By Iain Brown, Head of Data Science, SAS UK & Ireland
When considering risk, the rhetoric is often around prevention. How could we have prevented the financial collapse of 2008? How could the widespread disruption caused by COVID-19 have been prevented?
Naturally, risk assessment is all about preventing and managing risk. However, when we talk about ‘prevention’, the connotations are of defensiveness; of being on the back foot. There is often a feeling of ‘how can we survive these risks’? Rather than how businesses can leverage risk and risk assessment to gain a competitive advantage.
I caught up with our SAS Collaborators, a collection of top tech influencers, to discuss this very topic. We talked about what businesses need to do if they are not just going to fend off risks but turn them to their own advantage. The key, as is increasingly becoming the case in the modern world, is technology and, specifically, AI and analytics.
Make or break moments
For businesses, disruption is becoming a focal part of day-to-day life. There is, of course, huge variation in the types of disruption that companies can face. One day it could be something predictable and regional, like poor weather, and then the next it could be something unprecedented and with global ramifications – as we have seen with COVID-19.
While smaller disruptions are more frequent, the larger ones can represent make or break moments for businesses. Brands such as Victoria’s Secret, Debenhams and Cath Kidston, once household names on the high-street, have all gone into administration as a result of the pandemic. This is by no means a one-off occurrence. During the financial crisis of 2008, Lehman Brothers went under as well, sending shock waves through the world of finance.
The collapse of these companies cannot be wholly attributed to poor risk management practices. There may have been underlying issues which were exacerbated by severe disruption. However, with more effective risk management solutions, these businesses would have stood a better chance of reacting and making it through the turbulence.
For some it might well have been the difference between survival and going under. However, as one of our Collaborators, Bill Mew, mentioned, risk management does not purely have to be about survival. Instead, businesses that are prepared for these disruptions can ride the wave, leaving unprepared businesses in their wake.
Using COVID-19 as an example, one industry where this has been clear is retail. At the beginning of lockdown in the UK, the high-street was forced to close its doors in an effort to control the spread of infection. For some businesses, such as Primark, this temporarily resulted in a drop of sales to zero. This was because, without an ecommerce platform, it had no contingency plan to lean on: it wasn’t prepared for the worst-case scenario. Meanwhile, those retailers with a strong ecommerce platform were able to home in on the market share temporarily given up by businesses such as Primark. As another of our Collaborators, Peter Lavers, suggested, this reliability during difficult moments could earn businesses repeat business from customers moving forward as well.
For big and small businesses alike, history has proven the benefits of having an effective risk management strategy. The only real question businesses should be considering is: how can we have the most effective strategy possible? The answer lies in how they use their data.
A data with destiny
In the world we live in, disruptions are inevitable. Whether it’s geopolitical tensions, such as trade wars, climate change or something completely unforeseen, such as COVID-19, the next disruption is always just around the corner. As a result, businesses must be ready at all times.
With expected disruptions, it is easier for businesses to prepare. These would include seasonal spikes in demand, such as during the Christmas period, forecasted weather disruptions and, to a degree, Brexit. These are all events which, at some point, we can expect to take place or, at least, could have anticipated and planned for. As a result, businesses will have data directly relevant to these events, which can be analysed using data analytics and AI to create accurate, actionable insights to help businesses through the disruption.
However, planning becomes more difficult when a ‘black swan’ event hits. COVID-19 could be put in this category, given it came without warning and there was little to compare it to from history. As a result, businesses were caught unawares and without directly relevant historical data with which to combat the disruption.
In this scenario it’s vital businesses are agile and flexible. This stems from having an antifragile risk management strategy. Using the analogy of a ball, this would mean that the system is not comparable to a bowling ball or a glass ball, which would both end in damage if dropped. Instead, it must be analogous to a basketball: something that is flexible, adaptable and which can absorb impact.
From a risk management point of view, the way to achieve this is by having a bedrock of AI-driven analytics and by feeding your algorithms as much relevant data as possible. The more information they have to learn from, the better. Naturally, this will not allow you to predict global pandemics or financial collapses. However, it will allow you to generate insights based on the possibility of these ‘worst case scenario’ events. This will enable businesses to create multiple contingency plans for if and when the worst happens.
To achieve this, businesses need access to all of the data at their disposal and, for speed and efficiency, it should be accessible from one place, rather than siloed across multiple environments. One solution would be to integrate different data sites using an interconnected cloud platform. With all the information in one place, cloud-based analytics, which powers the necessary AI models to create an antifragile system, can then be used to analyse the data in its entirety. This is how businesses will generate the insights they need not only to survive disruptions, but to thrive during them.
Ultimately, when things are going well it’s easy to lose sight of the fact that disruption can strike at any moment and that some of them, if your business isn’t prepared, could lead to serious financial consequences. As a result, it’s vital that businesses are prepared for the unexpected at all times. Having antifragile risk management systems in place, powered by AI and analytics, is key to this. This will not only help businesses navigate their way through a tumultuous world but accelerate beyond their competitors in the process.