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Risk management: top risk areas for 2013

By Geary Sikich.

Well, it is 28 December 2012 as I write these lines. It appears that we have survived the end of the Mayan Calendar and the predicted apocalypse/earth changes – well, at least until the next prognosticator emerges with dire predictions. So, for those of you who like to peer into the crystal ball of future concerns; I have put together a quick list of my top risk areas for 2013 - really a look at strategic risk, although a quick drill down sees risk implications at the operational and tactical levels.

My top picks for emerging crisis issues and high impact risks in 2013:

Sovereign debt

One of my top areas for concern, after Greece, Italy Portugal, Ireland, France, Germany, USA... sovereign debt and government spending! Of course throw in China, India, Russia and a few others and you have a wonderful concoction for crisis and high risk exposures. USA is a particular concern due to being still the largest economy in the world. China is a close second, as it holds so much USA debt instruments.

Top question: What will happen when interest rates rise from their artificially low levels and suddenly governments cannot pay the interest on debt with tax revenue generation?

Geo-political instability

Syria, Iran, North Korea, Somalia are immediately associated with political instability and geographic influence. While the conflict in Syria threatens to grow much worse; perhaps dragging in the USA and EU allies, North Korea quietly (not if you are a South Korean) continues to expand its arsenal and threat of an action against its partitioned neighbor to the south. Iran has withstood the current sanctions and continues development of nuclear technology (for peaceful purposes according to its government) while periodically threatening to close the Strait of Hormuz. Somalia continues to shelter its pirates (a lucrative business) and provides a business model for pirates operating in Southeast Asia, Nigeria and other parts of the world.

Top question: Will Israel attack Iran, thereby starting a potential global conflict?

Technology

Cyber-threats abound and the world is ‘over-teched’. Dependency on technology is creating a technology bubble. ‘Big data’ is now a buzzword. We are overwhelmed by a tsunami of information – much of it ‘noise’ and it is increasing exponentially. Nobody knows what to do with all that data either; it just keeps building, growing and exploding.

Top question: How safe are we from cyber-threats?

Infrastructure

Worldwide, we face a growing concern when it comes to infrastructure. Key components of the infrastructure, for example, transformers, can take years to replace. The waiting time for large transformers is now up to three years.

Banking and financial institutions are still in the high risk category as bailouts and restructuring have not solved the problems that we created in the past.

Transportation – the global supply chain is at risk as threats from the above cited areas and the areas below present challenges that are as yet, unseen.

Top question: When and where will the next large scale power outage occur?

Social

Seven billion people and counting; the world’s population growth continues to strain the ability of support systems (agriculture, water, infrastructure, etc.) to provide sustainable living conditions. The rise of mega-cities in Southeast Asia puts even more pressure on society.

Top question: When will we learn that feeding people is not teaching them to be self-sufficient in terms of procreation control?

Economics

Recession, depression, inflation or deflation, or a combination of all? The gap in wealth and poverty levels keeps expanding. The world’s poor used to be less comprised of former middle class members. Economists continue to tinker with the system; holding interest rates artificially low, providing quantitative easing, rescheduling debt, avoiding the painful reality of defaults. Printing as fast as I can has become an unofficial central bank motto. Uneven demand is skewing prices for energy, food and agriculture products.

Top question: What will happen when interest rates start to rise?

Environment

While global warming has been, and is being discussed and debated, no one has come up with much of a solution. Pollution is still a major problem on a worldwide scale. Resource scarcity – strategic minerals is quietly causing commodity prices to gain in volatility. And, we have yet to understand the magnitude of potential geo-magnetic problems that could be caused by coronal mass ejections (CME) and increased solar activity. For most of the things cited here there is no defense and no short term solution or easy correction.

Top question: What is the combination of environmental issues that will create the next great unseen crisis?

