The rise of Complex Risk Theory, and how risk management practices will need to evolve in order to survive the Fourth Industrial Revolution

The rise of Complex Risk Theory, and how risk management practices will need to evolve in order to survive the Fourth Industrial Revolution

The rise of Complex Risk Theory, and how risk management practices will need to evolve in order to survive the Fourth Industrial Revolution
The rise of Complex Risk Theory, and how risk management practices will need to evolve in order to survive the Fourth Industrial Revolution
 

 

Riddle me this?  

Every few generations our tiny planet experiences a radical shift in complexity, an evolutionary "growth spurt" if you will, whereby the surrounding environmental demands shift so quickly and so radically that the functional world becomes almost unrecognisable to the previous generation as well as their chosen methods of operation.  
During this time the surrounding environment becomes noticeably more complex as wave after wave of disruptive influences compound through the known world. What follows is often a painful period of readjustment as the invested stakeholders scramble to adapt and once again secure a natural rhythm to their operational existence. 
 
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Those who adapt successfully, tend to survive the transition and proceed stronger for the experience, those who don’t fall by the way side. As Charles Darwin observed in his seminal works on the evolution of our species; “It is not the strongest of the species that survive, nor the most intelligent, but the ones that are most responsive to change.”  

So if Charles Darwin could foresee the value of adaptive approaches (Agile) to controlling material risks in his time; how is it that so many of us still struggle with the concept almost 200 years later?

The rise of the Agile Age

We are now living in an age which the World Economic Forum has titled as the Fourth Industrial Revolution. It is an era driven by rapid, momentous and continuous technological change. Consider how over the past decade in particular, our working and social worlds have experienced a colossal complexity shift whereby not only is there now a personal computer in every workstation and home, but also in every pocket and purse.
The impact of such sudden and integrated global connectivity is undeniable; humankind is now more informed, connected, agile and potentiality disruptive than at any other time in our history.  Our Working World is now made up of a globally connected community which can enable a business idea to go from a cocktail napkin to a multi-billion dollar listing in less than 10 years (Uber, AirBnB, Instagram, Twitter, Google, Facebook). Equally the same businesses could fall apart almost instantaneously as global demands change in favour of the next wave (MySpace, Yahoo, Blackberry).
"In 1915 the average time that it took for a start up business to grow into a Fortune 500 sized company was more than 50 years, in 2015 it was less than 10 years"
 
This modern era is like none that humankind has ever experienced, it is a world whereby everything is connected and interdependent, where small changes in one area can create gigantic uncontrollable outcomes in many others. Our Working World is now one that is significantly more complex and unpredictable and it is a world whereby the ability to react and adapt quickly is critical to survival.  
 
With this in mind, many of the industry accepted management models and historically accepted operating paradigms are no longer suited to the needs of a significantly more connected, dynamic and agile world. Most of these existing modus operandi are deeply rooted in principles developed during the Industrial Revolution when the world was embracing a complexity growth spurt of a different kind.
 

The previous Complexity Growth Spurt

During the late 19th century, the Industrial Revolution was in full swing as mankind had finally learnt to harness the full potential of steam and steel. Out of a relative obscurity, large industrial size factories sprang out that could build hundreds of thousands of repeatable widgets and distribute them almost anywhere in the world, all through a globally interconnected fabrication and distribution network powered by steam and housed in steel.

For the first time in human history, global trade sought to leverage the commercial benefits of "mass production". As a result, the previously accepted production practices rapidly become obsolete as industry now looked towards establishing infinitely repeatable, high-volume work flows.

From this industry need emerged Frederick Taylor, a scientist and engineer who spent his career advising industry on how to adopt systematic management principles that would help enable repeatable efficiency in the work place. Taylor's insights into how to replicate success through structured operating practices was highly innovative and noticeably revolutionary for the time and his ability to define, measure and improve an entities’ value chain is now part of industrial folk lore.

In many ways, Frederick Taylor was the first global operations consultant and his management principles, found an exceptionally welcoming market in the industrial era. “Taylorism” spread rapidly throughout the 20th century and became the primary means for establishing structured workflows to improve efficiency in the areas of labour and productivity. From Tayloristic thinking, the “production line”, "continuous improvement" and "quality control" mentalities were born and for the next 100 years almost all forms of industry adopted such structured scientific thinking.
Global giants such as Ford, General Motors, Toyota, US Steel, Du Pont (and many others) grew rapidly through Tayloristic production principles and even now in the year 2016 almost all established industry management models, operating systems and defined workflows can trace their origins back to the systematic principles advocated by Fredrick Taylor.

The current Complexity Gap  

In 2016 however, most emerging global businesses are no longer driven by the Tayloristic methodologies used by General Motors, Du Pont and the like but rather by the more holistic principles of Facebook, Twitter, Google and Apple. Just as steam power fueled the Industrial Revolution, real-time information sharing is fueling 

the Agile Age and what this means is that there now exists a management gap whereby the vast majority of existing operating models are designed to suit a more structured and stable world of lower complexity and higher certainty rather than the highly dynamic, fluid and agile world we are currently experiencing. This paradox whereby many of our historical methods of operation need to evolve to catch up with the modern context is increasingly being referred to as the “Complexity Gap” and risk management is no exception to this paradox.

