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Enterprise Risk Assessment: the forgotten methods

Risk management has gone through various stages in its lifetime. During the early 2000s, risk management started to get more generically formalised beyond those specialist areas of risk control in domains like insurance, engineering and finance. We had various management standards for risk management including AS/NZS4360, COSO, FERMA, BS31100 and eventually the ISO31000 series. Although not mandated in any of these standards, we all got used to sitting in rooms with risk workshop facilitators trying to identify all of the risks our organisations faced and then analysing them to see how big they were, what we were doing about them, whether we were adequately mitigating the risk and what else might we be able to do to further reduce the risk. At various times throughout the last 20 years, ERM has dissolved into little more than a box-ticking exercise. However, in the era of global pandemics, global economic shocks, tsunamis, earthquakes and global warming, Enterprise Risk Management (ERM) is making a comeback as an important component of a sustainably successful enterprise.

Therefore it is interesting to note that there are actually a number of other approaches to identifying, analysing and mitigating risk that are not commonly practised in a structured way by most organisations. They are the forgotten risk analysis methods of ERM:

  • History: A historical review of events at your own organisation can identify those risks that have actually realised (or maybe near-missed) over the history of your enterprise and how frequently and how big they actually were. This should be done rigorously using metrics wherever possible. Often, if the firm’s own history is ever mentioned, it is normally done so anecdotally. This runs the risk of primacy and recency effects overriding objective risk assessments of the likely frequency and severity of a risk realisation. Also, it may be possible to see what was tried before and to assess how well it worked to dampen the frequency and severity of occurrence, rapidly detect occurrence if it occurred, contain the consequences and then efficiently and rapidly recover and remediate.
  • Research: A research effort to assess what kinds of risks have actually occurred to similar peer organisations across the globe and across time to help identify what could happen that may not have happened within your organisation before. Also, identify mitigations that have been attempted and assess the historical success of those.
  • Experts: Getting the opinion of actual experts in a field. Too often the Financial Controller or the CEO’s Chief of Staff are providing opinions on the flood risk to the organisation’s operations. Are these officers really sufficiently qualified to assess the likelihood of flash flood or river/coastal flood at the organisation’s premises, and are they qualified to estimate the frequency and severity of those potential events? And are they qualified to estimate the likely impact such events might have on operations? When specialist knowledge is available, why not use it instead.
  • Crowdsourcing: Very rarely are surveys or idea boxes employed to tap the ideas and thinking of all the brains available in your organisation. Your staff represent a very large number of eyeballs seeing the world, with a very wide diversity of experiences and a large repository of grey matter, which are, at least some of the time, thinking about your enterprise and what is good and bad for it. Senior executives at a risk workshop may not be aware of all of the thinking of their staff on these risks. This is much easier now in the era of cloud and social media.
  • Literature: Academic survey of what researchers are highlighting and identifying in the literature as potential risks to your organisation. Once again this doesn’t need to be a hit or miss of what your CRO happened to be reading last week or last saw at a conference. A dedicated effort to monitor published articles on industry-relevant risks is useful especially in industries that are changing rapidly.
  • Benchmarking: Undertake industry risk benchmarking. What are similar organisations to yours identifying as risks and taking mitigating action against? Is your enterprise missing something that others have identified?
  • Models: Develop a digital twin of your enterprise or operations and run simulations to see where its vulnerabilities are. Armed with this knowledge, how likely is something going to occur that could threaten those vulnerabilities. Models can also be used to forecast the outcomes of various mitigation options. What mix of event suppression, detection, resilience, containment, recovery and insurance provides the most cost-effective mitigation option?
  • Rollup: Local risk analysis is being undertaken for cybersecurity, treasury risk, workplace health and safety, IT & construction projects, asset management and various other domains. Some organisations neglect to aggregate these individual exercises as input into the enterprise level.
  • Post-event analysis: Although this is sometimes done, it is not done frequently with the purposes of Enterprise Risk Management in mind. Post-event analysis should look at an occurrence from many angles: (a) had we identified this as a potential risk before? If not, why not and if so, did we assess its likelihood and severity accurately? If not, why not and if so, what did we do to mitigate the risk? (b) Did mitigations function? If not, why not, but if so did they decrease the likelihood and/or severity of the risk as expected (c) were containment and recovery plans available and triggered and did they function as expected?
  • Scenario testing: Not quite as forgotten as the ones above. This is more commonly seen in the ERM subcategories of Disaster Planning and Business Continuity Planning, but can actually be used more widely for all kinds of risk management. Develop a scenario where things are going wrong and try to operate through the simulation. Often risks, weaknesses and vulnerabilities are brought into relief under the more realistic circumstances of a simulated scenario.

