Risk Scenario Analysis


/ June 17th, 2010/ Posted in How to do Risk Assessment / No Comments »

It is ironic that future scenario analysis, developed famously by Royal Dutch Shell, was not used when it should have been in that very same industry. AP reported on May 06 that:

“…a site-specific exploration plan filed by BP in February 2009 stated that it was “not required” to file “a scenario for a potential blowout” of the Deepwater well.”

Risk and international business managers could take a close look at risk scenario planning as a way to grapple with black swan risk, defined here in the Barnes and Noble synopsis of Nassim Nicholas Taleb’s book:

“an event, positive or negative, that is deemed improbable yet causes massive consequences.”

Doesn’t that definition, by the way, assume that you were able to at least identify the risk before deeming it improbable? Perhaps the true black swan risk is the one that broadsides you altogether. In any case, the value in future scenario planning is that it sidesteps the necessity to predict. It does not depend upon forecasting.

We all know business continuity scenarios are not like conventional risk management, not only because they deal specifically with disaster and emergency risk, but also because they focus on mission-critical functions, and often take an all-hazards approach. There will be significant areas of overlap in plans to address several different perils.

Similarly, risk scenario analysis is interested in resilience, and starts from a consideration of a core mission. You define the trends with the most significant influence upon that mission, and then create extreme – but plausible – scenarios. The advantage is that you are not relying on one narrow prediction or forecast. You have instead rich scenarios that present conditions that challenge your organization’s survival in different ways.

The team can then plan pre-event treatment, and adjust its plans to meet difficult conditions in something like an all hazards approach.

Risk practitioners point out another advantage to future scenario analysis. It permits a freer discussion than is normally held to identify essential business functions, assets at risk, types of threats, and the longevity and relevance of the organization’s very mission. For example, if the team determines that, in three out of four future scenarios, shifts in industry practice, business models and technology would likely render the core business obsolete, they might well re-evaluate their strategic direction.

I have put in a proposal to RIMS to develop another risk assessment online course [update: Creating Value: Risk Manager as Innovator — up and running], in which I would include a module on risk scenario analysis, using the future scenario planning model.

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