Cross-Functional Collaboration Optimizes Risk Response

Risk Culture Belief Series

In the complex and interconnected world of business, addressing risks effectively often requires insights from multiple domains. The belief that “Cross-Functional Collaboration Optimizes Risk Response” highlights the strategic advantage gained when diverse organizational functions unite to tackle risk challenges. This collaborative approach not only enriches the risk assessment process but also ensures comprehensive risk mitigation strategies are employed.

The Imperative of Cross-Functional Collaboration

Risk is a multifaceted concern that impacts various parts of an organization differently. Thus, managing it in silos can lead to gaps in risk response and missed opportunities for mitigation. Cross-functional collaboration brings together diverse perspectives—from finance and operations to IT and human resources—each contributing unique insights that enhance the overall risk management strategy.

Practical Applications and Organizational Benefits

In practice, cross-functional teams work together to identify, assess, and respond to risks. For example, when a financial institution launches a new product, it involves not just the product development team but also compliance, marketing, IT security, and customer service. Each department examines the product from different angles, considering regulatory implications, market risks, cybersecurity threats, and customer impacts. This comprehensive analysis helps in crafting a well-rounded risk response strategy that is robust against multiple scenarios.

The RISKVIEWS Blog provides several case studies where organizations had to collaborate to resolve their problems. These organizations were able to mobilize diverse resources quickly and effectively, addressing crises in a holistic manner that significantly reduced losses and recovery times.

Building a Collaborative Risk Culture

Collaborative risk culture begins with leadership. Leaders must model the behaviors they expect to see throughout the organization. This means not only talking about risk management in abstract terms but embedding it into the daily activities and decision-making processes at all levels. Leaders must ensure that the organization’s risk appetite and tolerance are communicated clearly and understood widely. By setting a clear example and establishing comprehensive guidelines, leaders can create an environment where risk-aware thinking becomes second nature.

Embedding this belief into organizational culture requires structured mechanisms for collaboration. This might include regular cross-departmental meetings, shared risk management platforms, and joint training sessions on risk awareness. Such initiatives help break down silos and build a cohesive team approach to risk management.

Conclusion and Next Steps

“Cross-Functional Collaboration Optimizes Risk Response” is a guiding principle that underscores the importance of leveraging diverse expertise to fortify risk management practices. Organizations that embrace this belief are better equipped to handle the complexities of modern risk landscapes with agility and effectiveness.

Stay tuned for our next post where we will delve into the fourth Risk Culture Belief: “Innovation is Equally a Risk and an Opportunity.” We will explore how organizations balance the dual aspects of innovation, harnessing its potential for growth while managing the inherent risks it brings. Join us as we continue to unpack these transformative insights into risk management.

Keys to ERM – Adaptability

Deliberately cultivating adaptability is how ERM reduces exposure to unexpected surprises.

There are four ways that an ERM program encourages adaptability:

1. Risk Identification
2. Emerging Risks
3. Reaction step of Control Cycle
4. Risk Learning

Many risk managers tell RISKVIEWS that their bosses say that their objective is “No Surprises”.  While that is an unrealistic ideal objective, cultivating Adaptability is the most likely way to approach that ideal.

More on Adaptability at WILLIS TOWERS WATSON WIRE.

Real Resilience is not what you think it is

There is confusion about the term Resilience.  To many people, it means the ability to withstand stress. To some people, the ultimate resilience comes from thick walls (or huge capital requirements).  The picture above is one of many thousands like it that shows the ultimate result of seeking resilience in a static manner.

The dictionary has something slightly different:

the power or ability to return to the original form, position, etc., after being bent, compressed, or stretched; elasticity.

But Holling, a prominent ecologist, suggests something much more robust.  He suggests that a resilient species will survive all of the stressors that attack it from its environment and thrive when conditions become benign.

“a major strategy selected is not one maximizing either efficiency or a particular reward, but one which allows persistence by maintaining flexibility above all else. A population responds to any environmental change by the initiation of a series of physiological, behavioral, ecological, and genetic changes that restore its ability to respond to subsequent unpredictable environmental changes. Variability over space and time results in variability in numbers, and with this variability the population can simultaneously retain genetic and behavioral types that can maintain their existence in low populations together with others that can capitalize on opportunities for dramatic increase. The more homogeneous the environment in space and time, the more likely is the system to have low fluctuations and low resilience.”  CS Holling, Resilience and Stability of Ecological Systems

Real resilience is ADAPTABILITY.  The ability to change your approach.  To find the way to survive the extreme adverse scenario without devoting so much resources to safety that you miss the chance to “capitalize on opportunities for dramatic increase” as Holling says.

Does your ERM program build walls, thicker and thicker, or does it build adaptability?