As you can see there are many other options to identify and assess enterprise risks. None of these are outside the various ERM standards; it’s just that they are not used very often in practice. This could be because many of these require somebody to spend time and effort in researching these risks and interviewing experts outside of the semi-annual executive risk workshop. But is it time to invest resources into actually taking risk management seriously? How many of these forgotten methods are actually practised in your organisation?

Jeff Popova-Clark, Founder dataanalytics.com, jeffp@dataanalytics.com

See this article on LinkedIn – https://www.linkedin.com/pulse/enterprise-risk-assessment-forgotten-methods-popova-clark-gaicd/

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Data Science for Long Term Capital and Operational Planning

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How to get the most out of office “troublemakers”

You knows those people who are always seemingly disagreeing with the rest. Those people who passionately explain their ideas but lose most of us along the way. Those people who seem frustrated with the status quo and are constantly speaking up inconveniently when you are trying to get alignment across the team. They are outspoken, passionate, different, annoying and generally the people that most organisations try to repress. We brand them “mavericks” and not team players. But often they are speaking out at tremendous cost to their own reputation and career. Why do they do it?

And they do it despite the natural affinity to do the opposite. A range of famous psychology experiments by Solomon Asch shows that most of us will not disagree with the crowd even when the crowd is patently wrong. Survey’s show that over 70% of employees will not correct their boss even when they know the boss is wrong. So these dissenters are already a very rare bunch. Do they do it for kicks? Do they just enjoy stirring the pot and watching the commotion?

Frances Horibe (author “Creating the Innovation Culture : Leveraging Visionaries, Dissenters & Other Useful Troublemakers“) argues that these are the very people that you need today to break the status quo. She documents multiple case studies where large corporations have driven a dissenter from their midst only to find the dissenter comes back as a major competitor. Innovative ideas are uncomfortable, against the grain, and annoying.

So how can you tell if the person is (a) an innovator that has a very important point such that they were willing to risk their public reputation, or (b) is simply a misguided hot head or naïve know-it-all. If they are an innovator who sees something that no-one else is seeing, it is likely you yourself are not seeing it either. I suggest that you pull the person aside and ask them to take the time to explain three things (maybe in writing to help you take it to other stakeholders if it proves that it is actually innovation):

  1. What is the driver for why you are speaking out? (e.g. I believe what I’m saying will avoid a risk to the company/strategy/team that is likely to occur if we don’t change, or; I believe that the current approach is less fair to these stakeholders and they will object.)
  2. What is it you think needs to be different than what you think things will be if we don’t heed your advice/idea? (e.g. “I believe that we need to run the project in an agile, iterative style because if we pretend that we already know the risks and costs up front we are misleading everybody and ourselves, significantly increasing the risk of major project failure.” or “Our strategy presumes that everyone is like ourselves, but not every culture we are dealing with has the same goals and desires as the people in our team. For instance some of those stakeholders value time with community more highly than they value jobs within their region. We are likely to get major community pushback if we proceed this way. We need to accommodate their different personal and community goals”).
  3. Why do you think you are the one who sees this opportunity differently than everyone else? (e.g. “Perhaps I am the only person in the team with a combination of psychology, finance, science and commercial operations in my background” or; “My great grandmother lives on a native people’s reservation and I spent significant time in my childhood there. Few others have that experience” or “I have several years experience at another employer doing these projects and they changed their approach for the reasons I am highlighting and the changes really improved outcomes. No-one else in the team worked there.”)

