There is this adage in business that failure of imagination can be fatal. Unable to see an oncoming disruption or unfamiliar competitive threats are the usual suspects. However, developing an effective business risk response requires expanding our imagination beyond the traditional. COVID widened our sense of what was possible. The pandemic + Ukraine War + Middle East turmoil + severe weather events told us that black swans can fly in flocks.

But now? Well, anything is possible. And given the times, we should not fully exclude an alien invasion.

The Changing Risk Landscape

We knew that the new U.S. administration would drive change. They would look at international and economic norms differently. Present new ideas and policies. Certainly, tariffs would be high on the list. But four things rise up, fueled by two factors: (1) the greater link between words and deeds; and (2) that it would happen this fast:

  1. The clear use of the US economy and massive consumer spending pools, as leverage in foreign policy
  2. Decisions can be made and just as rapidly unmade (e.g, tariffs with Canada and Mexico), adding to the already heightened sense of uncertainty
  3. The Department of Government Efficiency (DOGE) and what it will really mean to critical government functions
  4. Disconnects with Europe that may signal a level of economic disentanglement.

Emerging Business Risks Requiring Response

It’s a lot of moving pieces that, when taken together and apart from the macro view that a conservative economic agenda means less regulation and faster growth, offer up at least two potential underlying risks for businesses to consider when it comes to operational risk management:

  1. Continued, if not the escalation of inflation that will challenge margins
  2. Declining consumer confidence and spending will challenge revenues.

The truth is we really don’t know how this movie ends. It’s more like a Quentin Tarantino film where each chapter offers new tensions and we’re not sure which characters make it (or how they make it) to the end. What we do know is that:

  1. The possible variance to margin has increased
  2. And much of that increase is out of the direct control of business leaders
  3. Some industries (e.g., steel, disaster remediation) may see positive margin impacts, but most will feel downside risk.

Resilience and Actions for Effective Business Risk Response

Resiliency used to describe the ability to withstand familiar risk and the rare black swan moment. Now, resiliency means the ability to withstand a flock of black swans, each slightly different in their individual traits but common in their implications.

There are any number of “so what’s” that come from this. We wanted to focus on three that we believe are imperative for companies to be resilient in this climate — and maybe even gain share as resilience translates to competitive advantage:

  1. Increase risk scenario modeling, noting that each individual risk may seem remote (e.g., China invasion of Taiwan), but the common implications of many risks increase the probability of impact to the business (disruptions to supply lines that drive up cost and/or force changes to supply chain design).
    1. Potential Action Items:
      1. Develop quarterly risk assessment workshops with cross-functional teams
      2. Create a risk register with probability and impact ratings
  2. Fully integrate risk scenario modeling into financial and operational processes and decisions, as we have found that often risk is outside normal budgeting and forecasting, or in the assessment as to whether operations are good enough to be resilient in this climate
    1. Potential Action Items:
      1. Incorporate risk factors into your KPIs and dashboards
      2. Review supply chain redundancies regularly
  3. Focus on your ability to manage the dip: the inevitable disruption from any one or several of the black swans such that “your dip” is short and shallow and you can bounce back to take share.
    1. Potential Action Items:
      1. Develop rapid response playbooks for your top 5 risk scenarios
      2. Cross-train teams to ensure operational continuity

Strengthening Your Business Risk Response with River Rock Advisors

RRA understands the need — and the complexity — of moving to a more proactive approach to operational risk management. It challenges the view of “good enough” and pushes leaders beyond the familiar. However, we are in a rapidly evolving business climate that will force a more aggressive approach to operational excellence.

If you want to learn more about our approach to operational risk management, risk scenario modeling, business risk response and our work, please reach out to Steve.Keener@riverrockadvisors.com or David.Toth@riverreockadvisors.com to learn more.