How many people in your organization do you think would know what to do in the event of an adverse situation that has never happened before?

But what is this adaptablity?  In two studies in the late 1990’s, researchers studied thousands of crisis situations and identified 8 dimensions of adaptability for individuals.  See study here.

Handling emergencies or crisis situations

Reacting with appropriate and proper urgency in life threatening, dangerous, or emergency situations; quickly analyzing options for dealing with danger or crises and their implications; making split-second decisions based on clear and focused thinking; maintaining emotional control and objectivity while keeping focused on the situation at hand; stepping up to take action and handle danger or emergencies as necessary and appropriate.

Handling work stress

Remaining composed and cool when faced with difficult circumstances or a highly demanding workload or schedule; not overreacting to unexpected news or situations; managing frustration well by directing effort to constructive solutions rather than blaming others; demonstrating resilience and the highest levels of professionalism in stressful circumstances; acting as a calming and settling influence to whom others look for guidance.

Solving problems creatively

Employing unique types of analyses and generating new, innovative ideas in complex areas; turning problems upside-down and inside-out to find fresh, new approaches; integrating seemingly unrelated information and developing creative solutions; entertaining wide-ranging possibilities others may miss, thinking outside the given parameters to see if there is a more effective approach; developing innovative methods of obtaining or using resources when insufficient resources are available to do the job.

Dealing with uncertain and unpredictable work situations

Taking effective action when necessary without having to know the total picture or have all the facts at hand; readily and easily changing gears in response to unpredictable or unexpected events and circumstances; effectively adjusting plans, goals, actions, or priorities to deal with changing situations; imposing structure for self and others that provide as much focus as possible in dynamic situations; not needing things to be black and white; refusing to be paralyzed by uncertainty or ambiguity.

Learning work tasks, technologies, and procedures

Demonstrating enthusiasm for learning new approaches and technologies for conducting work; doing what is necessary to keep knowledge and skills current; quickly and proficiently learning new methods or how to perform previously unlearned tasks; adjusting to new work processes and procedures; anticipating changes in the work demands and searching for and participating in assignments or training that will prepare self for these changes; taking action to improve work performance deficiencies.

Demonstrating interpersonal adaptability

Being flexible and open-minded when dealing with others; listening to and considering others’ viewpoints and opinions and altering own opinion when it is appropriate to do so; being open and accepting of negative or developmental feedback regarding work; working well and developing effective relationships with highly diverse personalities; demonstrating keen insight of others’ behavior and tailoring own behavior to persuade, influence, or work more effectively with them.

Demonstrating cultural adaptability

Taking action to learn about and understand the climate, orientation, needs, and values of other groups, organizations, or cultures; integrating well into and being comfortable with different values, customs, and cultures; willingly adjusting behavior or appearance as necessary to comply with or show respect for others’ values and customs; understanding the implications of one’s actions and adjusting approach to maintain positive relationships with other groups, organizations, or cultures.

Demonstrating physically oriented adaptability

Adjusting to challenging environmental states such as extreme heat, humidity, cold, or dirtiness; frequently pushing self physically to complete strenuous or demanding tasks; adjusting weight and muscular strength or becoming proficient in performing physical tasks as necessary for the job.

The questions that remains are:

Is adaptability of a company anything different from adaptability of the people in the company?

How does a company get adaptable people?  Are people born that way or can they be trained?

Five components of resilience – robustness, redundancy, resourcefulness, response and recovery

Adapted from the WEF Global Risks 2013 Report  (Minimal editing to focus discussion on “an organization” rather than “a country”)

Resilience Characteristics (Robustness, Redundancy and Resourcefulness)

The following three components of resilience are used to describe an organization’s state of resilience. These components should be designed into a system and, as such, will enable assessments of an organization’s inherent resilience capabilities.  

A. Robustness

Robustness incorporates the concept of reliability and refers to the ability to absorb and withstand disturbances and crises. The assumptions underlying this component of resilience are that: 1) if fail-safes and firewalls are designed into an organization’s critical networks, and 2) if that organization’s decision-making chains of command become more modular in response to changing circumstances, then potential damage to one part of an organization is less likely to spread far and wide.

Example of Attributes

— Monitoring system health: Regularly monitoring and assessing the quality of the subsystem ensures its reliability.

— Modularity: Mechanisms designed to prevent unexpected shocks in one part of a system from spreading to other parts of a system can localize their impact, as happened with the contagion from investment banking to retail banking during the 2007-2008 financial crisis.

— Adaptive decision-making models: Networked managerial structures can allow an organization to become more or less centralized depending on circumstances, such as when branch offices of the Japanese retailer Lawson’s continued operating through the serious disruptions of the Great East Japan Earthquake in 2011.  These measures can include having in place the right investment and incentive structures to overcome competing interests.