You may need to help the person with their communication to ensure they get it right (even if they are the only right person about this particular issue doesn’t mean they are an all-competent super person). However, there are also times when the person simply does not have all of the facts or hasn’t thought through the strategy logically themselves. Also the person just might be someone who has a psychological need to be contrary or just loves office drama. All of these potentials have useful information about the team communications and/or the mentoring/coaching needed for the person in the future.

https://www.linkedin.com/pulse/innovators-troublemakers-jeffrey-popova-clark-gaicd
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COVID Death Rates Climbing in Northern Hemisphere again

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Avoid the Data Swamp: An overview of Data Analytics’ Data Governance Framework

An overview of dataanalytics.com’s Data Governance Framework

As more and more enterprises create Data Lakes and expand their collections of dynamic and static data, it is becoming more apparent the value that Data Governance brings. Dataanalytics.com’s proven Data Governance Framework has been adopted by multiple organisations to improve the quality, reliability, deployability, security and value of their data, data products and data services. This quick 20 minute overview explains how your organisation can significantly improve the management and governance of your data.

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Humans are all gullible..even you and I!

This article is a reprint from the Illumination eZine on Medium.com

Mass Gullibility is a threat to you, and to me and to humanity itself!

https://medium.com/illumination/everyones-gullible-even-you-and-i-51d484f8c5cb

Psychology professors know it…Marketers know it…Sales people know it…Politicians know it…Heck, we all know it…All humans are gullible! Including me… and including you!

Just think about it: around 30% of the world’s population identify as Christians. That means that Christians would agree that 70% of the world are gullibly wrong about a pretty fundamentally important issue. Muslims (25% of the world) would think the other 75% of the world’s people are gullibly wrong; Hindus 85%, and; atheists would think that almost 90% of all humans are gullible. So a Christian, a Muslim, a Hindu and an Atheist might walk into a bar and disagree about many fundamentally important things. But they would all agree that the vast majority of humans are gullible because they would all agree that the majority of humans have allowed themselves to be duped about at least one “really important thing”.

So if the majority of people can be hoodwinked into displeasing the universe’s most powerful being(s) (or spending a lot of their time trying to please a non-existent one — a nod to the atheists there), then what else can us humans be hoodwinked into believing? And if so many can be hoodwinked into believing false things, then what real-world consequences are there for this “mass gullibility”?

Throughout most of history, the majority of humans have believed some true whoppers despite little to no evidence. Most humans believed the earth was the centre of the universe; almost no-one thought the earth was a globe and, instead, believed it flat with edges; white Europeans believed they were a superior race; many thought that evil spirits caused sickness and could be drained from the body through blood letting; almost everyone believed in magic and that there existed practitioners of magic like witches and shamans. No evidence…doesn’t matter.

Unfortunately reality does not care a whit about what humans believe or disbelieve: The pollution will spread where the wind blows; the fresh water will simply flow to the next lowest point; the contagious virus will leap from host to host; the sun will shine all the spectra, both the harmful and the helpful; carcinogens will interact with the body’s cells and the natural resources will simply run out when there’s no more left. So acting based on an accurate understanding of reality is a fundamentally important thing to do in a great many situations. Climate change, natural resources, pollution, economics, politics, science, engineering and many other spheres of human life; these are hard enough when we have access to all the facts. But when we are acting with incorrect information (especially if we sincerely believe it’s true), our chances of achieving good outcomes are greatly diminished.

Worse still, what if nefarious individuals decide to deliberately abuse our penchant for gullibility by convincing us of untruths for their own benefit? Perhaps they could peddle false stories like “that evil country has weapons of mass destruction, we need to invade” or “smoking our cigarettes doesn’t cause lung cancer” or “putting extra money in the hands of the job-creators through tax cuts will grow the economy and benefit everyone who works” or “taking our patented drug will modify this number which means you are less likely to get a bad disease; that’s much easier than exercising and giving up fast food ”. There is big money to be made by taking advantage of our innate human gullibility!

In politics it is even worse; What people believe to be true, actually is more important than reality. If a politician can convince voters that something is true that makes those voters more likely to vote for the politician, then whether that something is actually true is unimportant. Once a politician realises how gullible humans (and therefore voters) are, they realise they can simply make things up; “there is a caravan of armed enemies about to invade our country and the other political party wants to welcome them in” or “there are not thousands dying from that pandemic, they are just dying of normal causes”. Then the gullible human voters will vote based on their mistaken beliefs, potentially achieving the opposite to what they intend their vote to achieve.

