Power outages pose broader risk management questions
Jolted Out of the Comfort Zone
A few years ago you could have been forgiven for assuming the supply of electricity was a given, and that the only concern to your business was the input cost that fluctuated due to usage patterns and tariffs.
All that has changed in the space of a few short months, and suddenly businesses are scrambling to find ways to avert the power crisis. Production outputs are tumbling, profits are being eroded, and some businesses are in danger of closing down. The impact to our economy is incalculable.
Why has this been allowed to happen? No, I’m not going to debate the reason why our national power supply has fallen behind demand or who is to blame for the current crisis. That very public debate has been in all the media.
My main concern is how businesses, even major corporations, appear to have been unprepared for and unable to deal with the situation. It’s easy to say that it was impossible to plan ahead for the unexpected, but is that strictly true?
Risk management is often driven around two major concerns – regulatory compliance and direct tangible risks to our business that are easy to understand and measure. While this is necessary, it is far more effective to consider organisational risks holistically and in a broader context. If electricity is one of your primary inputs, then the cessation or reduction of its supply should always have featured prominently in your strategic planning, not only now that it has become an obvious issue. But don’t be hard on yourself if it didn’t – you’re in good company, as can be seen by the turmoil that the rolling blackouts have caused.
Enterprise Risk Management
This holistic approach to risk management is called Enterprise Risk Management or ERM for short. ERM has been a bandied about for many years, but for many organisations it has remained a buzzword. The main reason for this appears to be that it is not easy to implement.
It involves being able to look beyond the boundaries of your business, and to break down divisional boundaries within your business. It involves considering the improbable and measuring the intangible. The process of ERM revolves around six primary steps:
* Establish the context that your business operates in, both internally and externally
* Identify the risks, both internal and external, across the entire business operation
* Analyse and quantify the risks
* Integrate the risks by analysing the interdependencies between the risks. An individual risk can compound or negate other risks
* Assess and prioritise risks according to the likelihood and impact to your organisational KPIs
* Take appropriate action. This action can even take the form of exploiting risk. If, for example you did plan well in advance for the possibility of electricity shortages you could be annihilating your competition while they scramble to catch up. You could also be selling generators at a frightening rate!
Residual Risk
Another concept important to ERM is that of residual risk. In its simplest terms, residual risk is the risk that remains after appropriate action has been taken to mitigate the original risk.
At this point it becomes helpful to take a look at Eskom’s actions in the face of the impending crisis. It is apparent from news reports that Eskom did a sterling job of proper strategic capacity planning, and identified nearly a decade ago that electricity demand would outstrip supply in 2007. This forecast turned out to be remarkably accurate. The properly identified mitigating action was to knock on government’s door and ask for money to build additional power generators.
So far so good.
This request for money was turned down, not an entirely unpredictable response, given the enormous pressure to spend money on uplifting the impoverished. To my mind this was not the key turning point. It appears from news reports that Eskom then took insufficient further action in the intervening ten years, bringing us to the situation we are in today.
Surely they should have been constantly banging on the State President’s door, advising him on the steadily worsening situation, and creating a great deal of public awareness through the media? It is vitally important to constantly measure the effectiveness of your interventions.
A Brighter Future
We cannot change what has happened, but we can learn from mistakes made. One of the key things learnt has to be that risk must be considered in the broadest possible context and constantly measured and re-evaluated. ERM is a vital tool that enables one to at least consider the unexpected and make allowances for it, even if it is impossible to predict the future. ERM has the potential to save your company from extinction.
Keep the lights on, there’s somebody home.
