Complexity Economics

Is Risk Management a Source of Risk

The deployment of risk management within a business can be a source of false assurance.

Over recent years, businesses have become more and more reliant on increasingly complex modelling processes to predict outcomes, to the point that in many cases, businesses have lost sight of what risk management is all about – and at the same time, risk management lost sight of what the business was all about. Increasingly, I have seen risk management services being deployed in large institutions by the ‘big four’ consultancy firms, and to keep their huge costs down, they end up with the newly qualified consultants – mid twenties, bright young things, but I’m sorry, they often don’t have the faintest idea what your business does. They have insufficient real world experience to permit effective dissemination of risk knowledge.

I worked with one lovely young lady recently in a banking environment. Very intelligent – but she did not have the first clue of what the business was about. She made assumptions, and those assumptions lead the business down some long, dark alleys.

If you have risk function, however, that fully understands the business model, the deployment of its operational strategy, the sector the business operates in and the macro-economic and socio-political environment in which it operates, then they will be able to provide risk information that is relevant to the business, and can be understood by the business.

My hope going into this recession was that businesses would learn from this period in time, and take a more realistic, holistic view of the world. Worryingly, what I see is “more of the same”.

I see financial institutions that have – on the face of it – bolstered their risk functions, but in doing so have allowed them to become ever more ‘siloed’ and fractured in their approach. This can only lead to disaster, in my view. The left hand will not know what the right hand is doing – no one owns anything, no one is responsible, no one is accountable.

So, I think the deployment of risk management has been a source of risk, but I don’t think the dramas are over yet. There is a second wave of failure yet to hit, unless businesses can swallow the pill and take the right approach.

Posted by Andrew Bird, Managing Director at Nile Blue and freelance business consultant.

Established originally in 2005 in the USA, Ontonix is a technology company headquartered in Como, Italy. The unusual technology and solutions developed by Ontonix focus on countering what most threatens safety, advanced products, critical infrastructures, or IT network security - the rapid growth of complexity. In 2007 the company received recognition by being selected as Gartner's Cool Vendor. What makes Ontonix different from all those companies and research centers who claim to manage complexity is that we have a complexity metric. This means that we MEASURE complexity. We detect anomalies in complex defense systems without using Machine Learning for one very good reason: our clients don’t have the luxury of multiple examples of failures necessary to teach software to recognize them. We identify anomalies without having seen them before. Sometimes, you must get it right the first and only time!

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