But each of us individuals does not have enough time or expertise to check every single thing out. We are forced to rely on trusted others to verify what we cannot. And this creates yet another opportunity for the nefarious. Corrupt the trusted… and you get lots of people believing what those trusted people are telling them. We used to trust journalists…they were so ethical they would go to jail rather than reveal their sources, and some would even risk being murdered (and some even were) to get the truth out.

But in 2016, Professor Benkler of Harvard Law, found that 60% of statements on Fox News are either entirely or mostly false and an earlier 2011 study by Fairleigh Dickinson University showed that Fox News viewers believed more falsehoods than any other surveyed group, including people who watch no news at all! This becomes more important when it’s noted that Fox News is currently the most watched Cable News channel in the US, and has been for years.

We all trusted scientists and doctors. But more and more of them are working directly or indirectly for self-interested profit maximising corporations. How do we know when they are telling us the unvarnished results of unbiased scientific research and when, instead, are they twisting the message or the research itself to benefit their benefactors? Dr Ben Goldacre outlined a myriad of ways that seemingly independent scientific studies and publications have been corrupted and Stanford Professor John Ioannidis concluded in 2017 that medical practitioners are still treating patients as if all research was uncorrupted. Our local doctor is gullibly trusting “The nefarious and the corrupted” on our behalf.

Should we just give into the forces of self-interested falsehood tellers? Are we all just gullible sheep awaiting our inevitable fleecing? Or are their things us individuals can do to stop ourselves being taken for a ride? And what should we as a society do to limit the costs of “mass gullibility”? I have some suggestion for both us as individuals and for society as a whole in subsequent articles to follow in this series of Mass Gullibility articles.

About The Author

Jeffrey Popova-Clark is the Founding Partner of DataAnalytics.com. You can connect with him on Twitter and LinkedIn.

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COVID19 Mortality Rates: A Deep Dive

Jeff Popova-Clark (our Founding partner) has just published another fascinating article on LinkedIn. It is an investigation into why its so hard to pin down a mortality rate for COVID19.

https://www.linkedin.com/pulse/covid-19-mortality-rates-jeffrey-popova-clark/?trackingId=nqcFuZpCSfurRWJFm4Phlg%3D%3D

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Superforecasting: How we can all get better at predicting the future!

Jeff Popova-Clark takes us on a tour of Superforecasting
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Augmenting AI…with humans!!

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What is someone worth to your enterprise?

Working out what remuneration someone is worth is of enormous interest to both employers and their people alike. But what are the key ways to determine the appropriate compensation for the contribution of current and potential future contributors to an enterprise. I thought I’d jot down some of the main approaches to work out that elusive number:

