Using Riskope's Economic Downturn Forecast

Using Riskope’s Economic
Downturn Magnitude and
Duration Forecast to
Manage your Future
(Based on Nov. 2008 Forecast by Riskope)

Franco & Cesar Oboni
Riskope International

Rational and sustainable risk management
requires quantitative understanding of
scenarios
Riskope International SA ©, 2008-*, www.riskope.com
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Because we know this is manageable
we made it our mission to build the most
effective approach.
Months if not Years... 25 minutes

2

Our Lives, Corporations,
Projects
Can be seen as a never ending succession of
cycles of growth, peace, turmoil, i.e. cycles of
great changes we call crises.

Fast growth can be seen as a positive crisis: in
some cases it can, however, suddenly turn into a
negative crisis.

A crisis is a decisive moment, particularly in times
of danger or difficulty.

3

Generic Phased Crisis Model
Phase 3
Phase 1 Phase 2 Phase 4 Phase 1
Acute
Potential Latent Return Potential

Emergency that
Event Intensity : from

Desired Level of Service does not evolve into
emergency to crisis

a crisis

Triggering
Tolerated level of disservice (minor emergency)
point for the
emergency
plan
Max tolerated disservice limit (max emergency) Controlled
crisis

Crisis
Uncontrolled
crisis…may evolve
to catastrophic
consequences
Catastrophic crisis

One crisis cycle (time)

4

Each point of the “crisis trajectory”
has:
• A probability of occurrence
• An associated cost (loss, consequence…could be
positive or negative, but let’s focus on the negatives
for the moment…)

0.2
Probability per
Annum
• …thus a Risk, as

0.1
Risk=probability x cost
of consequence.
0 0 10 20
Million $
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It is in the Latency Phase that the
best returns are to be expected
from:
• Analyzing what could go wrong, and how much it
would “cost” the company: Risk Assessments
• Analyzing the means to bring the risks towards a
tolerable level in a sustainable way: Risk
Management
• Analyzing how to behave when a residual risk
hits, i.e. Crisis Management
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ERM excellence criteria:
•Risk/reward optimization
•Enterprise wide view of risks
•Control processes for risks
including:
•Hazard identification
•Risk evaluation
•Risk management and loss control
•Benchmarking against predefined risk
tolerability criteria

7

The future lies in
using Risk to weigh
decisions, rather than
just guiding mitigation.

8

Scenarios can be prioritized by their intolerable part of risk. A clear
road-map becomes available for rational and sustainable RM/ERM.

9

Bar graph for the Intolerable portion of
the scenarios

* A mathematical model is used

Of the 14 initial scenarios, seven are above
tolerability, but only three are top attention
priority.
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Case Study
Several mid-sized companies face
the present economic downturn

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Hazard Analysis

Let’s define probability and “magnitude” of
the hazard of this “economic downturn”.

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Crisis Forecast, November 2008

Duration Probabilities :
•30% less than 1.5 years Spring 2010
•80% less than 3 years Fall 2011
•10% longer than 6 years past 2014

Magnitude Probabilities:
•20% present situation will persist
•25% significant worsening
•55% critical evolution of disservice

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Measure of the Depth of Recession: “loss of service
and control” in the country system, for which we can
build a scale as follows, by drawing examples from
the past:

Level 1:Persistance, or Status Quo, i.e. generalized
budget cuts in the non- key services, for example
starting with culture, arts, then going to education[1];
some protests[2].

[1] cuts are already being performed in various countries,
France, Italy etc.
[2] also in act, Russia, Japan, etc
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Significant Worsening, i.e. Level 2 & 3.

Level 2:Generalized Poverty, unemployment up to
12%, vanishing maintenance of civil systems, reduced
health programs, salaries of public officers in decline,
protests, criminality, and some violence[3].

[3] already reported in some G20 countries including recent
riots in Greece etc.

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Significant Worsening, i.e. Level 2 & 3. (cont'd)

Level 3:Severe Impoverishment unemployment over
12%, severe reductions of public transportation offer[4],
gradual replacement of police forces with armed
forces[5], reduction of retirement plans, protests and
criminality, high violence.

[4] example: reduction of RR network and service
[5] examples in Italy, US, under the “war on terrorism”, or “war on
violent crime” cover

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Level 4:Critical evolution of disservice
(Disruption of Order and Quality of Life),
generalized rioting, wide spread criminality
and sacking, and total loss of control.

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Apparently some countries in the G20 group have
already passed the Status Quo level, but as we are
developing this study for a “theoretical” country
within the group, we will not bother with these
particular cases here.

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Crisis Forecast,
November 2008

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Consequence Definition

These will be different for every
client/industry or organization

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Example 1: a company that builds
specialty motor vehicles could have:
• Reduction of 20% of routine paying services
revenues, if the downturn is persistent, i.e. 2
M/yr
• Reduction of 50% of overall sales if downturn
worsens significantly, i.e. 5 M/yr
• Reduction of 70% of overall sales if downturn
has critical evolution, i.e. 7 M/yr

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Sometimes a risk assessment
P
confirms intuitive “feelings”!
Intolerable

Critical Evolution
0.55
Risk: 3.85
Intolerable: 1.53
Tolerable
0.25 Significant Worsening
0.20 Persistent Risk: 1.25
Risk: 0.4 Intolerable: 0.07
Intolerable: 0

C
2 M/years 5 M/years 7 M/years

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a company building special motor
vehicles will focus it efforts to
mitigate in this order:
1) Critical evolution
2) Significant worsening
3) Persistent
Mitigative scenarios, possibly including
diversifying etc. will have to be studied

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Example 2: a Discount Retailer
• Reduction of 60% of routine services if the
downturn is persistent, i.e. 6 M/yr
• Reduction of 30% of overall billable if
downturn worsens significantly, i.e. 3
M/yr
downturn has critical evolution, i.e. 1
M/yr
24

P
Persistent state may mean, quite
surprisingly, highest priority!
Intolerable
Critical Evolution
Risk: 0.55
0.55 Intolerable: 0

Significant Worsening
0.25
Persistent
0.20 Risk: 0.75
Tolerable Risk: 1.2
Intolerable: 0
Intolerable: 0.16

C

25

a Discount Retailer will have the
focus it efforts to mitigate in a
different order:
1) Persistent
Mitigative scenarios, possibly including a
line of top quality items etc. will have to be
studied
26

Example 3: a company that
services motor vehicles could have:
• Reduction of 40% of routine services if the
downturn is persistent, i.e. 4 M/yr
downturn worsens significantly, i.e. 6
M/yr
donwturn has critical evolution, i.e. 3
M/yr

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Highest risk does not
P
necessarily mean highest
priority!

Critical Evolution
Intolerable
Risk: 1.65
0.55 Intolerable: 0.01

Tolerable
0.25 Significant Worsening
0.20
Risk: 1.5
Persistent
Intolerable: 0.24
Risk: 0.8
Intolerable: 0
C

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a company that services motor
vehicles will have the focus in this
order :
3) Persistent
Even thus the risk of the critical evolution is higher, the
intolerable part of the significant worsening is more
critical. Possible mitigation: advertisement and lowered
prices right now!
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Scenarios will be prioritized by their
intolerable part of risk.
Therefore a clear road-map becomes
available.
Transparent decision can be taken
leading to a rational and sustainable
RM/ERM.

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Details available upon request via
contact page at
http://www.riskope.com

These results can help building
rational risk management
strategies.

Contact us,
Franco & Cesar Oboni
Riskope International
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Using Riskope's Economic Downturn Forecast

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