But the accident could have been avoided. A passenger had seen a large piece of metal later determined to have been a section of a wheel emerge from the floor into a cabin, where it became wedged between two passenger seats. The passenger dutifully went to find a conductor, who had the authority to activate the brake but still failed to do so. When the conductor was sued for negligence by Deutsche Bahn, he successfully defended his actions by claiming that he had followed an established rule that required him to visually inspect any problem which in this case was several carriages away before triggering an emergency stop.
His adherence to the protocol for managing a routine risk delayed his response to the novel event—with catastrophic consequences. The bottom line is that recognizing a novel risk requires people to suppress their instincts, question their assumptions, and think deeply about the situation. This System Two thinking, as Daniel Kahneman terms it, is unfortunately more time-consuming and more demanding than making a rapid evaluation and following the rules.
And in cases like the train derailment, the pressure of the moment makes it more rather than less likely that people will default to their instinctive thinking mode. Given those problems, companies cannot rely on managers familiar with routine risk protocols to identify novel risks. They should instead:.
At Nokia, another large customer of the Philips Albuquerque semiconductor plant, information about any unusual event in a supply chain had to be reported to a senior vice president of operations, logistics, and sourcing. This role differs from that of a traditional chief risk officer, whose priorities are to improve the management of known routine risks and to identify new risks that can then be transformed into manageable routine risks.
By contrast, the worry officer has to quickly recognize the emergence of any novel risk and mobilize a process for addressing it in real time. But following protocol, he reported it to the senior VP as a supply chain anomaly.
The VP mobilized a person multifunction team to manage the potential threat. Engineers redesigned some chips so that they could be obtained from alternative sources, and the team quickly purchased most of the remaining chips from other suppliers. But there were two types of chips for which Philips was the only supplier. In effect, Nokia could now use Philips as its captive supplier for the two scarce chips.
The relationship allowed Nokia to maintain production of existing phones, launch its next generation of phones on time, and benefit when Ericsson exited the mobile phone market. Digital technology can be a powerful tool in the search for anomalies, as the experiences of the Swiss electricity utility Swissgrid illustrate.
A control room manager who believes that a low-probability novel risk might materialize can analyze it more deeply to determine whether to implement a nonroutine response. Recognizing a novel risk requires people to suppress their instincts, question their assumptions, and think deeply about the situation.
In addition to encouraging employee reports, companies can look outside their organizations for information about novel risks. Swissgrid has joined forces with the Swiss army, the Swiss national police force, and several other federal and state agencies and corporations to develop a real-time national crisis-management platform that can be accessed by all parties involved. Each entity uses the platform to report any issue it learns about, such as a forest fire, an accident triggering a massive traffic jam, or unusual snow conditions or avalanches in the Alps.
Risk managers at Swissgrid, connected to the platform, get early visibility into external situations that could potentially interrupt the reliable flow of electricity to customers. At Swissgrid the senior risk officer keeps an eye out for unsettling developments like the Swissair bankruptcy and the high-profile cyberattack on the shipping giant Maersk.
Following any such event, he schedules an extraordinary-risk workshop attended by senior managers and risk officers from every business unit and by external subject-matter experts. This systematic process helps the company spot potential novel risks and transform them into managed ones. Yet we cannot wait for problems to show up and then solve them like firefighters. Also, nothing in the backgrounds of operating or risk managers will help them respond quickly and appropriately.
In this situation a company needs to make decisions that are a good enough, b taken soon enough to make a difference, c communicated well enough to be understood, and d carried out well enough to be effective until a better option emerges. A company has two options for right-of-boom responses:. The team should consist of employees from different functions and levels of the company, external people with relevant expertise, and representatives of stakeholders and partners.
For managing the consequences of delays in large-scale product development—for instance, for a new aircraft—the team should work closely with its suppliers. Over time, as the situation changes and new information emerges, the membership of the team may change. It can delegate specific questions, such as how to access and preserve cash and how to manage key components in the supply chain, to other individuals or subgroups to examine, but the team must maintain responsibility for coordinating all aspects of the response.
The team usually meets at least daily and more often if the event is evolving rapidly. It manages communication within the firm and coaches the CEO on external communications. The discussion dynamics are important.
The aim is to encourage inquiry, not advocacy, which is why meetings must be psychologically safe gatherings where everyone can offer untested ideas and disagree. On the other hand, if your business is going well, that is even more reason to look at your risks. The landscape of every business is always changing and, even if things are going well now, risks always exist.
In any case, part of maintaining a healthy business is constantly assessing where your business stands, even if the risks are ultimately low. Risk, pertaining to business and not the 8-hour boardgame , is the probability of a negative occurrence due to external or internal vulnerabilities. A business is at risk in a certain area when something needs to change or the chance of a negative outcome is high.
Or worse, become obsolete. For a successful business, you need to keep your thumb on the pulse of multiple risk categories. These risk categories include the following:. This has everything to do with employee training. Instead, train your employees to focus on quality, not quantity. If your company is constantly relying on the next innovation for growth, then a hiccup is inevitable because not all new products and services will be successful.
If you want to save capital by not having to hire an outside firm, and there is time available, you can appoint current employees to head a risk management team.
However, this would only be wise if someone within the team has experience in this area and can act as a leader. Otherwise, paying for an outside risk management team will be a worthwhile investment. They will be able to map out all the risks to your company based on your type of business and set up strategies to implement immediately if any of those risks become a reality.
This should lead to the prevention, or mitigation, of those risks and threats. Risk management is a form of insurance in itself and is an imperative step for sustainable success. The seven steps above should get you started in shaping a risk management plan, but they are just starting points. A deep dive into your business and industry will help you better shape a risk management plan that could save the business you worked hard to create.
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