Ethos Issue 7, Jan 2010

Enterprise Risk Management:
Strengthening Singapore’s Advantage
Ang Hak Seng

The risk incurred by organisations that have become very adept at scenario-based vulnerability management, and which then cease to plan beyond Level 2, is to be blindsided by inadequate scenarios or unforeseen circumstances. For example, assuming a discrete number of terrorist tactics will blind security forces to terrorist innovations such as the September 11 attacks. Therefore, effective strategies should not rely on knowing the specific source or nature of a risk, only its dimension of operation. Approaches to managing such vulnerabilities include diffused capacity building, de-correlation of risks, business continuity plans and resilience plans.

Finally, at Level 3 ("Unknown Unknowns"), even the dimension of risk is unknown. Besides building strong sensing mechanisms to give some early warning, organisations need to be able to react quickly to events. Therefore, the ability to assemble emergency response teams on the fly and subsequently dissolve them quickly to restore normalcy is crucial in dealing with strategic surprises and
black swans.

Such "Hastily Formed Networks" or HFNs are a key to systemic responsiveness. This capability to group and ungroup task forces swiftly was an important factor in Singapore’s successful battle with SARS in 2004. Similarly, when the financial crisis struck in late 2008, governments which had the ability to react quickly saw better outcomes than those where bureaucratic obstacles slowed down decision-making and response. By the same token, enhancing flexibility in planning (for example, adopting quarter-to-quarter planning frameworks) and flexibility in problem solving (e.g., developing HFNs) would allow better preparation for such uncertainty. This has implications on the way government organises itself. There could be a lot more organically and spontaneously formed need-based groupings, rather than more rigid structures that are costly to maintain.

Seizing Opportunities
Implementations of ERM that focus solely on managing vulnerabilities fail to recognise the value of a risk-oriented approach in seizing opportunities.

Traditional cost-benefit analysis would suffice to analyse opportunities at relatively low levels of uncertainty (Level 1). Given discrete options, portfolio management and game theory may shed light on the best set of opportunities to pursue.

However, true opportunities begin to reveal themselves in regions of greater uncertainty (Level 2). Here, Blue Ocean thinking² helps to systematically explore new opportunities. The value innovator is the person who is able to make smart trade-offs, sensing where risk must be taken to exploit new opportunities. Conversely, there must be significant uncertainty for such strategies to prevail.

In Level 3, where even the dimensions of risk cannot be fathomed, seizing opportunities no longer relies on a specific framework. Instead, opportunities are best sought through an appropriate market system which encourages experimentation and accepts failure. By the law of large numbers, a small number of entrepreneurs will find breakthrough opportunities. Such market systems require government action to promote free market forces: by providing accessible infrastructure, making available seed funding and removing market entry barriers. In Singapore, however, given our small size, it may be necessary to "strategically direct" innovation by identifying a promising industry, sector or research area. The performance of these attempts should not be measured only by the number and value of successes, but also the learning value that we extract from each experiment.

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