Model what you know to understand what you don’t

From the risks associated with broad strategic objectives to answering very specific questions, models are the Swiss army knife of risk assessment. Perhaps you want to evaluate the changing dynamics of your supply chain, or understand the risks of entering a new market, or how your strategic landscape might change over the next eighteen months; build a risk model.

A risk model is a mathematical representation of a system, commonly incorporating probability distributions. Models use relevant historical data as well as expert opinion to understand the probability of a risk event occurring and its potential severity. Gathering the right data is one of the challenges of risk modelling; the second is getting decision makers comfortable enough to use the model when making meaningful decisions.

Models look at the “known unknowns” and present results in terms of the probability of an outcome occurring—there is always some uncertainty. One of the fallouts we’ve seen from various crises, whether financial or geopolitical or natural disasters, is that certain long-held, widespread assumptions are simply not relevant anymore. A simulation can be a very powerful tool to test assumptions, realistic or far-fetched, to see the impact on the model and, in turn, understand how assumptions impact decisions about how you run your business.