Abstract
Risks and futures methods have complementary strengths as tools for managing strategic decisions under uncertainty. When combined, these tools increase organisational competency to evaluate and manage long-term risks, improving the flexibility and agility of the organisation to deal with gross uncertainties. Here, we set out a framework to guide the assessment of strategic risks for long-term business planning, based on its application at Portugal’s largest water utility, Empresa Portuguesa das Águas Livres. Our approach extends strategic risk assessment by incorporating scenario planning—a futures approach used to help the utility move beyond single point forecast of risks to focus on critical dimensions of uncertainty that are fundamental to the resilience of corporate objectives and their vulnerability to external pressures. We demonstrate how we combine two complementary approaches—risk and futures—and use them to assess (i) how a set of baseline strategic risks for a water utility evolves under alternative futures, (ii) the aggregate corporate-level risk exposure, and (iii) the process and responses needed to manage multiple, interdependent strategic risks. The framework offers a corporate approach to evolving strategic risks and improves a utility’s (i) knowledge of uncertainties, (ii) ability to assess the impacts of external developments over long time horizons and the consequences of actions and (iii) degree of flexibility to adapt to possible future challenges. The framework supports risk managers in their long-term strategic planning, through the appraisal and management of multiple, interdependent long-term strategic risks and can be replicated in other organisational contexts to bridge operational and corporate perspectives of enterprise risk.
Highlights
Water utilities are capital-intensive organisations that operate extensive and geographically dispersed assets in order to provide safe, wholesome and affordable drinking water that has the trust of customers
In-company ethnographic studies and semistructured interviews with risk ‘owners’ from a sustained network of international utilities, some of the authors have (i) illustrated the use of risk ‘heat maps’ with horizon-scanning methods, projecting changes to a set of strategic risks forward in time to inform discussions about water utility resilience (Prpich et al 2011; Luís et al 2015, 2016) and (ii) analysed trends in the nature of risks managed over a 10-year period, revealing how risks have become progressively extrinsic in nature (Chalker et al 2018)
Both tools are essential for increasing organisational competency to manage strategic risks, improving the strategic flexibility and agility of the organisation, allowing risk managers to better assess the consequences related to strategic decisions
Summary
Water utilities are capital-intensive organisations that operate extensive and geographically dispersed assets in order to provide safe, wholesome and affordable drinking water that has the trust of customers. Existing probabilistic-based risk management approaches are recognised as being unreliable with regards to unexpected low frequency hazard events (e.g. combined events) and complex systems with a number of sub-units that have a high degree of dynamic interaction and emergent behaviour (e.g. non-linearity, ‘scale-free’ behaviour) Such approaches used in isolation are of questionable value in improving the resilience of utilities that face systemic, longterm risks—defined as trends or events that occur suddenly and are characterised by uncertainty in terms of the likelihood of the risk and its potential impact (Cinner and Barnes 2019). Adaptive planning is more suitable at the operational level where there are greater opportunities to make low risk trade-offs, whereas scenario planning is more suited to high risk decisions, such as longterm infrastructure investments where uncertainties are high (Peterson et al 2003; Scott et al 2012) This rationale underlines its value for long-term decision-making where external factors influence the decision outcomes. The real value of scenario planning is when actions or measures to maintain strategic flexibility increase the organisation’s performance and thereby create new value— e.g. competitiveness, resilience (Miller and Waller 2003)
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