Tracing Risk CascadesThe Autumn 2009 issue of McKinsey on Finance contains an article by Eric Lamarre, director of McKinsey's Montreal office, and Martin Pergler, a consultant in the Montreal office, that does a good job of elucidating the types of indirect risks companies should include in their risk assessments.
Cascading (i.e., interconnected) risks
(McKinsey & Company [pdf])
The above graphic illustrates the types risk triggers in the business environment (outer circle) that lead to:
- Changes in a company's competitive position
- Changes in the company's input costs due to changes along its supply chain
- Changes in the health and/or performance of the company's distribution channels
- Changes in the ability and/or willingness of customers to buy from the company
A complete risk management process will include assessing the likelihood and significance of a range of relevant risk cascade scenarios. Lamarre and Pergler provide well-chosen examples of what this process would look like in practice. An extended example explores how new carbon regulations would affect aluminum producers, both directly and indirectly.
Labels: Risk management