Drivers of Change: Geopolitical, Energy and Commodity Risks: BCP Implications

Introduction

Unpredictability is the new normal. As the world approaches 7 billion in population this year, there is an ever increasing demand for food, energy and a voice in how things are run. How do these changes affect business continuity planners, you may be asking? Then simple answer is, they will have far reaching effects on how business continuity planning is conducted. No longer can we be satisfied with the assurance that our “hot site” is available, or that we can maintain business operations in the face of a pandemic; or that we can deal with the aftermath of a natural disaster.

Deep foundational change is occurring as a result of increasing geopolitical instability, increasing energy demands and shifts in commodity consumption. Emergent economies, political, social, environmental and technical drivers are affecting energy and commodity demand, price fluctuations and risk exposures for organizations. Strategists, continuity planners, risk officers and Chief Executive Officer’s (CEO’s) need to be flexible in their decision making and understanding of a wider array of risk exposures. Unpredictability can be positive or negative. Never under estimate the impact of change (we live in a rapidly changing, interconnected world), inflation (this is not just monetary inflation, it includes the inflated impact of improbable events), opportunity (recognize the “White Swan” effect) and the ultimate consumer (most often overlooked in contingency plans is the effect of loss of customers).

 

Identify Deep Change Drivers

Geopolitical Unrest

On 15 February 2011, thousands of protesters took over a main square in Bahrain's capital Tuesday — carting in tents and raising banners — in a bold attempt to copy Egypt's uprising and force high-level changes in one of the United States’ key allies in the Gulf. Tunisia started the wave of geopolitical unrest; Egypt followed and then came Yemen. Now Bahrain is seeing protests. Yemen, Syria and Jordan have already begun to make concessions to their populations. Uncertainty exists in Sudan, Oman, Algeria and Morocco; while there is not enough unrest, no one knows what will set off these potential powder kegs. Other Gulf States should beware and be aware. Considering that the Gulf States represent the majority of the energy supplies for the world the business continuity consequences could be significant.

The possible disruptions to business operations due to geopolitical unrest should be incorporated into business continuity plans; especially if your organization has overseas operations or markets globally. Perhaps it is time to rethink the scope of your latest Business Impact Assessment?

Energy and Commodity Risks

Energy drives everything. It takes 85 million barrels of oil per day globally, as well as millions of tons of coal and billions of cubic feet of natural gas to enable modern society to operate as it does. In 2009 there were 214 vessels attacked, resulting in 47 hijackings and $120 million in ransoms paid for those ships were realized by the pirates. As gaps in the global network open up, more guerrilla entrepreneurship is sure to follow. The rewards are substantial.

Short-term reasons for rising food prices include low stockpiles, a rough growing season, and demand for grain-based ethanol. At the end of this year's growing season, the USDA estimates that the U.S. will have 675 million bushels of stockpiled corn; roughly 5% of what the country uses in a year. It's expected to be the lowest surplus since 1995. Corn futures have doubled since June, breaking $7.00 per bushel this month. The food price index run by the Food and Agriculture Organization of the UN just passed its previous peak reached in summer 2008.

High food prices were the main cause of the Tunisian uprising and were part of Egypt’s unrest.

When crude made its epic run to $140 per barrel, a company that I was consulting with enacted an emergency supplement for employees who earned less than $40,000 annually to help offset the high cost of fuel.

How will you maintain continuity of operations should we see a return to $140 per barrel or higher oil? What about the impact that high commodity prices will have on your organization’s ability to continue business operations?

The challenge for business continuity planners is going to be to expand their planning zone and enlarge the scope of their existing plans and; hopefully, provide the value that the “C-Suite” requires.

 

The Problem

The “What to do quandary?”

It seems like more and more companies are facing indecision, decision paralysis and inability to commit to a course of action. There may be a general lack of knowledge when it comes to emerging issues and today’s fast paced events with serious consequences. Business Continuity Plans, Emergency Plans, Contingency Plans and even Risk Management Plans rarely reflect the occurrence of events with far reaching impacts.

Most plans fail to take into account the need for constant analysis of events and the creation of a mosaic that provides a clearer picture of how to respond with proactive decision-making. Instead, we make plans that are reactive, based mainly on responding to the after effects of events. The estimation errors created by poorly conceived and executed business impact analysis and subsequent planning often lead to resulting surprise at the impact of the event.

