Adaptive Risk Management is the process of learning from experience and adjusting management procedures in response to new information. Traditionally, this is done as an assessment based on high-probability events. Losing clients, negative cash flow, costs of acquisition and expansion, or even staff turnover are all common occurrences that have an associated level of relative risk. But over the past year, businesses have had to learn from low-probability risks with high-impacts such as the economic effects of the pandemic. In fact, a pandemic was not even categorized as a potential risk, high or low, prior to last year.
According to a recent poll, 41 percent of businesses indicated a substantial increase in low-probability risks brought on as part of the pandemic (Journal of Accountancy). In addition, 78 percent of respondents indicated that they would adjust their risk management process to better manage future events based on the impact of pandemic-associated risks.
Typically, risk can be modeled against specific probability. Even the great recession of 2008 could be somewhat predicted based on market models in the months and weeks leading up to the financial collapse. But even that is an example of a risk that can be, even broadly, anticipated. Complex events and their impact on business, particularly small business, have remained unclear, until now.
But how do we learn strategically from this event and is it something we should better prepare our businesses for in the future?
The good news that most businesses have settled on is that most comprehensible events will be less hazardous to individual economic complexities than the onset of a global pandemic. There is also a great deal of regard placed on enlightenments of how hazards impact the operational functionality of every business. One of the biggest challenges in strategic hazard planning is that every business is different, and each must adapt in its own way. In this, business owners become more aware of their place within the market.
Imploring adaptive risk management is about understanding that risk is always present, and its impact can have varying limitations. Success in risk management is supported by three principles:
1. Make risk decisions by balancing project values and organizational priorities.
2. Own risks, responsibilities, and accountabilities at all times, despite their unlikely nature.
3. Work in team collaboration to ensure stewardship throughout a risk process.
These areas of thought not only allow for a business to be more open to risk management, but the fluidity allows for all risks to be managed with similar regard. It is also healthy to understand that no risk can be truly assumed. What we can do is learn from individual scenarios and allow that knowledge to guide adaptive management.