Resiliency vs. Fragility

Is there really a choice?  Who would choose to be fragile over resilient?

But many firms found that they had made the Fragility choice for their supply chains when the Earthquake, Tidal wave and reactor troubles shut down many suppliers in Japan last year.

Again we saw many choices of fragility when much of New York City and northern New Jersey were shut down for a week or more due to a “superstorm”.

In that superstorm, we saw the range of fragility and resiliency illustrated in the trees that we love to live in the midst of. Some trees swayed menacingly in the high winds, others lost branches, some large enough to take out fences and cars.  Other trees broke off or pulled up their roots often causing major damage to wires and houses.  The swaying trees had resiliency that exceeded the stress of the storm; the trees with broken branches had partial resiliency, giving up their weakest part but often surviving.  The last set of trees, of course, didn’t have enough resiliency to survive.

How do you Plan Resiliency?

Resiliency of trees is not planned.  It is a combination of luck of where the tree has grown, evolution of the tree species and the creative destruction of past storms and other stresses.

The same is true of many companies.  Their resiliency is a combination of luck about the business that they are engaged in, evolution of the industry and its regulation and creative destruction of past stresses.

  • Luck – If your business started up in a location that is prone to many storms, but your distribution was successful in another region, you may eventually decide to shift some of your facilities closer to your customers, a decision that makes you more resilient to the storms at your headquarters.
  • Evolution – In some businesses, the evolution has meant that regulators mandate a certain level of resiliency.  In others, customers place a high value on uninterrupted service or product delivery that encourages resiliency.
  • Creative Destruction – Your competitors who were prone to cutting corners and running extremely lean or highly leveraged went out of business due to prior stress events.   The slightly more conservative firms tend to survive the minor stresses but are threatened by major stresses.

This is not just about stress from natural catastrophes. It is about stresses from recessions, from competitors of all sorts and from regulatory and tax changes.

But businesses have a major advantage over trees. Businesses can plan for stress. We can envision stresses and adjust our resiliency accordingly.

  • We can look at our exposure to all different stresses and identify where we have concentrations of risk.
  • We can change our plans for resiliency and prepare for, make provision for or transfer our risks to reach an explicit goal for resiliency.
  • We can be the beneficiaries of creative destruction, expanding when our competitors are picking up the pieces.

Those are the results of consciously choosing resiliency over fragility.


 

See Dave Ingram’s comments on Resiliency on CFO.com here and here.

About Dave Ingram

Dave is an Executive Vice President of Willis Re, specialising in theory and practice of ERM for insurers. Based in…
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