Highly complex, highly uncertain environments expose organisations to a higher degree of risk. Thus if an organisation's chosen methods of risk control are too immature, too impaired or too misaligned to deal with the advanced degrees of complexity and uncertainty in play, the organisation can not possibly consider itself to be Agile.

The rise of Complex Risk Theory

The new reality is that; global businesses (as well as many large projects and programs) are getting so operationally complex that they are starting to reflect the adaptive-interdependent networks seen in such complex natural systems as ant colonies, swarming birds and even self evolving viruses.  
 
Yet despite the noticeable increases in global complexity and dynamism over the past few decades, most established management methodologies and operational systems still appear to endorse Tayloristic approaches best suited for environments of low complexity and high certainty. In the case of risk management specifically; most traditional risk management methodologies are all very systematic, linear and process based in their approach to controlling material risks.  Consider the following "Brand Name" risk methodologies outlined below which are each industry recognised in their respective fields;
Upon review it is noted that each of these established risk methodologies advocate for a similarly Tayloristic approach whereby they commonly encourage their practicing officers to control risk in a systematic step-by-step manner. Namely;  (1) Identify the risk (2) Quantify the risk and (3) Treat the risk.  This three step process is text book Taylorism and strongly echos the "Assess>Measure>Adjust" continuous improvement approach seen in most production environments. 
As implied previously, Tayloristic approaches require the surrounding operating environment to be rational and consistent; the Agile World however does not offer such luxury and it therefore questionable what value such systematic approaches can offer in an era defined by its’ dynamic complexity and inherent unpredictability. "Processing complex risks though a system designed with a Tayloristic mind set is perhaps not the best risk solution for an Agile World" 

The need to move from Tayloristic to Agile in Risk Management 


Although there are many who still endorse the idea that a structured, Tayloristic approach to risk management can add value in the Agile World, the proponents of complexity theory appear to disagree. In fact, two distinct complexity characteristics appear to exist which suggest that Tayloristic approaches to risk control are impaired in an Agile World;

Character #1 - The lack of predictability (and systematic replication)  

One of the signature traits of a complex system is the shear lack of predictability. Unlike in rational ordered systems (i.e. non complex/highly certain) a complex system is constrained by the unpredictability of its inter dependent relationships. This means that in a complex system we cannot forecast or predict what will happen next with any level of consistency nor efficiency as there are far too many variables and moving parts.  
More to the point, no single outcome can be consistently replicated in a complex environment and hence the principles of Taylorism are moot.  “Complexity is the inability to predict the behavior of a system due to large numbers of constituent parts within the system and dense relationships among them” (Sheard, 2012)
The lack of consistency, predictability and repeat-ability in complex adaptive systems is a critical issue for the art of risk management as most traditional risk management methodologies appear to endorse the view that all material risks are proactively identifiable & measurable and also, in a repeatable manner - but we know they are not.

Character #2 - the compounding nature of relationships

Another signature trait of a complex system is the high inter connectivity of multiple, compounding relationships within the system (dynamism). A commonly referenced concept illustrating this point is that of Lorenz’s “Butterfly effect” whereby subtle, almost unnoticeable, changes in one particular relationship within the complex system creates additional changes in the dynamics of all other relationships within the system. 
The nature of a complex system is that even subtle changes are bound to ripple and amplify from relationship to relationship until a point is reached whereby major, irreversible shifts are experienced further downstream. As Lorenz suggested in the mid 1970's, a minor flap of a butterfly’s wings in one part of the world could set off a chain of events that ultimately unleashes tornadoes in other parts of the world. Such is the power of compounding and momentous change within a complex system.
Authors in the field of complex systems theory and chaos theory acknowledge that the more interdependent relationships which exist within the complex system, the more potential there is for minor changes to create unpredictable and disproportional outcomes in other relationships. In this regard, "complexity" implies a highly dynamic and fluid state of existence whereby the interdependent relationships are often emergent and thus most relationship changes are often unrepeatable as they enjoy an unstable and/or non-linear relationship (i.e. they are chaotic).

Considering the above two complexity characteristics; surely we must concede that global operating environments have gotten so inherently complex, dynamic and unpredictable that we can no longer gain any reasonable sense of confidence from attempting to "predict & process" risks in a systematic, repeatable manner and thus we need to look towards new means of securing control.

Quo Vadis – so where to from here?  

