Risk Management in Large, Complex Organizations – Lessons from the Eurozone

By Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Guillermo de la Dehasa wrote an interesting paper for Voxeu called “Eurozone Design and Management Failures” (May 2011).  The paper provides an interesting perspective on the role of risk management in a large, complex organization.  The risk management failures include: taking into account and ignoring known risks, monitoring and managing risk, and using the appropriate risk metrics.

 

Europe’s sovereign-debt crisis is a defining moment for the Eurozone in that it exposed the weakness of the monetary union’s design, governance and management.  Academics pointed out three basic initial design flaws overlooked by policy makers in their haste to create the euro:  the lack of price and wage flexibility, a monetary policy where one size fits all and the lack of monitoring of individual countries’ fiscal policy.

 

The Eurozone sovereign-debt crisis uncovered more serious flaws:  the Eurozone policymakers (IMF was) were not equipped to deal with a solvency crisis; the European Financial Stability Fund (EFSF) only provided a short-term liquidity facility.  A liquidity facility may delay the day of reckoning and raise the cost and lastly there was no provision in various Eurozone agreements for resolving a solvency crisis.  The present system, at best, contributes to the creation of a debt overhang increasing the cost of crisis resolution.

 

The three current bailouts were triggered by policymaker management failure to address the solvency issue.  The failure to incorporate risk analysis into Eurozone policymaker culture and strategic thinking could prove extremely costly for investors and painful for Eurozone citizens. 

School Trip Risk Assessment

by Stephen McPhie, CA

Partner, RSD Solutions Inc. 

www.rsdsolutions.com 

info@rsdsolutions.com 

 

My daughter brought home a form for me to sign to give her permission to go on a school trip.  The form included that statement that a risk assessment was available upon request.  My initial feeling of comfort that risk had been assessed gave way to wondering what this actually meant.  Was the trip going to be less risky because a standard risk assessment form had been filled out?  Do people filling out the forms truly document, assess and rank all the risks and devise and action plan to eliminate or lessen the risks?  Do they actually visualise and understand the risks?  Or do they just hurriedly slap down a few of the same token things each time to satisfy the beast? 

I can just about remember ancient times when I was a kid and went on school trips. No risk assessment forms were filled out.  Teachers would instinctively know the risks and exercise due caution.  We would be made to walk in a line two abreast with a teacher at the head of the line and another at the back.  Periodic head counts would be made.  We stopped and regrouped before crossing roads.  And so on and so on.  The teachers had instinctive and practical risk awareness – although it was not formalised or policies written or bureaucracies created. 

In fact, across the public sector, the term “risk assessment” is seen and heard everywhere these days.  It seems to be the favourite buzz phrase.  But is it accompanied by a culture of true risk awareness?  It seems that complaints about the heavy burden of bureaucracy and form filling are as common as the term “risk assessment”.  Are such complainers really embracing an effective risk culture? 

Unless there is a fundamental risk culture instilled within an organisation with commitment from the top down and bottom up, forms and bureaucratic prescriptions are useless.  In fact, they may become counterproductive by taking attention away from the real risk issues and instil a false sense of comfort, thus increasing risk. 

The lesson for businesses is that risk management must be a qualitative exercise that is going to be different for each organisation.  Off the shelf solutions can be valuable and have their uses but they must be made to fit the organisation as a tool and not the other way round.  Paying your cash and imposing a system is not a substitute for a proper commitment and culture.

 

The (Forgetful) Dismal Scientists or “Yesterday’s logic is illogical today”

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

As the US Federal Reserve Chairman’s own version of the QE2 sets sail, commodity prices continue their upward move. The upward march in oil was initially caused by the increase in demand for product as world oil consumption moved from about 88 million barrels/day last year towards an expected 90 million this year. More recently, Brent crude has been pushed above $100 because of increased uncertainty of continued delivery from the Middle East.

Now those of us with long memories, say 12 months, will recall that the dismal scientists as economists are affectionately (?) known, predicting that the next recession would start when oil trades above $100 USD/bbl. Interestingly, the Street has not renewed their talking of this outcome but rather they focus on the renewed and continued strength of the US economy. It is strange that all the arguments Street economist gave about the effects of triple digit oil and $4.00/gallon gasoline 12 short months ago are no longer gain attention.

This blog raises 2 points:

1. It takes a paradigm shift for yesterday’s logic to be illogical or have reduced impact. Effective risk management must be dynamic but not at the expenses of forgetting the past.

1. It looks like price volatility will continue in 2011 and downside risk is starting to appear.For corporate risk managers: what are you doing now that the likelihood of downside economic risk is increasing or are you seeking safety in the crowd?

In fairness.  I caught the following (taken from the Globe and Mail) just prior to posting:

"The International Energy Agency’s (IEA) executive director Nobuo Tanaka said prices above $100 per barrel for the rest of the year could drag the global economy back into a repeat of the 2008 economic crisis."

Turing Risk Test

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I am currently reading the book “The Man Who Invented the Computer”, by Jane Smiley. (http://tinyurl.com/4vo9oua)  I highly recommend it. It is a thrilling read – even if you are not a computer geek (or a geek in general). 

Reading the book reminded me of my early days in academia (early 1980’s) when we debated where computers were going to go. The big debate we had was about the Turing Test. The Turing test involves having someone ask simultaneously questions of a computer and of a human. If the person asking the questions cannot tell the responses from the human, from the responses of the computer then the computer has “passed” the test. 

At the time the “test” was proposed, the thinking was that the computer would give the weaker responses and thus it was up to computer designers to develop more elaborate and sophisticated computers. 

The question I would like to propose is the Turing Risk Test. It goes like this – if you read a risk analysis of your organization produced by a computer, and a risk analysis of your organization produced by a person (or a team of people), will you be able to tell the difference? Which will be the most sophisticated analysis? Which will be the most useful analysis?