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09 March 2018

Boiling a Frog: Why it's important to be proactive in risk management

By Sergio Jimenez

Being proactive means thinking and acting ahead of anticipated events. Not only is it a great method for avoiding more work down the road, but it focuses on eliminating problems before they have a chance to appear; thus averting disasters. In today’s ever more complex world, this approach is fundamental for organisations in order to minimise their compliance issues and lower their risk profile. Therefore, compliance must evolve into a more proactive model that assesses the risks and changes involved at each level of responsibility.

In his book “The Fifth Discipline”, Peter Senge talks about the parable of boiling a frog. If you drop a frog in a pot of boiling water, it will of course frantically jump and try to clamber out. However, if you place it gently in a pot of tepid water and turn the heat up very gradually, the frog will do nothing. In fact, he will show every sign of enjoying himself; and, as the water gradually heats up the frog will tranquilly fall into a state of unconsciousness…eventually allowing itself to be boiled.

The conclusion of the whole story? It’s difficult to notice gradual changes or risks, even when it is life-threatening.

Now, many of us may be asking why the frog didn't just jump out of the pot. After all, there was nothing restraining him and there was no barrier between him and his freedom. Well, the main reason why the frog did not jump is due to the fact that his threat-sensing capability is generated by sudden and unexpected changes, not slow gradual changes. His survival threat was below his ability to identify those changes.

Organisations should try to identify threats at early stages using the anticipative approach when there is still time to plan, rather than reacting to what has already gone wrong.

A perfect example of the above parable is the Japanese auto giant Toyota. Quality had always been Toyota’s number one goal and, in fact, they lived for continuous improvement. However in the 1990’s they decided to focus on becoming the world’s biggest car company and quality became second place to growth; there was less employee engagement and sharing of best practices and this risk remained unnoticed until a disaster happened in 2009…

What happened?

Toyota headquarters issued an emergency recall of nine million cars due to a problematic floor mat and defective brakes, which led to unintended acceleration – a consequence of which 52 people were tragically killed from accidents due to this default. Taking responsibility, Toyota's President apologised to the public and halted the sales and production for eight models. The company’s financial loss hit $5.5 billion.

Developing a truly proactive approach to managing compliance is one of the less well-understood functions, which is unfortunate, as it affects businesses at all levels. Part of this problem is due to the reactive way in which compliance has traditionally been viewed.

Bringing the discussion to a practical level, a proactive approach to compliance will mean regular risk reviews to assess the risk level, together with reporting the direction and velocity of individual risk levels over time, so they cannot increase unnoticed by management. Subjective risk assessments can be supplemented by automated tracking of key risk indicators, with a trigger to reassess relevant risks, based on movements in those indicators. Gradual risk increases can also be identified by mapping all reported incidents against specific risks in different parts of the business.

Until we get into the habit of being proactive, the traditional approach will always misjudge the threats facing our organisations. Neutralising those threats requires us to shift our thinking away from correction and more toward a system built around anticipation and prevention through the practice of shared learning.

If our frog had anticipated that the gradual increase in heat levels would ultimately be his demise, he may have thought twice about getting comfortable in the pot…

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