zante [Not up in the air | The Economist EU oy Saat et eames Uae TO vee PES OPC iab bale tates Subscribe for 12 weeks for just €20 + receive a free notebook PEOOGSMTET Wir poltics usinoss& nance Economics Science &echnology Cullre Blogs Debate Multimedia Prt eon Business.view Comment (15) Timakesperreaing It Not up in the air ‘iaespiies —— Reornts& permissions Pint Risk-management lessons from the voleanie ash cloud sor20% 2010 Busrese @rinchope. ACLOUD of volcanic ash billowing slowly across Europe probably didnot feature in the Fisk-management scenarios of many firms. AS a result, companies from travel agents to Kenyan flower exporters have suddenly had to figure aut how to cope as much of Europe abruptly became an sircrat-tree zone. In some ways this has tured out to be less ofa problem than might have been feared. ‘Some fms have even found asiver lining in the ash cloud. Many employees stranded in London simply spent the weekend enjoying an unexpected, sunny “volcation’. They are ‘Row taking the opportunity to meet people face-to-ace whom thay normally connect with only vtualy, while connecting virtually with colleagues back home whom they normally eal with in person. In shot: no big deal. The Economist, for one, seems to be coping just fine with its chief executive and deputy editor stranded in New York, ts New York bureau chief working out ofthe London office and its central Europe correspondent wrestling with Miteleurogs's trains and autobahns, ‘Some fms have responded with impressive agility. United Parcel Service, for example, aulckly started fying frelght bound ffom Asia to Europe to Istanbul, and vansporting it from there to its final destination by lorry When Chris Fralic of First Round Capital, an American venture-capital frm that invests in start-ups, found himself stranded in London, the firm arranged an impromptu but well-attended “Office Hours” event at which entrepreneurs ptcned ideas. Follow The Economist htp:wwn.economistcominadel 169432554#print M62eaeare Conventional thinking about risk management holds that risks are mainly local ana routine—that itis possible to lst ll the negative events that could happen, determine their probabilty based on past experiance, then calculate what economists call “expected loss", the probabilty multiplied by the cost it happens. Ifthe probabilly ofa very disturbing large-scale event is set very ow, then the expected loss may be so insignificant that it gives a frm a false sense of secufity, leading managers to assume that this type of risk is manageable withthe same resources as more normal” ones. ‘Among the consequences of this tracitonal approach is that frms do not bull in the capacity to respond to unikely but potentially devastating events, says Mr Miche!-Kerjan, ‘Thay also fall to prepare for the tondency of such catastrophic events to affect many organisations at once, rendering seemingly sensible rsk-management strategies useless, For instance, if there isan incident on one aie route and a fight is cancelled, a fm can simply get an employee rebooked on another fight, When allaines are affected at the same time, that strategy is unlikely to work so well Don't leave it all to the “chief risk events that they are nearimpossible to _officer”, assuming the company has. predict. So how should frms prepare fer one them? This is something that should be ~ regularly discussed by the board, not lft only to the “chief risk ofcer” (assuming a frm Its in the nature of black-swan-ike has one), says Mr Miche!-Kerjan, Ideally, the firm should create a disaster-strategy team that reports to the board, whose job is to bring together the fms network of partners (eg, supplies, customers) to brainstorm about potential threats and how to respond. ‘Tne aim i less about trying to predict what unlikely events may come along, and more about creating mechanisms and relationships that would help the frm and its partners respond with agily if disaster did strike. Such exercises, when done wel, help their participants to develop a capacity to devise quick, creative solutions to unexpectes problems, and to buld rust among those who would have to take crucial decisions on the spot and those who would have to follow thom. Mr Michel-Kerjan says that when he works with companies, he typically stats by asking, “When was your last rehearsal exercise based on an unconventional disaster scenario? Did the CEO participate forthe entie time In his or her capacity as CEO?” Too often, the answers are not recertly, and no, Maybe the volcanic eruption will serve as a wake-up call to such companies that they need to modernise ther risk management. The same ‘may also apply to Mr Michel-Kerjan, who found himself stranded in Madrid airport when the ash cloud brought European air travel toa hat. 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