Geopolitical risk is a key risk we’re seeing managed by multinational, large organizations in suboptimal ways. With a different approach, we believe its impact can be reduced.
We’ve seen many organizations struggle to both identify and adequately manage risks driven by geopolitical factors, leaving businesses unduly exposed to the consequences of supply chain, business disruptions and uncertainty, and volatility in global trading conditions.
Our 8th annual political risk survey found for nearly three-quarters (74%) of globalized company respondents, political risks are among the top five risks facing businesses today. For 11% of respondents, it was the number one risk. This figure is likely to rise in the next survey.
So, to help your organization better manage the many geopolitical risks that could threaten performance and resilience, in this insight, we offer risk managers six best-practice approaches to managing geopolitical risk, including:
01
Risk managers are uniquely well-placed to overcome some of the common challenges companies face when identifying and prioritizing geopolitical risks. You also have a range of tried and tested risk management methodologies you can apply to what can feel to others like overly complex and potentially overwhelming risk factors.
Many companies fail to manage geopolitical risk effectively due to a lack of coordination and reactive decision-making (more on which below). Geopolitical risk is a concern for many departments, such as HR or finance, but without a coordinated approach, the response can be haphazard and ineffective. There may also be intelligence gaps where key business owners simply don’t get the geopolitical risk analysis another department is creating or accessing. This can lead to poor resource allocation and missed opportunities to manage geopolitical risks proactively.
This is where your role as risk manager comes in.
Let’s say there’s geopolitical intelligence effectively trapped in an economic forecasting team. It has insight that could help prepare procurement or logistics teams to overcome anticipated regional disruption. You can connect risk identification with risk mitigation and management, breaking down silos. The business won’t miss chances to mitigate risks, such as supply chain disruptions, or seize opportunities to secure a competitive advantage by moving first to, for example, establish alternative suppliers if primary suppliers are compromised.
02
We believe a well-managed geopolitical risk function must have a clear central owner, typically within the risk management or ERM function. That’s because you’re accustomed to assessing, reporting and managing all types of risks in a consistent way using repeatable quantitative and qualitative methodologies. You can overcome the issues associated with there being isolated pockets of excellence across the business, or best practice that worked in one region but then isn’t deployed elsewhere.
One example of best practice we’ve seen in this context was a mining company that developed a centralized, consistent approach to geopolitical risk management. With a consistent internal methodology for rating risks across different countries, the business evaluated risks in the same way, regardless of the country, enabling it to allocate finite risk management resources more effectively and efficiently across the world.
A consistent framework should also set triggers and thresholds for action (i.e. escalation protocol), preventing you from intervening in low-risk areas and meaning you focus efforts on high-risk regions.
This is about making geopolitical risk management decisions based on evidence, rather than subjective factors such as the business leader being able to make the most persuasive argument for resources in their region.
03
A proactive approach to managing geopolitical risks is crucial to anticipate and prepare for potential issues rather than reacting to them after they occur. Too often we see a reactive approach to geopolitical risks, leaving businesses ill-prepared to make informed decisions and allocate resources effectively by implementing mitigation strategies able to minimize disruption and losses.
A company with a proactive strategy is more likely to, for example, identify early signs of political instability in a region and adjust its investment plans or supply chains accordingly. You may also be more likely to map out key stakeholders and build relationships with them before any issues arise in a potentially unstable territory, meaning you can resolve problems more quickly and efficiently before they impact operations.
04
Your proactive geopolitical risk management framework should include clear escalation protocols, so when risks are identified at the country or regional level, there’s a defined process for escalating them to the global level.
Let’s say a local team identifies a potential movement towards greater political instability, they should understand exactly who to contact and how to report it. Such protocols ensure you can manage risks in a timely and coordinated manner and prevent siloed and reactive decision-making that’s unlikely to be efficient.
05
Having a predictable set of processes for actioning insights and assigning ownership is one tool in your arsenal against geopolitical risk impacts, but these will be more effective if you create and maintain a strong risk-aware culture where each person takes ownership of the geopolitical risks that could undermine success.
This might mean having a well-publicized system where employees can report geopolitical risks they encounter in their daily work, helping the business capture and address these risks proactively.
Let’s imagine your business expands its operations in a community, but ends up losing out financially because it failed to identify local challenges such as unpaid bills and local government interference. If the business had a more proactive and risk-aware culture, it would have known to build strategic partnerships and relationships with local government and police, which would have helped it better manage the risks.
06
External geopolitical risk analysis can provide a buffer for public companies in particular by offering an independent risk assessment when making major M&A investment decisions. It can help validate choices and provide evidence to stakeholders that your actions are based on expert analysis, rather than personal bias.
To elaborate, if you decide to invest or acquire a business operating in a politically unstable country, you can use external analysis to show due diligence around evaluating risks thoroughly.
A tabletop geopolitical risk exercise led by external experts can, for example, help executives demonstrate how they explored the impacts of geopolitical crises, planned potential responses to these crises and identified measures to mitigate the impacts and how these would impact the broader strategic goals of the business.
More generally, working with outside experts can also help your business widen the view of geopolitical risk and refine plans to mitigate them. For example, we worked with a leading European conglomerate to identify and assess the leading geopolitical risks to its strategic priorities in Africa and the Middle East, helping the business prioritize key risks and develop tailored risk mitigation plans to address the most impactful risks.
Can we help you manage and enhance your geopolitical risks more effectively and efficiently? Get in touch with our enterprise risk management geopolitical specialists to find out.
