How Blending Business Continuity, Strategy and Risk Management Mitigates Black Swans and Shapeshifters

How Blending Business
Continuity, Strategy and Risk
Management Mitigates “Black
Swans” and “Shapeshifters”

A Complimentary Webinar from Aurora WDC
12:00 Noon Eastern /// Wednesday 03 April 2013

~ featuring ~

Geary Sikich Dr. Craig Fleisher

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Geary Sikich advises executives about complex decision
making, risk, continuity and competing in the global
economy.

Connect with Geary via: LinkedIn
Web: http://www.logicalmanagement.com
Email: gsikich@logicalmanagement.com
g.sikich@att.net
Geary Sikich
Skype: geary.sikich
Author, Expert, Advisor

The Intelligence Collaborative is the online learning and networking
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AGENDA

Defining the problem
“Black Swans”
“Shapeshifters”
Suggested actions/possible solutions
Q&A

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A black swan is a highly
improbable event with three
principal characteristics: it is
unpredictable; it carries a
massive impact; and, after the
fact, we concoct an explanation
that makes it appear less
random, and more predictable,
than it was.
Taleb continues by recognizing what he terms the
problem –

“Lack of knowledge when it comes to
rare events with serious
Nassim Taleb “The Black Swan: The Impact of the
consequences.” Highly Improbable.”
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Skewed Paradigms:
Extremely Rare Events –
Strategy, Risk
Management, Business Continuity
Planning, Competitive Intelligence

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Randomness, Risk and Black Swans

Effect of a single
observation, event or element
plays a disproportionate role in
decision-making creating
estimation errors when
projecting the severity of the
consequences of the event. The
depth of consequence and the
breadth of consequence are
underestimated resulting in
surprise at the impact of the
event.
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The stretcher who hammers out the metal

Are you making things fit;
regardless of the
consequences?

You may be falling into an
“Activity Trap”

In Greek mythology Procrustes or "the stretcher [who hammers out the metal]", also known as Prokoptas or Damastes
"subduer", was a rogue smith and bandit from Attica who physically attacked people by stretching them or cutting off
their legs, so as to force them to fit the size of an iron bed. In general, when something is Procrustean, different lengths
or sizes or properties are fitted to an arbitrary standard.
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The problem –
 “Black Swan” event is a subjective term – Your “Black Swan” may
be my “White” or “Gray” Swan
 “Black Swan” events are labeled after the fact
 “Black Swan” events are selective in their consequences for those
who experience them
 “Black Swan” events take the “fat tails” of power law systems
seriously. Expect change to arrive not gradually, in a way that will
allow the organization to adjust in real time, but in sudden
discontinuities of great consequence that reshape the business
environment, bringing both dangers and opportunities.

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Prediction – Projection
If you don’t know what you
don’t know, how can you
prepare for it?
Conventional practices leave us
vulnerable to
random, potentially
catastrophic events, that
cannot be predicted based on
simple extrapolations from the
past or projections of the
future. Powered by


Strategic plans, Risk
Management plans, Business It is much easier to
Continuity plans, Competitive sell: “Look what I
Intelligence did for you”
initiatives, etc., that are
standalone activities than
generally reflect good
intentions – whether to meet “Look what I
regulatory requirements or to avoided for you.”
address governance.

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Shapeshifting is the nonlinear evolution of
events combined with reactions to events.
Shapeshifting can be influenced and
somewhat controlled by individuals (an act
of will, a decision, or situational awareness).
Shapeshifting may be the result of natural
forces, limited information, failure to work
through the process of solution and/or
extreme influence by external forces.
Shapeshifting is evolutionary (uniqueness is
created in the way that evolution occurs.
Shapeshifting is not linear (evolution creates
change, collateral factors come into
play, consequences have long lasting effects.
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Volatility and Disorder – Nonlinear Effects

Execution Risk Positive Consequences

Right Action

Action
Recognized Risk Altered Risk State
No Action

Wrong Action

Execution Risk Negative Consequences

Transparent Vulnerabilities? Outliers? Variables?

Distorted Maps of Real Risks? Linear vs. Non-Linear Thinking

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A stone and its weight in pebbles – size matters.

A collection of small units with semi-independent variations
produces vastly different risk characteristics than a single large unit
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Non-predictability of events is not relevant with regard to
the consequences of events. Effective decision making
does not mean “perfect” – all decisions are flawed.