Foreign sources of energy

World energy consumption continues to increase. We consume over ninety million (90,000,000+) barrels of oil daily. World coal consumption is over seven billion (7,000,000,000+) tons annually. According to International Energy Administration data from 1990 to 2008, the average energy use per person increased 10 percent while world population increased 27 percent. Regional energy use also grew from 1990 to 2008: the Middle East increased by 170 percent, China by 146 percent, India by 91 percent, Africa by 70 percent, Latin America by 66 percent, the USA by 20 percent, the EU-27 block by 7 percent, and the world overall grew by 39 percent. Worldwide total energy consumption increased 1.35 percent in 2010 according to World Watch. Since the global financial crisis in 2008, worldwide energy consumption has grown faster than the global economy for two years in a row, as many countries started implementing massive stimulus packages to push their national economies out of recession.

Top question: When is the next resource availability shock going to occur?

Global workforce

As the world population continues to grow, we find that the global workforce is faced with a significant challenge. In many countries an aging workforce is about to transition into the next phase of life. The replacements are ill equipped to fill the roles that are being vacated. ‘Under-skilled’ is a word that has entered the global vocabulary. A skill mismatch poses a real threat to global stability. In the nuclear power industry a significant percentage of nuclear engineers are ready for retirement – no replacement pool is coming out of colleges to fill the gap. Same for petrochemical engineers; where roughly eighty percent of the workforce will soon be eligible for retirement. The list goes on and on.

Top question: When will we realign the workforce and match needed skills to educational attainment?

Renewables

Fragmented and disoriented best sums up the area known as renewables. Biofuels, wind, solar, biomass, etc. all promised to be answers to global energy consumption issues. Most have, at best, provided minimum offsets to the use of fossil fuels. One issue, in the USA is a lack of an energy policy. Worldwide, renewables present even less of an alternative as countries wander through policy and program development.

Top question: Will renewable energy ever evolve past an interesting sideshow?

Piracy

Worldwide, piracy is on the upswing. It is a growing business, spurred on by large gains with minimum exposure. We tend to assume that this means Somali and other pirates hijacking ships at sea. However, take a look at the stats below:

1. In 2008 41 percent of software installed on PCs was pirated.
2. $51 billion was lost in 2009 due to online piracy.
3. The Information Technology & Innovation Foundation claims 24 percent of global Internet bandwidth consists of pirated content.
4. From 2004 to 2009, 30 billion songs were downloaded illegally.
5. Movie piracy costs US film studios $25 billion annually.
6. Over 70 percent of Americans feel that sharing movie and music files with family members is okay.
7. Over 50 percent of Americans feel that sharing movie and music files with friends is okay.
8. Hundreds of millions of dollars are spent on anti-piracy campaigns annually.
9. 70 percent of 18-29 year-olds have downloaded illegal content.
10. Democrats and Independents are significantly more likely to download media illegally.
11. Universities spend millions of dollars to combat piracy annually.

Top question: At what point does the economic impact of pirated goods begin to undermine the stability of the global economy?

Markets

Volatility is an underlying premise. Volatility can be a good thing, invigorating markets. It can also be a bad thing, causing investors to flee to the sidelines. The advent of nano-trading has brought more volatility to the markets. Germany recently banned nano-trading. A nanosecond is 10-6 of a microsecond (1 nanosecond = 1.0 × 10-6 milliseconds). Currently the markets clear trades in microseconds. What this means is that if I can trade in nanoseconds; I can buy and sell many times before the markets can clear my initial trade. Next time you take a look at stock quotes, notice that the price now is carried to the right of the decimal point anywhere from four to eight places. The US financial markets have suffered over 18,000 extreme price changes caused by ultrafast trading, according to a new study of market data between 2006 and 2011.

Top question: When will the markets experience a significant imbalance sufficient to drive investors to the sidelines?

Competition

I have been involved in a recent discussion on LinkedIn as to the number one cause for a business fail. The discussion was started by Chris Cayer, COO Reyactive LLC and a member of the Strategic Business and Competitive Intelligence Group with the following question:

What do you think is the most common reason businesses fail?

Chris is writing a book specifically on how to deal with root causes of business failures, and wanted to hear member thoughts on the subject. I have provided an abridged, edited summary of my comments below, expressing my focus on why competition as a driving force in business success or failure.