There will always be a great deal of intense media focus on high profile events (the crisis of the moment). Look how quickly these crises were or are being relegated to the back page:

  • The eruption of the Icelandic volcano Eyjafjallajokull
  • The recent Deepwater Horizon catastrophe
  • The sinking of the Aban Pearl, an offshore platform in Venezuela that occurred on 13 May 2010 (barely acknowledged)
  • The Tunisian protests
  • The aftermath of Egypt after Murbarak

Challenges for Planners, Strategists and CEO’s

The Strategist, Planner and CEO’s greatest challenge - to develop strategies that are flexible enough to adapt to unforeseen circumstances while meeting corporate goals and objectives. This requires a rethinking of contingency planning, competitive intelligence activities and cross-functional relationships internally and externally. Four elements need to be incorporated into the planning process:

  • Drivers of deep change (Outlier Events) acting in parallel
  • Continuously evolving situations with local consequences
  • Impact of reactionary response to create potential cascades resulting in cumulative effects
  • Lack of pattern recognition leading to a failure to anticipate the future

How does one overcome the cumulative effect of outlier events? We have to rethink business operations and begin to focus on what I will term “Strategy at the edge of chaos.” This should not be considered a radically new concept in management thinking; rather it recognizes that while strategic concepts are the threshold of management theory, appropriate strategic responses do not always happen fast enough. Markets are not in a static equilibrium; the recent crisis in Europe has cascaded from Greece to concerns over the banking systems in Spain, Portugal and may see Germany leave the European Union. Markets and organizations tend to be reactive, evolving and difficult to predict and control.

Complex does not mean Complicated

Complexity is a natural property of every system. It is defined as a function of interdependency and uncertainty.  Humans instinctively try to stay away from highly complex scenarios because of one fundamental reason – high complexity implies a capacity to deliver surprising behavior. ‘Complex’ does not imply ‘complicated.’ A highly complicated system may possess numerous components (i.e. a watch movement) and yet be unable to behave in an unexpected manner. Systems with very few components (not complicated), on the other hand, may be extremely difficult to manage due to the complexity and the capacity to deliver surprising behavior. This is why standalone programs for strategy, risk management, health, environment, safety, emergency response and continuity/contingency planning cannot adequately provide a measure of protection for an organization.

A report issued by BP last year addressed the factors leading to the accident; "a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces." The report concluded that decisions made by "multiple companies and work teams" contributed to the Gulf of Mexico disaster.

Human asset integrity management is crucial for the realization and identification of critical risks. Individuals require knowledge and expertise of how to address and handle these challenges.

So how do operating companies address the human factor? An interview with Kenneth St. Brice, RASHPETCO's Asset Integrity Manager, noted the importance of human asset integrity management. "While Asset Integrity implementation is based upon a number of technical objectives being accomplished, it is critical to understand that the key cornerstone to success in any Asset Integrity Management program is the human element. The human aspect of integrity assurance, also known as the "soft barriers" comprised of such areas as risk management, health, safety, environmental, competency, training, supervision, procedure implementation, communication, etc. If not well developed, these factors may potentially undermine the assurance built in other areas of integrity development."

How well does your business continuity plan address the human factor?

Conclusion

Some final thoughts:

  • If your organization is content with reacting to events it may not fare well
  • Innovative, aggressive thinking is one key to surviving
  • Recognition that theory is limited in usefulness is a key driving force
  • Strategically nimble organizations will benefit
  • Constantly question assumptions about what is “normal”

Lord John Browne, former Group Chief Executive of BP, sums it up well:

“Giving up the illusion that you can predict the future is a very liberating moment. All you can do is give yourself the capacity to respond to the only certainty in life - which is uncertainty. The creation of that capability is the purpose of strategy.”

The best strategy to deal with disoriented thinking is to be mindful (aware) and observe things for what they are (situational awareness) not for what they appear to be. Accept that your initial impressions could be wrong. Do not rely too heavily on preemptive judgments; they can short circuit more rational evaluations.

How you decide to respond is what separates the leaders from the left behind. Today's smartest executives know that disruption is constant and inevitable. They've learned to absorb the shockwaves that change brings and can use that energy to transform their companies and their careers.

Are we asking the right questions? When was the last time you asked, “What variables (outliers, transparent vulnerabilities) have we overlooked?

 

 


 

About the Author

Geary Sikich is a Principal with Logical Management Systems, Corp., a consulting and executive education firm with a focus on enterprise risk management and issues analysis; the firm's web site is www.logicalmanagement.com.  Geary is also engaged in the development and financing of private placement offerings in the alternative energy sector (biofuels, etc.), multi-media entertainment and advertising technology and food products.  Geary developed LMSCARVERtm the "Active Analysis" framework, which directly links key value drivers to operating processes and activities.  LMSCARVERtm provides a framework that enables a progressive approach to business planning, scenario planning, performance assessment and goal setting.