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Since 1956 there have been
over 200 incidents – from sunk
rigs to blowouts, collapse and
hurricanes, storms, etc.

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Volcanic States?
Idaho 10 volcanoes
New Hampshire 2 volcanoes
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Emerging Risks – Likelihood, Impact & Velocity
High Competition
Global Workforce
Geo-Political Sovereign Debt
Infrastructure
Environmental
Markets RISK VELOCITY
Economies
Likelihood

Very Rapid
Foreign Sources Impact of the risk would
be evident in a month
Alternatives
Rapid
Technology Impact of the risk would
be evident in a quarter
Social Trends Slow
Impact of the risk would
be evident in a year

Low
Low High
Impact
•Traditional risk assessments that prioritize risk on probability and impact are outpaced by the speed
at which risks move throughout the organization. While 70% of finance executives agree that risk
velocity is a core consideration, only 11% have introduced it into their risk assessments.
Source: Deloitte; Risk Integration Strategy Council Research

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Suggested Actions/Possible Solutions

As a result of the globalized environment in which we operate
today risks that were virtually unknown in the past decade
continue to surface resulting in an increased need for
organizations to constantly assess the global landscape to
determine potential impacts (positive and negative) of risk
realization.
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False Positives

Mistaking the absence of evidence
(of harm) for the absence of harm.
Overestimation of the chances of
success and underestimation of the
chances of failure.
Artificially suppressed volatility
causes fragility – extreme fragility –
while exhibiting no visible risks.
“Why did we build something so
fragile (susceptible) to these types
of events?”

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Suggested Actions
Step 1: Where Are We? Develop an External Environment Profile
What are the key factors in our external environment and how much can we control them?

Step 2: Where Are We? Develop an Internal Environment Profile
Build detailed snapshots of your business activities as they are at present.

Step 3: Where Are We Going? Develop Assumptions about the Future External Environment
Catalog future influences systematically; know your key challenges and threats.
Step 4: Where Can We Go? Develop a Capabilities Profile
What are our strengths and needs? How are we doing in our key results and activities
areas?

Step 5: Where Might We Go? Develop Future Internal Environment Assumptions
Build assumptions, potentials, etc. Do not build predictions or forecasts! Assess what the
future business situation might look like.

Step 6: Where Do We Want to Go? Develop Objectives
Create a pyramid of objectives; redefine your business; set functional objectives.

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Suggested Actions
Step 7: What Do We Have to Do? Develop a Gap Analysis Profile
What will be the effect of new external forces? What assumptions can we make about
future changes to our environment?

Step 8: What Could We Do? Opportunities and Problems
Act to fill the gaps. Conduct an opportunity-problem feasibility analysis; risk analysis
assessment; resource-requirements assessment. Build action program proposals.

Step 9: What Should We Do? Select Strategy and Program Objectives
Classify strategy and program objectives; make explicit commitments; adjust
objectives.
Step 10: How Can We Do It? Implementation
Evaluate the impact of new programs.

Step 11: How Are We Doing? Control
Monitor external environment. Analyze fiscal and physical variances. Conduct an
overall assessment.

Step 12: Change What’s not Working Revise, Control, Remain Flexible
Revise strategy and program objectives as needed; revise explicit commitments as
needed; adjust objectives as needed.
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Suggested Actions
Heightened Awareness or Reactive and Backward Looking
Preemptive Proactive Reactive
Anticipates Change Recognizes Change Process is means to an
end “Mission Critical”
Recognizes complexity Causal focus overlooks
& interconnectivity opacity, complexity & Fails to ask: “Is the
interconnectivity process still relevant?”
Research focuses on
long term Research – tactical Research –
trends, drivers, issues trends, drivers, issues prescriptive, little
creative problem
Expanded knowledge Knowledge: “Cylinders solving
base of Excellence”
Knowledge: potentially
Not process dependent Process focused inaccurate “False
Alignment – Alignment – “Cylinders Positives”
SP, BC, RM, CI of Excellence” Alignment – “Defined
Boundaries”
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We know very little about how different highly
disruptive, nonlinear changes might interact with
and amplify one another.
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How Blending Business Continuity, Strategy and Risk Management Mitigates Black Swans and Shapeshifters

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