B. Redundancy

Redundancy involves having excess capacity and back-up systems, which enable the maintenance of core functionality in the event of disturbances.  This component assumes that an organization will be less likely to experience a collapse in the wake of stresses or failures of some of its infrastructure, if the design of that organization’s critical infrastructure and institutions incorporates a diversity of overlapping methods, policies, strategies or services to accomplish objects and fulfill purposes.

Examples of Attributes

— Redundancy of critical infrastructure: Designing replication of modules which are not strictly necessary to maintaining core function day to day, but are necessary to maintaining core function in the event of crises.

— Diversity of solutions and strategy: Promoting diversity of mechanisms for a given function. Balancing diversity with efficiency and redundancy will enable organizations to cope and adapt better than those that have none.

C. Resourcefulness

Resourcefulness means the ability to adapt to crises, respond flexibly and – when possible – transform a negative impact into a positive.  For a system to be adaptive means that it has inherent flexibility, which is crucial to enabling the ability to influence of resilience.  The assumption underlying this component of resilience is that if organizations can build trust within their networks of suppliers, employees and customers and are able to self-organize, then they are more likely to spontaneously react and discover solutions to resolve unanticipated challenges when larger industry and community institutions and governance systems are challenged or fail.

Example of Attributes

— Capacity for self-organization: This includes factors such as the extent of social and human capital, the relationship between social networks and organizational structures, and the existence of institutions that enable face-to-face networking. These factors are critical in circumstances such as failures of government institutions when organizations need to self-organize and continue to dobtain essential services.

— Creativity and innovation: The ability to innovate is linked to the availability of spare resources and the rigidity of boundaries between disciplines, departments and social groups within the organization.

Resilience Performance (Response and Recovery)

These two components of resilience describe how a system performs in the event of crises. They provide evidence of resilience when actual crises occur.  Response and recovery are dependent on risk, event and time. These components will provide the ability to compare systems and feed the measurements and results to calibrate the resilience characteristics.

D. Response

Response means the ability to mobilize quickly in the face of crises. This component of resilience assesses whether an organization has good methods for gathering relevant information from all parts of society and communicating the relevant data and information to others, as well as the ability for decision makers to recognize emerging issues quickly.

Example of Attributes

— Communication: Effective communication and trust in the information conveyed increase the likelihood that, in the event of a crisis, stakeholders are able to disseminate and share information quickly, and to ensure cooperation and quick response from the audience.

— Inclusive participation: Inclusive participation among all stakeholders can build a shared understanding of the issues underpinning crises and acute risks to the organization, reduce the possibility of important interdependencies being overlooked, and strengthen trust among participants.

E. Recovery

Recovery means the ability to regain a degree of normality after a crisis or event, including the ability of a system to be flexible and adaptable and to evolve to deal with the new or changed circumstances after the manifestation of a risk.  This component of resilience assesses the organization’s capacities and strategies for feeding information throughout the organization,  and the ability for decision-makers to take action to adapt to changing circumstances and  incorporating new situations into business strategies,.

Example of Attributes

— Active “horizon scanning”: Critical to this attribute are multi-stakeholder processes tasked with uncovering gaps in existing knowledge and commissioning research to fill those gaps.

— Responsive feedback mechanisms: Systems to translate new information from horizon-scanning activities into action – for example, defining “automatic policy adjustments triggers” – can clarify circumstances in which policies must be reassessed.

As an example of the overlapping and complementary nature of these attributes, inclusive participation is listed as a key attribute of response, but it is also vital in other areas such as recovery and resourcefulness. Also inherent in all resilience characteristics, though referenced above only in the attribute of adaptive decision-making models, are investment and incentive structures and design requirements to overcome collective action problems and competing interests. There are many individual stakeholders who would benefit from greater shared resilience but currently lack either the incentive or feel too pressed for time and resources to take the necessary actions.

How Much Resilience Do We Need?

Much too much of what we do relies upon the simplest idea of linear extrapolation.  It must be hard wired into human brains to always think first of that process.  Because we frequently seem to miss when extrapolation does not work.

Risk managers desperately need to understand the idea of system capacity.  The capacity of a system is a point beyond which the system will fail or will start to work completely differently.

The obvious simple example is a cup with a small hole in the bottom.  If you pour water into that cup at a rate that is exactly equal to the rate of the leak from the hole at the bottom, then the water level of the cup will be in equilibrium.  A little slower and the cup will empty.  A little faster and it will fill.  Too long in the fill mode and it will spill.  The capacity will be exceeded.

