Failure to monitor external risks

Frogs and fuel pumps – lessons in strategic risk

“If you drop a frog in a pot of boiling water, it will of course frantically try to clamber out. But if you place it gently in a pot of tepid water and turn the heat on low, it will float there quite placidly. As the water gradually heats up, the frog will sink into a tranquil stupor, exactly like one of us in a hot bath, and before long, with a smile on its face, it will unresistingly allow itself to be boiled to death.” From Daniel Quinn’s, The Story of B.

The boiling frog story has been used as a business metaphor for a few years. It offers up a warning of the consequences of being unaware of gradual change which can lead to corporate failure, loss and, in extreme cases, possible extinction. It also highlights the dangers of inadequate monitoring of the external environment or, monitoring the wrong things. In addition to the example above, which references the implications of climate change, it has been used for the purposes that include strategy, politics and business concerns. The ‘science bit’ says that frogs are poikilothermic creatures, which means that they are unable to regulate their core body temperature and can’t detect changes in external conditions. However, a number of thinkers and writers have since dismissed the story, pointing out that real frogs behave differently.

Despite this, it has found its way into the speeches of Al Gore as well as the creative arts such as the film Dante’s Peak and the work of the Scottish author Christopher Brookmyre – who even used it in a book title. Whether it is true or purely a metaphor, the story makes a powerful point about the risks of not noticing or monitoring change outside of our organisations and our apparent apathy or inaction. For me, this also speaks to the concept of (organisational) blind spots – those areas or developments that we miss or stop noticing through a slavish adherence to uniformity and routine or get dismissed because they are outside of our accepted and entrenched ways of working and thinking. By way of an example, the 9/11 Commission into the events of September 11th 2001 found that intelligence had been passed to the security services that suspected terrorists had started to learn how to fly aircraft. This information was dismissed because it didn’t fit the accepted frame of reference used by those security agencies about how they judged terrorists behaved.

The ‘frog analogy’ addresses the consequence(s) of a failure to recognise and respond to change from negative or threat perspective – a natural and comfortable mindset for some risk managers to operate from. These accounts and stories are often told retrospectively and sometimes (often) when it’s too late to do anything, despite there being the usual and obvious lessons to be learned that eventually get identified and reported. We are all experts with the benefit of hindsight once the certainty of the details about an event have been established. However, risk is an uncertainty about an event that may or may not happen and at its best and most valuable risk management is inherently forward-looking.

There are other examples about how monitoring change can be employed to enable better risk identification, response and management. In his book Hidden in Plain Sight, Jan Chipchase identifies how petrol stations have evolved to meet changing external factors and needs. For me, his brief example of the evolution of petrol (or filling) stations can be used to offer a more optimistic view of the opportunity side of the risk equation.

Filling stations were not always the ubiquitous facilities we have today. The first recorded station was at a pharmacy in West Germany in the late 19th century – the rarity of the car meant that petrol was a luxury item and a symbol of status and wealth. In the UK, filling stations started to appear in the 1920s; in the decades that followed, their number grew rapidly in response to the emerging ‘car culture.’ Other factors contributed to this growth such as major investments in road-building and social changes such as the arrival of supermarkets, recognising that people did ‘a large shop’, less frequently and needed a car to carry larger volumes of goods.

Over this time, this industry’s business purpose and business models evolved in response to shifts in the external environment, be it social, technological or some other form of change. Initially stations met the purpose of ‘necessity’ – filling up the car to complete a journey. Later this evolved into ‘customer service’ where small groups of attendants, dressed in company livery-clad overalls, emerged onto a forecourt to fill-up the car, check oil, tyre and water levels as well as clean the windscreen. It has since moved on to ‘self-service’ with DIY fuel pumps, car-washing and vending machines, through to ‘convenience’ where stations have the range of goods of a small but well-stocked shop.

Once they were places that represented a short-stay to fulfil a basic function. In addition to the now usual facilities of a shop, car wash and cashpoints, my local filling station now has a well-known, high street bakery and cafe on-site and around 30 ‘parking’ spaces for customers. The café has chairs and tables – clearly indicating an expectation that it has been designed to accommodate the idea that people will stay for a while, ‘refuelling’ themselves and their vehicles. The emergence of electric cars are likely to give rise to yet another evolution with battery charging times of at least 30 minutes, but probably longer … potentially resulting in extended time for retail (larger shops with a bigger range of goods?) or leisure (with a gym or library attached?).

In 1990, there were 19,000 stations in the UK but by 2015 this had fallen to just over 9,000 as people’s living, shopping and driving habits shifted. This appears to be an industry that has always adapted, adjusted and evolved in response to technological, economic and societal changes and re-shaped the purpose of its services in light of them. The advent of driverless cars will no doubt shift the purpose and design of stations again. Here is a model that we are familiar with and for those of us that drive a vehicle, one we experience first-hand regularly. There are almost certainly working models that never left the R&D departments of the firms that operate in this industry or experiments that failed but this industry does provide us with a real and practical example of monitoring and responding to change successfully.

So what on earth does this have to do with risk and risk management?

At the heart of a risk professional’s role is the idea of helping our organisations to manage change and uncertainty (better). The history of the filling station is a brighter vision of monitoring and reacting to change than the one about boiling a frog. For me, it offers a more positive model for how organisations can manage threat and opportunity risks, particularly for those risks and changes that are external and strategic to them.

This speaks to a role for risk managers to be (more) embedded into the strategy aspects of their organisation more than ever. (When was the last time you reviewed or were asked to review a PESTLE analysis from a risk management perspective?) Risk is about managing the future and possible future events that matter to the business even though risk managers accept (willingly) that their work also necessitates dealing with issues that are current or historical. We have a crucial role in helping develop appropriate and proportionate responses in partnership with senior teams and managers as well as our stakeholders outside of our business. The impact and disruptive capabilities of digital innovation and different business platforms make it more important than ever that we work with other parts of the business to develop early warning systems to help our businesses respond effectively and put in place effective and meaningful mitigations. There are various routes open to us – using the above as metaphors, we can be reactive and let a frog boil or we can be proactive and help design a new type of filling station to meet a new need – the choice is ours.

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