In the seventies, Xerox was as omnipresent in American offices as the Microsoft Office suite is today. And just like Microsoft, Xerox leveraged its success to invest in the technologies of the future. One of those innovations, called the Alto, was the world’s first personal computer. At the time, Xerox was so focused on revenues from its copying business that it didn’t realize the Alto’s potential. But Steve Jobs did. After seeing a demo, Jobs incorporated many of the Alto’s innovations into Apple’s next computer, the Lisa. Obviously, the rest of this story is now history.
This cautionary tale is familiar – but it underlines a central lesson for any business attempting to limit risk and plan for the future today. When it comes to managing risk, it’s no longer enough to focus your attention on preventing downside risk – that is, the possibility of something going wrong within your organization. With the incredible pace of disruption, failing to take advantage of the upside of risk – the chance to seize new opportunities – is often the most dangerous risk of all.
In fact, we’re now living in a moment when we need to embrace change and expand the whole way we think about risk. Along with upside and downside risk , outside risks like geopolitical instability and climate change are on the rise. Businesses are now facing more risk – and more kinds of it, from more places – than ever before.
The good news is that we also now have the technology to get ahead of these risks. We can analyze data from across and outside of an organization – and then turn that information into actionable insights. We can better see how any single decision is likely to affect the organization’s future. And instead of simply looking backward at what’s happened in the past, we can focus equally on where our businesses and industries are headed long term.
When businesses have a more focused view of these risks, they can feel more confident in their decisions – and help investors and other stakeholders trust that the business knows where it’s going. And at EY, we’ve found that there are three rules of risk management for any organization that wants to navigate this moment of disruption and thrive in the long-term.
First, it’s crucial to analyze risks in real-time, instead of looking backward at older data that takes too long to collect. Second, major decisions should be modeled using “what if” scenarios, so businesses can look at how they might create changes across their operations. And third, it’s vital to bring multiple perspectives to the table to help ensure you’re looking at situations from every angle.
1. Real-time risk-checking
Five years ago, it often took at least a month to gather and analyze data from across an organization, so businesses were always looking backward. Now, we’ve developed tools using advanced analytics and artificial intelligence (AI) that analyze data and predict potential risks in real-time.
So, for example, we can look at how new laws and regulations interact with all of an organization’s banking and financial transactions – and see instantly whether they increase the risk of financial fraud or compliance issues as well as predict potential risks in the future.
In another case, we helped an energy client develop a way to predict price fluctuations in the power market. The process used AI and machine learning techniques to detect a wide range of data patterns. Some of this data was straightforward, like analyzing the market shifts for energy indices like crude oil and liquefied natural gas. But it also took into account things like oceanic weather patterns, which it predicted by looking at the wave height and wind direction around marine platforms and buoys. It tracked the weather on land, too, by observing humidity and cloud conditions. It even looked at how public and school holidays influence demand and pricing. By considering such a wide range of factors, we were able to provide forecasts that were nearly 20% more accurate than traditional methods.
2. Running “what if” scenarios
In addition to evaluating short- and long-term risks today, EY tools can also help organizations better answer hypothetical questions about potential decisions they might make in the future. That way, you can make more informed critical decisions with the confidence that you’ve thoroughly considered your options.
For example, is it riskier to open a factory in Michigan or Missouri? Indonesia or India? Would adopting new technology like RPA (robotic process automation) and blockchain decrease a company’s exposure to compliance issues? Do new tax reforms make it smarter to invest in hiring more people, or training current employees?