A Tragedy of the Commons: Encouraging a collaborative approach to systemic risk management

Steve Culp is guest blogging for the Forum. He is Managing Director of Accenture’s Risk Management Practice and a member of the Forum’s Risk Officers Community.

 

Risk is a loaded word. Although defined in the Oxford English Dictionary as “a situation involving exposure to danger”, in the economic world, leaders understand that reward and returns cannot be delivered without some level of risk. Taking the “right” risks is what enables success in a competitive market place. Yet as industries become more global, and supply chains more complex, the possibility of systemic risk, where one event affects many companies, is a more pressing concern. It is also harder to manage alone.

The global recession has driven many organisations to make short term, necessary decisions with a primary cost focused view in order to reduce costs within the overall supply chain. Buffers and safety stock were viewed as expensive in this period.  Concepts such as zero inventory, just-in-time movement of goods and increasingly global operations, have indeed reduced total supply chain costs, but have in parallel increased the vulnerability and level of risk associated with supply chain and transport networks, which can rapidly lead to unexpected disruptions when there are issues in the external environment.

In many organisations, a growing awareness of this increased vulnerability within core business has encouraged the implementation of tools and processes to support effective risk management at an operational level. However, systemic risk management is still in its infancy. Companies are often structured to look at risk within silos over discreet time periods, and are reluctant to share best practices with their competitors. This endogenous approach to risk management is neither sufficient nor effective when, rather than being constrained to the profit statements or stock levels of one company, the interlinkages and interconnectedness of supply chain operations result in disruptions across companies, industries and geographies.

Systemic risk requires business to consider events beyond their immediate organisation’s structure, and to understand the full complexity of supply chain and transport networks. This requirement for a more collaborative approach to risk preparedness and mitigation is one of the key objectives for the World Economic Forum’s Supply Chain and Transport Risk project which aims to map key systemic risks to supply chain and transport networks, in order to ensure focus and alignment of effective risk management and intervention at the wider industry level.

Like a tragedy of the commons, there is currently limited incentive for an individual company to invest in upgrading their risk knowledge and to share relevant information in order to reduce the systemic danger to other organisations and third parties. Yet by encouraging a more collaborative industry wide approach to systemic risk management, organisations have the opportunity to confront risks in today’s complex supply chain ecosystems, strengthen their competitive advantage and reduce the impact on their end customers and shareholders.