  • Competition is the main cause of business failure. More companies go out of business because competitors come up with something better or cheaper, etc.
  • The drivers for all of the failures reside in the competition area. Think about the issues, such as: lack of resources - cash, management experience, etc. Competition creates demand and demand creates failure points that result from competing to succeed. I am reading Nassim Taleb's newest book, ‘Antifragile’ and would suggest that this may have some excellent examples and discussion on competitive forces.
  • How does one become profitable? Answer, by eliminating or minimizing the competition. Your customers are someone else’s competitor - they are doing the same thing to survive and thrive - eliminating the competition. Hence, competitive intelligence, competitive analysis, risk management, business continuity planning, business/product cycle etc. No competition, no need to worry about a product lifecycle as such.
  • Competitive forces are neither ‘good’ nor are they ‘bad.’ Do not mistake my comments for a judgment on competition and non-competition. Competition is healthy and creative; it drives markets.
  • Do not mistake the customer’s actions or inactions for decisions that are based on old paradigms of failure. For example: When did you last purchase carbon paper? Computers effectively made carbon paper obsolete and yet they did not compete directly with carbon paper companies. Typewriters were a direct source of competition, but unseen risk and thinking that what is not seen is not there and what is not understood does not exist, i.e., I make carbon paper therefore my competition is other makers of carbon paper and my customers are captive as they use my product and they have no alternative to carbon paper.... there is a tendency to mistake the unknown for the nonexistent.

It all boils down to competitive forces. Customers are not just consumers; they compete in their markets, etc., etc. Every example provide by business schools has as the underlying basis competition and competitive advantage.

Top question: Where will the next competitive shock come from?

Concluding thoughts

There are unlimited ways to buffer and alter the risk exposure that an organization has, but all involve decision making and an understanding of the consequences of the decision to act on a risk issue. Key decision makers must maintain risk within acceptable limits. However, all decision making is flawed. This is the result of bias, universally poor information acquisition, processing, management and application. We are trapped in a complexity that we have created by virtue of the explosion of connectivity, speed, sources not properly vetted, information overload, lack of information and ‘flow.’ Flow relates to perception, intangibles and bias. Combined with the above factors and many more, we make flawed decisions. Flawed decisions are not necessarily bad, nor are they good. Flawed decisions flow in all directions, creating a need for embedding a culture of risk and business continuity management, to create a responsive and resilient framework that prevents collateral damage and buffers us against unilateral damage. We fail to incorporate lessons learned because of failure bias and the speed at which events change the operating horizon. But, this is for another article or my next book!

About the author

Geary Sikich is a seasoned risk management professional who advises private and public sector executives to develop risk buffering strategies to protect their asset base. With a M.Ed. in Counseling and Guidance, Geary's focus is human capital: what people think, who they are, what they need and how they communicate. With over 25 years in management consulting as a trusted advisor, crisis manager, senior executive and educator, Geary brings unprecedented value to clients worldwide.

A well-known author, his books and articles are readily available on Amazon, Barnes & Noble and the Internet.

G.Sikich@att.net

References

Apgar, David, Risk Intelligence – Learning to Manage What We Don’t Know, Harvard Business School Press, 2006.

Cayer, Christopher, COO Reyactive LLC and a member of the Strategic Business and Competitive Intelligence Group: What do you think the most common reason businesses fail? LinkedIn discussion December 2012.

International Energy Administration (IEA), World Energy Consumption statistics, 2012.

Orlov, Dimitry, “Reinventing Collapse” New Society Publishers; First Printing edition (June 1, 2008), ISBN-10: 0865716064, ISBN-13: 978-0865716063

Sikich Geary W., "Walking on Shifting Sand", Global Conference on Disaster Management 2012.

Taleb, Nicholas Nassim, Antifragile: Things that gain from disorder, 2012, Random House – ISBN 978-1-4000-6782-4

World Watch, Energy consumption statistics, 2012.

•Date: 3rd Jan 2013 • US/World •Type: Article • Topic: Enterprise risk management

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