Does Flexibility Mitigate or Enhance Risk?

Abstract

In volatile, uncertain, chaotic and ambiguous (VUCA) environment, flexibility is often used as a mechanism to hedge the risk. It would be worthwhile to have a discourse on this complex relationship of flexibility with risk. Risk, in general, is associated with uncertainty and can be measured in terms of probability of failure. In this short discussion of relationship between flexibility and risk, we will restrict the discussion on business risk and managerial risk only. As flexibility composes of options and change mechanisms, it might act as a suitable hedging mechanism for business risk. There are ample examples that indicate both the balancing and reinforcing relationships of flexibility with business risk. Another type of risk is more internal, that is, managerial risk. Flexibility initiatives to change internal functioning to implement both innovative processes and actor-based flexibility are assumed to reduce internal risk of managing various activities. The discussion in this paper points towards flexibility as a double-edged sword; on the one hand it has contributed to reduction of the risk, whereas it led to enhancement of the same on the other. It thus advocates a valuation of flexibility initiatives from a risk management perspective.