Friday, 7 March 2008

Strange Events In Distant Places

Time is central to the concept of risk. Risk relates to the uncertainty associated with possible future outcomes. Risk-taking is at the heart of business and investing. Successful entrepreneurs are good at assessing and managing risk. They see opportunity where others see threat. The fundamental job of executives is to anticipate change and manage it on the basis of an opinion about the future.

In recent years, one of the consequences of globalisation has been that global risks (i.e. risks that are global in their nature) are becoming more important. Globalisation has placed us in a situation where a small perturbation in one area can have a disproportionate effect in another area. In the flattening and shrinking world, we are more susceptible to exogenous shocks than previously.

As the global system becomes more interconnected and interdependent, it has resulted in greater asymmetry (small events can have disproportionately large impacts), greater volatility, and greater time compression (product and industry life-cycles are shortening). It is now quite important to be aware of the points at which the trends have turned, or at which discontinuities arise. The study of weak signals of newly emergent futures is becoming more important in the work of the futurist.

In an interesting review in McKinsey Quarterly, Richard Haass (head of the Council on Foreign Relations in the US) recently said:

“Risk control requires a richer analysis. In a way, this is another consequence of globalization. Companies operate in a global environment, but so does each particular place or actor they evaluate. Trying to put individual countries or situations in an isolated petri dish not only has become much more difficult but, in many instances, distorting.” (Article in full).

Futurists are in a position to supply that richer analysis.

An interesting tool provided by PriceWaterhouse Coopers is a case in point (see tool). They publish a political hotspots map that is based upon Country Stability Rankings (this seems to be an attempt to provide an objective calculation for a subjective evaluation). They also say that “performing political risk scenario analysis can better prepare a company for the unexpected and unpredictable”. We quite agree. Sadly, the analysis is a bit thin because the time horizon is twelve to eighteen months and does not seem to consider emergent political hotspots. For example, we are surprised not to see the Arctic as an emergent hotspot.

If the process of globalisation continues as fast as it has to date, then the question of geopolitical risk is likely to become even more important than it has been so far. Because of the nature of globalisation, these are risks that organisations of all sizes, in all locations, in all industry sectors, will have to be aware of. Scenarios are a useful device in exploring some of these risks.

And yet, how often do we monitor weak signals of an emergent future that come from an obscure source on the other side of the world?