A Framework for Navigating Volatility in a Complex Environment

A Framework for Navigating Volatility in a Complex Environment
July 4, 2023 6 mins

A Framework for Navigating Volatility in a Complex Environment

A Framework for Navigating Volatility in a Complex Environment

As the risk landscape expands, every TMC business should consider developing a robust framework for operational resilience. A three-phase strategy provides a rational approach to building a framework to help understand and manage key risk concerns and minimize business disruptions.

Key Takeaways
  1. Understand what drives revenue, existing and new legislation, and how the business landscape is changing.
  2. Be aware of the commercial impact of particular risk events and consider the risk mitigation strategies needed.
  3. Synthesize the outcomes of the three-phase strategy to provide better, more valuable risk insights.

Reimagining Operational Resilience in the Technology, Media and Communications Industry

For technology, media and communications (TMC) businesses, innovation is an inherent part of operations. However, innovation can lead to more complexity and, in turn, increased risk. The challenge for TMC businesses lies in being able to balance creating future-proof strategies and generating shareholder value through business cycles despite the risks that come with digital disruption and technological shifts.

How complex systems fail

"Complex systems are intrinsically hazardous systems; it is the presence of these hazards that drives the creation of defenses against hazards that characterize these systems. Complex systems are heavily and successfully defended against failure; the high consequence of failure lead over time to the construction of multiple layers of defense against failure. Catastrophe requires multiple failures – single point failures are not enough; overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Complex systems contain changing mixtures of failures latent within them; The complexity of these systems make it impossible for them to run without multiple flaws being present – the failures change constantly because of changing technology, work organization and efforts to eradicate failures. Catastrophe is always around the corner; the potential for catastrophic outcome is a hallmark of complex systems – the potential for such failure is always present by the system’s own nature.” 

Cook, Richard (2002). How complex systems fail.

A three-phase strategy framework can help to understand and manage key risk concerns and minimize business interruptions. 
The framework calls for action on three fronts − assess, quantify, and manage – and provides an iterative and holistic approach towards financing present and emerging risks. It needs to be iterative due to the ever-changing nature of the risk landscape, regulation, and innovation, and holistic, to ensure that the solutions proposed are relevant to all the moving parts of the ecosystem within which a business operates.

Assess

The assessment phase is derived from the need to understand the business landscape by identifying particular item(s) of interest, what drives business revenue, which pieces of legislation have an impact on liability, and how the business is changing.

This phase has three stages:

  1. Internal
    The business, how it operates, and its stakeholders.
  2. Innovation
    How the business is changing in relation to market dynamics and technological advancements.
  3. External
    Changes in the competitive landscape and regulations.

Quantify

Having assessed the landscape, this next phase is to identify risk events, such as supply chain disruption, and the commercial impact it could have on the business. 

This requires an innovative way of modelling risks because as the technological landscape changes, there is often not enough data to properly quantify the impact of these new risks. Having modelled the commercial impact, businesses can then proceed to stress test these scenarios against their balance sheet, to better understand their risk tolerance.

Manage

This phase is about allocating resources for mitigation strategies to reduce the likelihood of the risk materializing.

Most businesses respond to risk with the Four Ts of risk management − Tolerate, Treat, Terminate, Transfer. However, due to the rapid nature of innovation, a few external factors often lag, for instance, regulation, insurance solutions and financing. The existing ecosystem is often not evolved enough to sufficiently protect against the risks emerging from technological advancements. So, there is a trend towards having to ‘tolerate’ or ‘terminate’ risks inherent to technological advancements or “treat’ by developing solutions that are not readily available in the market due to several factors, such as shortage of skills, regulation and a lack of understanding of the cost of risks. 

Shortage of skills

Limited deployment of a new technology is typically associated with only a small portion of the market being trained to utilize the technology effectively. 

Regulation

Government agencies need to think about the deployment of new technologies and balance against the threat to the public.

Lack of understanding of the risks

There is relatively new deployment and risks associated with new technology has not been experienced.

Reimagined Operational Resilience

The next step in reimagining operational resilience is to synthesize the outcomes of each of the above individual phases to provide better insights in terms of qualification, development and evaluation.

Download the Framework

Qualify

Assessing the business landscape and quantifying risk exposures lead to qualification. For example,

  • What is the business’ risk tolerance?
  • What are the qualified risks or issues that a business should look at from a probability and severity standpoint?

This will inform businesses on how they should direct their resources as they progress towards treating these risks.

Develop

The insights from quantification should provide more clarity on the financing strategy. For example,

  • What can/cannot be transferred?
  • What balance sheet risk can the business retain?

Technological innovation often requires developing new solutions to mitigate new risks, leading us to the final stage in the management of the risk.

Evaluate

As companies finance their risk mitigation strategies and re-assess their program in line with dynamic market changes, metrics to measure the success of this framework need to be created. For example,

  • Where is the deployed capital being best utilized?
  • Is there an objective measurement supported by data and analytics that can substantiate if the business is more operationally resilient than it was last year, and if the capital being deployed is indeed reducing the total cost of risk effectively?

This is the first article in a series as the framework can be applied in many ways. Case studies will be provided using this framework across various risks that businesses in the technology, media and communications industry are facing like ESG, Human Capital and Cyber. As new TMC related risks emerge, such as Artificial Intelligence, this framework can be used by businesses to guide them on how to manage risks from the deployment of new technologies.

Why Aon?

To help manage this risk framework, TMC businesses can leverage Aon’s ability to effectively deliver on each phase in a holistic way. Aon has the ability to develop market leading data and analytics to support clients, utilizing valuable risk insights to better navigate an increasingly complex business environment.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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