Historically acceptable risk management methodologies now run the risk of being less evolved than the most current environment and so in light of this; a new generation of complex risk thinkers appears to have emerged who in their own right are actively seeking out risk solutions better suited for a complex-uncertain world.
This new generation of risk thinkers include; Nassim Taleb / Stanley McChrystal / Bent Flyvbjerg / Daniel Kahneman / Chapman & Ward / Roland Kupers / Andrew Zolli / Klaus Schwab and many more.  Once you know they exist, their work is not hard to find.  Although these complex risk thought leaders don’t yet appear to endorse a single, universal substitute to the traditional risk management approach; they do appear to commonly advocate for the following;
  • Risk methods which require their practicing officers to first identify risks in order to control them (aka the traditional risk method) are better suited for environments of high certainty and predictability (e.g. a repeatable production environment) not for environments of advanced complexity and uncertainty (ie the Modern World).     
  • Attempting to predict risks should not be the only way to proactively control material risks - maturing controls, developing resilience, improving behaviors/attitudes, promoting collaboration, establishing agility and integrating common effort should all have an equal standing in any attempts to proactively control material risk, regardless of the degree of environmental complexity in play     
  • Environments of advanced complexity and uncertainty require risk management solutions that are significantly more scaled & adaptive (agile) than those advocated by the traditional risk management methodologies. In brief, environments of advanced complexity require advanced control solutions.
From the above we can reasonably conclude that effectively controlling risk in the Modern World should not be about getting better at predicting, measuring and documenting identifiable risks, but rather it should be about getting better at embedding an effective organisational risk attitude supported by a fully matured and integrated control capability.  This is a premise that many of the traditional risk management methodologies commonly fail to emphasise. "Risk management in the modern era is about enabling an agile control capability, not about finding better ways to identify or predict risks"  

Structured risk identification and assessment tools such as risk registers, heat maps, bowties, risk software and data storage are all Tayloristic in nature, not Agile in nature. Hence those organisations operating on the global stage in this highly adaptive and agile modern age, that still choose to use such Tayloristic tools as their primary means of controlling risk, are potentially positioning themselves to become victims of the Complexity Gap. 
 
That is, they will almost certainly at some time in the near future experience significant hurt due to their chosen risk control approaches being less developed than the requirements of their operating world. "We need to shift the paradigm from black & white systems... to integrated solutions that deal with the variety and complexity of the threats of today" (John W. Thompson) 

So what?  

During such periods of complex evolutionary growth, stakeholders either adapt or die. Thus most organisations can actually no longer afford to ignore the calling of the Fourth Industrial Revolution because those that don’t adopt and embed a more agile approach to controlling their material risks will almost certainly become part of history’s redundancy heap.  
 
As Charles Darwin observed; it is not the strongest of the species that survive, nor the most intelligent, but the ones that are most responsive to change. So, if Darwin could foresee almost 200 years ago the value of Agile approaches in controlling emerging threats to survival; then we (the invested risk community) have no excuse not to embrace such teachings in the year 2016.

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This submission is part of a series of thought pieces which have been developed whilst engaged in a Higher Degree in Research into "Controlling risks in complex-uncertain project environments".  Follow our research on LinkedIn whereby I will regularly post conceptual learnings and dilemmas for industry practitioners to review and hopefully comment on. 
 
Also please feel free to share this thought piece with like minded professionals who may also be interested in the topic.  This thought piece is authored by Warren Black (2016) a Higher Degree in Research Candidate at the Queensland University of Technology  https://au.linkedin.com/pub/warren-black/15/464/625  www.complexus.com.au

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                                        Warren Black
About: 
I am an Engineer, Risk Professional and Complex Systems’ Thinker who has particular interest in understanding how the complexity sciences may offer a better means to controlling emergent risks within highly complex, operating environments.  I currently consult on how to improve organisational Governance, Risk & Assurance practices so that they may reflect not only the degree of investment at risk, but also the specific environmental complexities in play. 
 
I believe that over the past decade in particular, I have accrued deep expertise in my chosen subject matter as evidenced by the fact that I was the head of Program-wide Risk for BG QCLNG and have held Senior Project Risk & Business Advisory roles at both Deloitte and Marsh & McLennan Risk Advisory Practices. I am also arguably one of only a handful a Risk Professionals who has built a full end-to-end risk management & reporting framework for an organisation of over $25 billion (BG QCLNG). At its peak this was the 8th largest project in the world and is hence a significant indicator of my capability. 
As a practising complexity & risk specialist, I have worked within two of the world’s largest mining project hubs (BHPB and Rio Tinto), three of the Queensland mega LNG projects (GLNG, APLNG, QCLNG), Australia's largest construction company (Leighton’s/CIMIC), The State of NSW's largest Infrastructure PMO (I&P PMO), Victoria's Largest Rail PMO (VicTrack), Brisbane's largest city Rail Project (Cross River Rail) and the largest publicly funded civil & infrastructure PMO in Queensland (Brisbane City Infrastructure).  
 
Also, as a demonstration of my commitment to my art; I am currently engaged in a PHD by Research whereby I am "Investigating a Complex Systems Approach to Complex Project Risk Management". I believe that the complexity sciences provide a new generation lens upon which to help risk management transition into a future world of complex working relationships and perpetual disruption.

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