to define a ‘way to do business’.This uncertainty is making business leaders fidgety. How to you prepare for tomorrow when you don’t know what it holds?
The need for resilience
Traditional risk management is becoming increasingly inadequate in the face of ‘black swan’ events (Taleb, 2007)and technology disruptions. Possibility of failure is high in this threat environment. To weather these stormy seas, businesses must focus on building resilience. As an idea that is popular in military parlance and as a personality trait, resilience must now get increased focus from business leaders.
Let’s take a look at the key components of an enterprise landscape (Figure 1).
In the last decade, the advent of the digital age and the rise of the millenials have significantly impacted these components.
Changed workforce composition and ways to work – The millenials, born with the internet, have two differential behaviors – technology as a “sixth sense” and their expectation of organizational accommodation(Hershatter & Epstein, 2010). They bring new technology demands to the workplace and have changed the way work is done. Corporations need to be always on, always available, mobile, collaborative and non-hierarchical.
Changed consumer demands – These millenials are also the new consumers who, supported by new technologies, are levying further demands on the enterprise. The need better experience, better service, and better quality. Customer loyalty is at an all-time low as these digital natives easily switch from brand to brand based on peer references and social recommendations.
Accelerated the pace at which businesses need to leapfrog technology – Advances in disruptive technologies – analytics, artificial intelligence, wearables etc. – have opened up a new universe of opportunities and threats. Asthe ‘S’ curve of change covers shorter time periods, businesses are struggling to keep pace with the change.
Redefined the competitive landscape –When a search engine starts making cars you know the traditional boundaries between industries have dissolved. Add startups to the mix and you have a whole new ball game.
Rise of the collaborative economy –For the consumer today access is more important than ownership and there is a stronger focus on ‘green’ consumption. Expectations fromenterprises to be responsible social entities with a more planet friendly approach are rising.
These changes have put organizations in an environment where possibility of unexpected events is higher and risk management is no guarantee for survival. What risk management does is prepare you for scenarios that you can simulate, situations you can anticipate, bad outcomes, but expected outcomes. It does not prepare you for the unexpected.For example, not many financial institutions (FI) that were affected by the financial crisis in 2008 were prepared for it. They had risk management efforts in place, but the nature and complexity of the crisis was unprecedented and hence far surpassed any precautions FIs had taken.
Disruptions can come in any form. For example, Apple with iTunes changed the game for the music industry and Amazon with e-books redefined the publishing industry. The industry players had to adapt to the new environment or be history. And increasingly digital brands are making survival tougher. For instance, a video of a leading logistics company’s delivery person throwing a package in a customer’s front yard went viral and created uproar. The company had to issue an apology but the brand damage was done.
Building a resilient business
We’ve seen that businesses are entering the age of disruptions where traditional risk management approaches are no longer enough. Organizations must build resilience thinking. One hundred per cent of business leaders surveyed by a Wipro and Financial Times survey (Wipro and FTRemark, 2014) agreed that building resilience is a top priority. But the understanding of resilience is not widespread.
In 2000, educational sociologists Ricardo D. Stanton-Salazar and S.U. Spina neatly defined resilience as: “A set of inner resources, social competencies, and cultural strategies that permit individuals to not only survive, but recover, or even thrive after stressful events, but also to draw from the experience to enhance subsequent functioning.” An approach to building resilience can be found in the study of evolution and that of natural ecosystems. Through the ages, species have evolved to adapt to changing environmental factors for survival.
Some essential components of a resilient system are – Flexibility, Modularity, Adaptability, and the ability to stay true to its core – culture and values. Figure 2 highlights the areas where enterprisesneed to factor in these components.
Going back to the example of the financial crisis, those that survived the crisis did so because their organizations were resilient. That doesn’t mean they didn’t suffer a setback. It simply means that they were able to weather the impact and bounce back with renewed operations. A great example is the Canadian banking sector that came out of the crisis relatively unscathed due to the simple and balanced structure they had in place.
Building resilience cannot be looked at as a one-time activity it’s a continuous effort. Also, there is no defined approach to resilience. Every business must find their route to it. However, below are some guidelines that can help build more resilient organizations:
Define you core – an interesting aspect of resilience is that a resilient entity – after encountering a disruption – need not go back to its previous state but can emerge as something entirely different. But even in this state it remains true to its core. Therefore it is important to define what does your business stand for? And what are the characteristics/ propositions of your organizations that cannot be compromised on. The resilience strategy must then be built to protect this core.
Take a systemic view – In today’s interconnected world, an adverse event at any node can create a ripple effect of uncertainty across the network. For instance a natural disaster in parts of Asia could disrupt business for major retailer in the US by halting production, supply chains etc. One needs to understand the entire system and institute appropriate hedging mechanisms working along with partners to build a resilient system.
Simplify and build modular structures – It’s difficult to understand the impact of a disruption in a complex system. So map your key journeys and take steps to simplify them. Further, build modular structures that can be activated or isolated to stem the impact of a shock.
Build Flexibility -Strategic Flexibility can enhance the ability ofenterprise to deal with the dynamic changes of theexternal environment, help enterprise shorten the reactiontime to the change, and at the height of the fuzziness,expand the scope of the choice of enterprise resources (Li, Zhao, & Zhao, 2013).
Build quick response mechanisms –Hundred per cent hedging is neither feasible nor recommended for enterprises. Therefore, resilient businesses build strong response mechanisms to disruptions. I was working at Satyam Computers in 2009 when its founder was accused of fraud and malpractice. It was a major unanticipated crisis and no one thought the company was going to survive. But after being acquired by Tech Mahindra the company showed a quick revival. I believe it was the best in class processes and systems that Satyam had in place that could fast adapt to the new reality.
Get an objective outside view – We tend to be blind to fault in our systems. It could be because of familiarity, preference or comfort with the status quo. Getting an impartial view from third party advisors will help bring in fresh perspective to tackle any gaps or loopholes in the system that can prove costly in the long run.
A focus on resilience will be very important for business success in the coming years. They will need to better absorb disruptions by navigating fluidly from one circumstance to the next (Zolli & Healy, 2012). They will also need to create intersections of fields, disciplines or cultures, to morph existing concepts into a large number of new ideas (Johansson, 2004, p. 2).Going forward it will be important to look at building resilience as an ecosystem approach vs. a limited view within organizational boundaries.
Ultimately, as JamaisCascio said “Resilience is all about being able to overcome the unexpected. Sustainability is about survival. The goal of resilience is to thrive.”
Idea in brief
As technological progress happens at a breakneck speed, businesses are facing a volatile landscape. What works today may be obsolete by tomorrow, what is right at this moment, may be wrong in the next one, and there is no way to define a ‘way to do business’. This uncertainty is making business leaders fidgety. How to you prepare for tomorrow when you don’t know what it holds?