- Published: Friday 31 May 2019 07:48
Traditional risk management tools are good at managing known or anticipated risks. But these extra-territorial threats require a different approach. Dr. Sandra Bell says stress testing is one of her tools that provides answers and helps identify and fix organizational vulnerabilities in a safe environment.
A resilient organization is one that is able to achieve its strategic goals such as economic growth, development of competitive advantage, and increased profits, regardless of the adverse challenges it faces internally or externally. Such organizations are seen not only surviving operational disruptions and hostile market environments, but thriving in spite of them.
Traditional risk management tools such as root cause analysis, SWOT, and probabilistic risk assessment (PRA) can be used to manage known or anticipated risks. However, a more sophisticated approach to risk management is required to address the scenarios below. An extreme event that we can imagine but that, to our knowledge, has never actually happened. or circumstances in which the complexity and uncertainty of the environment in which we operate cannot exclude the possibility of unforeseen impacts or circumstances.
Stress testing provides a way to identify and fix organizational vulnerabilities in a safe environment, rather than learning the hard way and incurring further brand damage through experience. Hindsight is always 20:20.
What is a stress test?
The term “stress testing” is used to refer to various techniques used to assess an organization’s vulnerability to major environmental changes and exceptional but plausible events. Its purpose is to make the risks to organizations more transparent by providing information about their behavior under such circumstances.
What your stress test looks like depends on what you are trying to achieve. For example, a test that examines a single risk to an organization, such as the credit risk of a financial institution or the supply risk of an energy company, or multiple risks, such as all events that can disrupt business processes within a manufacturing industry. You can build tests that .
You can also isolate single risk factors (sensitivity testing) or explore groups of risk factors (scenario analysis). Similarly, if we know the combination of factors that cause the most damage, we can intentionally emphasize this subset of factors while keeping all others constant (maximum loss approach). Finally, tests can be based on historical or hypothetical scenarios constructed considering plausible changes in historically unprecedented circumstances.
Scenario creation is the most difficult aspect of stress testing. Developing scenarios requires a great deal of practical expertise and judgment to identify the correct risks and factors, along with imagination and creativity to ensure they are appropriate, credible, and viable. Because it will be done.
Future-proof your policies with stress testing
Resilient organizations are fully aware that their environment can change dramatically and adjust their policies to stay optimal. One way to do this is with a stress test.
For example, in the energy sector, most organizations have carbon emission reduction policies designed to contribute to international efforts to avoid the most dangerous impacts of climate change. In most cases, this includes increased use of renewable energy such as wind and solar power. However, while reducing emissions may avoid the worst-case scenario, the climate is still changing, extreme weather events are becoming more severe and frequent, and we are heavily dependent on the weather for solar and wind power. affect the reliability of the energy supply from
By using stress tests in which scenarios reflect the outcome of proposed policies (e.g. a world where 50% of energy comes from renewables), energy organizations such as the UK National Grid and Scottish Power are able to predict future weather forecasts. I was able to test myself against the scenario. This allows us to source energy from different countries and build resilience into our system, rather than identifying realistic future scenarios where energy supply cannot meet demand and knowing when that will happen. And so the lights keep on and the UK is well on its way to a low carbon future.
Use stress testing to build relationships
Despite market challenges and operational risks, there are three key ingredients to success. First, enterprises need to be adaptable, knowing when to change and optimizing policies and operations in response to the external environment. Leadership is also important. Leaders instill in people the will to succeed in difficult times. The third and final area, one that is often ignored by organizations, is networking. Developing and maintaining effective relationships with stakeholders, customers and suppliers is not just a matter of maintaining business success, it is a key factor in maintaining competitive advantage and achieving profit and growth. am.
Stress testing can also be used to examine relationships at a deeper level and identify whether the necessary trust and mutual trust exists to enable cooperation under stress. If not, concrete steps can be taken to build these critical components of an effective network. For example, the energy sector has ensured that supply can be maintained even through low-carbon policies, but the balance between supply and demand in extreme weather conditions, when supply is threatened and demand increases at the same time, is becoming increasingly difficult for joint efforts among energy companies. It depends on your efforts. and its customers.
Organizations should set long-term policies to achieve long-term goals. However, the world is changing rapidly, and it is important to ensure that the ideas and plans contained in our policies and used as the basis for decisions and guiding actions do not have unintended consequences in the future. As the saying goes, there is no plan to survive the first contact with the enemy. Professional stress testing can be performed through an external organization and helps companies optimize risk management and increase resilience. Resilience must work at all levels – executive, operational and technical, and designing and conducting stress tests is one way resilience can be comprehensively assessed.
Dr. Sandra Bell, Head of Resilience Consulting for SunGard Availability Services, said: