John Marke: Complexity Enhanced Risk Insights

Blog Wisdom, White Papers
John Marke

Accenture isn’t “top of mind” when we think of Enterprise Risk Management (ERM)…for now.   I recall a Senior Director at consulting firm I worked for (it’s no longer in business)  tell an auditorium of about 1000 consultants “I’m not afraid of Accenture.  They don’t scare me.”  Ah huh.

I thought: “That’s because you haven’t come up against them in the market.”   Look, this Risk Report is more than a compilation of statistics and trends, it tells us a lot about Accenture’s corporate culture and what’s important to them.  But first, go get the App!

The App – They ought to charge you for it. A couple of clicks and you’re got customized and mobile knowledge management. Works on your iPhone, iPad, Android device or laptop. The only way they could have made it better is to have tossed in Key Board Cat for good measure. Accenture wants to be your E-Buddy and they’ll go through a lot of expense to spoon feed you great info.

Okay, why do consultants conduct and publish painfully correct and beautifully pictured risk research?

  1. To prove they are smart and pretty
  2. To give staff something to do
  3. To build relationships

Pie-charts never made a sale. It’s all about relationships.  That’s part of Accenture’s DNA. That kind of thinking is dangerous….for the competition. That’s why they are promoting the hell out of this Report and using new media to do it.

Aside from the classy mobile App, Accenture does everything but invite you for coffee at Starbucks with your industry Partner. The Team has private emails of the Partners. I can’t even get my kid to reply to my emails, what chance do I have with a real, live Partner? Well, I gave it a try with two, Michael Chagares (Cross-Industry) and Shelly Hurley (Global Resources). Both replied! Steve Culp, the Managing Director just a click away too. Nice touch.  Nice example of executive leadership.  Culture, folks, culture.

Accenture doesn’t cover as many market verticals as the competition, but they drill down with the same expertise and level of insight you expect from a Big 5.  Okay, they know the tradecraft as well as anybody else.  So how do you differentiate?  Well, Accenture is not in the audit or assurance business. That is a limitation because risk consulting is often tied to bread & butter auditing.  But I do not think that is necessarily a competitive disadvantage for Accenture. Let’s take an example from the Report and from my research….

“Due to the systemic nature of emerging risk, and the severe potential impact of such events, companies with slight advantages in detecting and managing emerging risks can obtain significant competitive opportunities.” (p.42 Accenture, 2011 The Report…)

Accenture is actually talking about Brian Arthur’s Law of Increasing Return[1] where a tiny advantage early on can produce amazing compounding effects over time.  I think this is important enough to have amplified and clarified exactly why they meant with an example, like the following example I have provided to amplify the point.

 

In 2000 Philips had a “clean room” fire in its microchip/wafer plant in New Mexico. Both Ericsson and Nokia bought chips from Philips. Philips estimated about a week’s delay in production. Nokia played it safe and sent teams around the globe to get other sources lined up. Ericsson’s response was more laid-back. As described in Sheffi in The Resilient Enterprise [2]the head of Ericsson’s consumer electronic division didn’t hear about the chip problem until weeks after the fire. Once they realized the magnitude of the problem, it was too late. Nokia had already locked up all the surplus capacity. The plant was down for 9 months. Ericsson took a $2.34 billion loss in the company’s mobile phone division and ended-up being forced into a JV with Sony. During the first 6 months of the crisis Nokia’s market share went from 27% to 30% of the handset market. Ericsson’s went from 12% to 9%  That’s the competitive advantage of risk management and crisis management joined at the hip ….oops, I meant fully integrated across silos.

Complexity — The consequences for being caught napping are even worse today. We’re actually dealing with multi-tier risk — interconnected vulnerabilities and consequences that are often as opaque as they are deadly.  They cannot be truly understood with prevailing ERM methodologies. It’s like trying to repair a computer with a hammer.  You might get lucky but odds are you will just make matters worse.  The varying degrees of interdependence and interconnectivity between capital markets, manufacturing and consumer products markets exhibit eye-crossing complexity.  Optimizing everything from supply chains and flight schedules to capital market trading has made a lot of money…and made us more vulnerable to catastrophic failure, made the nets more fragile.

Two Paradigms

I think we’re going to have two paradigms, both operating simultaneously and dealing with completely different sorts of risks. One deals with fairly well known risks that use self-assessments, risk registers, and the traditional tool kit. The other deals with Complexity Enriched Risk[3] or CER and uses a different approach. In the CER environment the “ERM Assessor” morphs into an “ERM Consultant” as the overall operational and financial environment becomes “enriched” by complexity. We need to understand and help our clients to understand this strange new environment. I think we all will become more and more familiar with these terms in risk management….

  • Complex Adaptive Systems
  • Resilience – ecological models and engineering models
  • Agent Based Modeling
  • Network Theory and Network Analysis
  • Behavioral Economics
  • Tiered Risk
  • Non-Linear Behavior and Non-Linear Modeling
  • Thresholds, Tipping Points & Phase Changes
  • Stationarity

To add value in a CER environment the consultant must provide expert, substantive advice, not just on the ERM process but on specific risks at hand. This is outside the comfort zone of many ERM practices. Yes, this is my own bias, but I’ve worked for both Audit & Assurance and Consulting firms. The common ground may be “risk” but the respective cultures are entirely different.

It’s all about rules for auditors, it’s all about relationships for consultants. Both are going to have to learn about complexity at the tool kit, grass roots level to meet 21st century risk. I think Accenture may have an edge here, we’ll see how they exploit it


[2] Yossi Sheffi, The Resilient Enterprise, MIT Press, 2005, pp. 8-9.

[3] Coined by John Marke…kinda catchy eh?