The highly popular single serving coffee machines are built with a fixed approach to cup capacity.  The more sophisticated will allow for two different capacities, but usually leave it to the human operator to determine which limit to apply.

For the past several years, there have been a number of events, the latest a hurricane that damaged an area the size of Western Europe, that have far exceeded the resilience capacity of our systems.  The resilience capacity is the amount of damage that we can sustain without any significant disruption.  If we exceed our resilience capacity by a small amount, then we end up with a small amount of disruption.  But the amount of disruption seems to grow exponentially as the exceedance of resilience capacity increases.

The disruption to the New York area from Hurricane Sandy far exceeded the resilience capacity.  For one example, the power outages still continue two weeks after the storm.  The repairs that have been done to date have reflected herioc round the clock efforts by both local and regional repair crews.  The size of the problem was so immense that even with the significant outside help, the situation is still out of control for some homes and businesses.

We need to ask ourselves whether we need to increase the resilience capacity of our modern societies?

Have we developed our sense of what is needed during a brief interlude of benign experiences?  In the financial markets, the term “Great Moderation” has been used to describe the 20 year period leading up to the bursting of the dot com bubble.  During that period, lots of financial economics was developed.  The jury is still out about whether those insights have any value if the world is actually much more volatile and unpredictable than that period of time.

Some weather experts have pointed out that hurricanes go in cycles, with high and low periods of activities.  Perhaps we have been moving into a high period.

It is also possible that some of the success that mankind has experienced in the past 50 years might be in part due to a tempory lull in many damaging natural phenomina.  The cost of just keeping even was lower than over the rest of mankind’s history.

What if the current string of catastrophes is just a regression to the mean and we can expect that the future will be significantly more adverse than the mild past that we fondly remember?

We need to come to a conclusion on those questions to determine How Much Resilience Do We Need?

Diversity and Resilience

Can’t we all just learn to “Get it Right”?

Just picture a ship with a large flat deck and thousands of passengers on the deck. The boat lists to one side and the passengers scurry to the other side to avoid going over the edge in the side that is dipping. Guess what happens? The boat now lists to the other side. Stabilizing the boat requires that everyone is spread about the entire deck. But since we do not necessarily know the exact spots where everyone needs to stand, some moving around makes sense. Just as long as everyone does not start moving together.

The world we live in is a much more complex and dynamic system than a ship at sea. We definitely do not know what is the safest course of action for everyone to take. We do know what hasn’t worked. We suspect that some of the things that we thought did work in the past were actually not good ideas. We do not know how to get the world to go backwards in time to when things were working best. In fact, they weren’t working best for someone then anyway.

Diversity is the most sensible approach when we do not know what will work. With a diversified approach it is quite possible that some will be doing the exact wrong thing, but at the same time, some will be doing the best thing for what comes next.

Only if we are certain of what will come next can we be sure to pick the best course. When too many people pick any single course of action, however, there often are unintended consequences.
Never before had mortgage loans in the US all gone down together, but when everyone started to increase the amount of leverage in the mortgage system, the leverage itself became the cause of massive correlation.

Ecological systems that are more diverse are more resilient. Human systems are the same.

Resilience Realism

There are two parts to identifying and understanding whether something is a risk to your organization. The first part is to understand what might happen in the world and within your organization that might cause an adverse result. The second part is to understand the resilience of your organization to the adversity.

Consider the situation of New Orleans. For the Big Easy to be properly prepared for a major hurricane, they need to have both a realistic view of what sorts of hurricanes could hit the city AND they needed to be realistic about the resilience of their city to the impact of the hurricane.

Riskviews has featured the Plural Rationalities view that there are four different views of risk many times.  In addition to the view of risk, resiliency can follow the pattern of four different points of view.  In fact, it may well be a combination of the view of resiliency and the view of risk that makes up the four risk paradigms.

Conservators believe that the world is risky AND they are not very resilient.

Maximizers believe that the world is low risk AND that they are very resilient.

Managers believe that the world is moderately risky AND that they can be appropriately resilient if the work at it and apply the correct expertise.

Pragmatists believe that they do not know how risky that the world is and they also cannot tell whether they will be sufficiently prepared.

Consider the residents of the Atchafalaya Spillway area where the water from the flooding Mississippi River was diverted by the Army Corps of Engineers.  Some of those folks fled immediately when asked to evacuate.  They doubted that they had the resilience to face the flood.  Others stayed put because they had always survived floods before and they felt that their resilience was fine.  A few folks stayed and built up their own defenses.  You may have seen the TV footage of homes in their own little islands of recently added sandbags.  The Pragmatists may have been in any one of those three groups but for entirely different reasons.)

The feeling of resilience comes from experience – from the feedback that people get from their experiences.  And it helps to form their current approach to risk.