13 July 2012

PwC: Prospering in an era of uncertainty – The case for resilience

In today's climate of financial uncertainty, business and risk managers must focus on building resilience in order to bounce back from setbacks, rather than employing older risk management techniques that simply attempt to predict and reduce threats.

The paper, published in association with the UK’s University of Oxford, warned that those sectors with longer and potentially more damaging supply chain disruption, including financial services and manufacturers, are most at risk if they do not start adapting risk management plans.

Given today’s financial and operating environment, it advises organisations to accept that they must take a ‘radical new stance’ to managing risk, and adapt early rather than ‘scrambling to action stations once the alarm bells have sounded’.

“Traditional risk management focuses on removing uncertainty, which is almost impossible in the current treacherous financial climate. Resilience accepts that shocks will occur and gives as much prominence to an organisation’s power of response as to its power of control”, says the paper.

“Enterprise Risk Management (ERM) grew up in the years of cheap credit. Today, boards and executives are looking to extend its foundations and build on its many strengths, in order to strike the right balance between risk management and value creation, and create a new framework that links strategy, risk and resilience in a way that’s more appropriate to the new uncertain environment”, says the report.

Resilience accepts shocks will occur and the organisation’s power of response is as important as its power of control. This enables boards and executives to bring the benefits of risk thinking to the exploitation of opportunity as well as to the management of downside risk, says the report.

It argues that resilience brings three key benefits:

• first, short-term survival: responding quickly and robustly to shocks;
• second, adaptation: enhanced awareness of change in the external environment and the need for intelligent response;
• third, transformation: moving into new markets and creating entirely new experiences for customers.

The paper, published following a series of workshops with FTSE 100 companies around the world, discusses two elements of resilience. It calls these ‘buffers’ and ‘adaptive capacity’. As predictability wanes, the need for buffers and adaptive capacity increases, it says.

Buffers provide the breathing space needed to absorb shocks and mount a considered response. Examples are operational assets that can be realised in a crisis, cash and other liquid assets on the balance sheet, and diversification of suppliers, customers and sources of funds to avoid over-concentration of risk.

Adaptive capacity combines strategic flexibility and organisational agility with a culture that supports learning and renewal. According to the paper’s authors, an increasingly important element of adaptive capacity lies in the relationship an organisation has with its customers and supply chain partners.

Whereas buffers are prerequisites for survival, adaptive capacity becomes more important as an indicator of longer-term resilience, the experts argue.

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