Our world is more connected than at any point in history. With a simple tap of the keyboard, multi-million-dollar deals are struck across continents and consumers can order anything from the world to their doorstep. We have never had it so good.
Companies with operations spread out across the world can situate their production or headquarters in areas of low-tax or low labour costs. The likes of Exxon-Mobil, Walmart and Apple straddle the planet in a manner befitting colonial European empires with the sun never setting on the ring of the cash register or the spinning cogs of the production line.
Yet, as history has proven, no empire is everlasting, especially as it overreaches itself - resulting in decay and ruin. In this new era, organisations are vulnerable to the whims and rhythms of the connected world. A world connected by hazards or ‘risk drivers’ such as political volatility, cyber hacking or supply chain exposures caused by terrorism, piracy, inadequate safety controls and other critical factors can create a rapid path to ruin.
This time, it is not the barbarians at the gate but a new business risk, what we call ‘Connected Risk’.
Connected Risk is the systemic impact on commercial organisations, their partners, suppliers and clients from cumulative and cascading financial, operational and reputational fluctuations and uncertainties. It is caused by an inherent weakness in the inter-connected architecture of today’s business-to-business relationships. These are increasingly digital and allow a single negative event to exponentially spread disruption, paralysis and wreak severe economic damage both within and between organisations.
The key drivers for Connected Risk are the ways in which political, environmental, supply chain, cyber and credit risks combine to cause financial, operational and reputational loss.
In an increasingly connected world, corporates and their networks need to prepare for more unpredictable ‘black swan’ events which are caused when a local event produces a ‘butterfly effect’ and unleashes a cascade of further events through the network, impacting numerous corporates along the way.
This exposes a raw nerve in corporates’ sophisticated global supply chains and/or delivery systems as they are now vulnerable to extreme events and systemic risk.
Business risk is a number one concern for corporates and their (re)insurers. What is needed is an integrated risk management framework which quantifies bottom-up exposure, manages risks and in so doing delivers superior return on equity.