Streamline Training & Documentation: Tracing Risk Cascades

Thursday, November 05, 2009

Tracing Risk Cascades

The Autumn 2009 issue of McKinsey on Finance contains an article by Eric Lamarre, director of McKinsey's Montreal office, and Martin Pergler, a consultant in the Montreal office, that does a good job of elucidating the types of indirect risks companies should include in their risk assessments.

(click to enlarge)

Cascading (i.e., interconnected) risks

(McKinsey & Company [pdf])

The above graphic illustrates the types risk triggers in the business environment (outer circle) that lead to:

Changes in a company's competitive position

Changes in the company's input costs due to changes along its supply chain

Changes in the health and/or performance of the company's distribution channels

Changes in the ability and/or willingness of customers to buy from the company

The company needs to identify the ways in which risks may cascade from external events to changes in the competitive picture, the supply chain, distribution channels, and customer behavior, and thence to such internal operational and financial factors as productivity, product and service performance, and costs (inner circle).

A complete risk management process will include assessing the likelihood and significance of a range of relevant risk cascade scenarios. Lamarre and Pergler provide well-chosen examples of what this process would look like in practice. An extended example explores how new carbon regulations would affect aluminum producers, both directly and indirectly.

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Labels: Risk management

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