  1. Market value approach: what do persons who do that type of role generally receive for performing that kind of work or what does the market think that person is worth. Essentially what is the market rate for that type of work or for the individual in question. This is a common approach for commodified positions in the private sector and for individuals who are well-known in their industry.
  2. The marginal utility approach: if the person is undertaking their role to the standard expected, what extra revenue/profit/gross margin will the enterprise achieve over and above what the enterprise will achieve if the person was not undertaking their role. This value can change over time based on variations in market conditions and on the performance of other roles in the enterprise. An example may be the remuneration of a football player. If the football player is so good that the club is much more likely to win a football game and attract more fans to watch the game, then they are worth a significant amount based on marginal utility.
  3. Equal share approach: if the surplus value being created by the enterprise is shared equitably around the firm amongst the people responsible for achieving that surplus value, then this is a fair compensation for that contribution. So if the value add is $1M per annum over and above other input costs (including return on equity), and 10 staff helped achieve that value add, then everyone should receive $100K. This is more often used for bonus calculations, but is nonetheless, part of an individual’s remuneration.
  4. Company value delta: what is the increased value of the enterprise in the market if the individual is in the role as opposed to if the individual is not in the role. Some CEOs are valued based on this concept, where the value of the company is increased because the market believes this CEO will improve the performance of the company or bring a loyal book of established clients. Therefore the CEO is worth a proportion of the net asset value delta of the company with him/her vs the value without him/her.
  5. Compensation for investment approach: how much would a person have to have invested in their education/certifications/experience to have been capable of undertaking the role and what is a fair compensation for that. For instance, some medical specialities require over 10 years of tertiary studies to achieve a level of education and expertise to be able to function autonomously. This level of investment leaves less career lifetime to earn and therefore requires higher compensation to make up for the level of prior investment made by the position holder/candidate.
  6. Optimise churn approach: what level of compensation is sufficient to deter an incumbent from choosing to go elsewhere. This can even be below market rate, as there is a cost to change employers that incumbent staff may factor into their decision to quit to start with a new employer who may be paying the higher market rate.
  7. Attract the best approach: what remuneration is likely to attract, retain and motivate the best people who are more likely to contribute more to the enterprise’s success. This may be a “set the tone” approach which says that a high performing culture is the expectation and that the enterprise attracts and retains the best, and appreciates the added value the best bring to the enterprise.
  8. Lifetime value approach: as opposed to viewing a person in their current role or the value they are currently contributing, this approach looks at the value add of a person over the lifetime of their tenure with the enterprise. This looks at the person’s potential to add value both now and into the future. This approach decides what is the right remuneration to remit as a function of their expected lifetime value to the enterprise. Some individuals who are being groomed for future leadership positions may receive more remuneration than their current role or value might justify.
  9. Seniority approach: the key here is the current size of the budget, the current delegated authority, the current number of staff and the general seniority of the position held. This is common in the public service where marginal utility or market rates can’t be determined easily.
  10. Length of Experience approach: the key here is how long the person has held the position or has worked in the enterprise. The theory is that more experienced incumbents are more likely to contribute more than the less experienced. Once again this is common in the public service.
  11. Industrial Award approach: based on the pre-negotiated industrial award, pay what is specified in the award for an incumbent in a particular position. Depending on the power-relationship between the negotiating parties, award rates may be a little above market rates. Essentially a union is likely to try and capture more of the enterprise’s surplus for the workers out of the owner’s capital return. Unions do have a vested interest in maintaining the continued operation of major employers.
  12. Incentive approach: what level and structure of compensation will incentivise the person to perform at a high level adding further value to the company than an unmotivated incumbent, whilst encouraging them to stay with the company to continue contributing.
  13. The perceived-by-peers fairness approach: what would the majority of the person’s work colleagues believe is fair compensation for the work they do, the effort they put in, the sacrifices they make and the contribution they make to the success of the enterprise
  14. The perceived-by-incumbent fairness approach: what would the person themselves feel is a reasonable compensation for the work they do, the effort they put in, the sacrifices they make and the contribution they make to the success of the enterprise. This can be impacted by the incumbent’s knowledge of the remuneration of others.
  15. Past achievement approach: how much better did the organisation do last year/period as a result of the contribution made by the incumbent. Once again some CEO’s claim responsibility for the increased revenue/profit/gross margin from the previous year/period and claim that they are worth a proportion of that increase.
  16. Compensate for opportunity cost: how much could the person have earned if they were investing their time, expertise and effort elsewhere? This is commonly used by headhunters where they offer a potential recruit at least a bit more than their current remuneration to attract them to give up their current role.
  17. Minimum allowable approach: some enterprises will try to minimise remuneration to the lowest allowable by law. This is common when the labour market is a buyers market, with plenty of alternate labour available to replace the leaving of any incumbents and when the expertise and skill required to undertake the role is very low.
  18. Hardship compensation approach: How much hardship, danger or sacrifice is required to undertake the role and what is a fair compensation for the sacrifices required to undertake the role. The role may be based in a remote location, or require unusual hours of attendance, or be particularly physically demanding or emotionally traumatising (e.g. mercenary work).
  19. Key contribution approach: a person may have an idea or piece of intellectual property upon which the unique differentiation of the business model relies. This person could have taken their IP to elsewhere but chose to contribute that unique differentiator to the enterprise. In recognition of that unique and key contribution and the importance of it to the overall value or competitiveness of the enterprise, perhaps compensatory remuneration is justified.

In some circumstances, some of the above approaches amount to the same thing, and often the final number does include consideration of multiple of the above approaches. How many of the above considerations does your enterprise use when determining compensation for current and potential contributors? Are there others not included on this list?

https://www.linkedin.com/pulse/what-someone-worth-your-enterprise-jeffrey-popova-clark/