How Volatility, Uncertainty, Complexity and Ambiguity Are Shaping Risk Management

By: | December 13, 2021

James Curbeam, CPCU, ARM, AIC, is the director of risk management for the Las Vegas Valley Water District. He holds a B.S. in finance from Creighton University and an executive MBA from the University of Nebraska Omaha. James has served in the following industry leadership roles: President, Nevada Chapter of RIMS; President, Nebraska Chapter of RIMS; and President of the Las Vegas CPCU Society. James is also a founding member of the American Association of Water Distribution & Management, which was formed as a Thought Leadership Lab for risk management in the water industry. He also was named the 2019 PRIMA Risk Manager of the Year. James can be reached at [email protected]

Risk managers are facing challenging times.

The present risks for organizations are definitely different than in the past. VUCA is the term coined to describe these risks. VUCA has become a trendy acronym for volatility, uncertainty, complexity and ambiguity.

Let’s examine these terms one at a time.

Breaking Down VUCA

Volatility describes the challenge of dealing with the unexpected or an unstable environment.

In Las Vegas specifically, hospitality companies have dealt with the government shutdown of their operations.

For most organizations with sophisticated risk managers, there was no ability to transfer this risk. Thus, these losses directly impacted the companies’ balance sheets and the layoff of thousands of employees.

Uncertainty represents a lack of understanding of the cause and effect of events.

During the pandemic, the government tried to minimize the impact on individuals by extending unemployment benefits. Currently, companies are facing the reality of trying to reopen with the realization that it may be personally beneficial for individuals to stay home and not return to gainful employment.

There are dependencies everywhere that must be considered today to truly mitigate risk. Due to this complexity, risk managers, unfortunately, must operate in a reactive posture most of the time.

Cyber exposure is a perfect example of such a risk.

Mitigation strategy for cyber exposure is too often established after an organization is fortunate not to be one of the companies that was exposed to a loss.

When information has multiple meanings, it can be difficult to make decisions. In a world of ambiguity, causal relationships are completely unclear. Sometimes no precedents exist, and the manager encounters the unknown unknowns.

After the death of George Floyd, for example, attention was drawn to social injustice. Many organizations struggled with what and if they should have a response.

In 2017, the Oxford dictionary expanded its definition of the word “woke;” it was added as an adjective meaning “alert to injustice in society, especially racism.” There are liberals demanding companies become woke and on the other hand, conservatives attacking woke companies.

Although Oxford established a definition for “woke,” it appears comprehending the definition varies in society.

Despite the vagueness around the term, you hear it referenced routinely. As a risk manager, how do you advise your company to react toward this new term? How do you advise your organization to deal with this and other ambiguities in the VUCA world?

The only answer is to fall back on the basic risk management process using the five basic steps to manage risk:

  • What is the business’ risk of exposure?
  • What is their mission statement?
  • What are their core values?
  • What previous positions have been taken?
  • Who are their customers?

The next step is to analyze the risk. The scope of the risk must be determined. Determine the severity and seriousness of the risk.

Next, evaluate the risk. Will the organizations’ actions cause a short-term or long-term reaction? What will be the impact of taking no action? What is the potential financial impact? What is the potential impact to the business’ brand?

Lastly, treat the risk. After completing the evaluation, determine how to minimize the impact of the decision? Who is the communicator of the decision? What is the public statement that is prepared?

Finally, monitor and review.

These are unprecedented times; therefore, as risk management professionals relying on our risk management principles, it is essential to lead during these VUCA times. &

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