Using Economic Downturn Magnitude and Duration Forecast To Manage Your Future

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
1
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 1 Phase 2 Phase 3 Phase 4 Phase 1
Potential Latent Acute Return Potential
Desired Level of Emergency that

Service does not evolve into
a crisis
Tolerated level of
disservice (minor
emergency) Triggering
point for the
emergency
Max tolerated plan
disservice limit (max Controlled
emergency) crisis
Crisis
Uncontrolled crisis…
may evolve to
catastrophic
Catastrophic crisis consequences
s net nI t nevE
ot yc ne gr e me
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 $
5
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
6
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.
10
Case Study
Several mid-sized companies face
the present economic downturn

11
Hazard Analysis
Let’s define probability and “magnitude” of

the hazard of this “economic downturn”.

12
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

13
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
14
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.

15
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

16
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.

17
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.

18
Crisis Forecast,
November 2008

19
Consequence Definition
These will be different for every

client/industry or organization

20
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

21
P Sometimes a risk assessment
confirms intuitive “feelings”!
Intolerable
0.55 Critical Evolution

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

22
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

23
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
donwturn has critical evolution, i.e. 1
M/yr
24
P
Status quo may mean, quite
surprisingly, highest priority!
Intolerable
Critical Evolution
Risk: 0.55
0.55 Intolerable: 0
Significant Worsening
0.25
0.20 Persistent
Tolerable Risk: 0.75
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
•2) Significant worsening
•3) Critical evolution
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

27
P Highest risk does not
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
Risk: 0.8 Intolerable: 0.24
Intolerable: 0
C

28
a company that services motor
vehicles will have the focus in this
order :
• 1) Significant worsening
• 2) Critical evolution
• 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!
29
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.

30
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
31

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Using Riskope’s Economic

Downturn Magnitude and

Franco & Cesar Oboni

Rational and sustainable risk management

Riskope International SA ©, 2008-*, www.riskope.com

Fast growth can be seen as a positive crisis: in

A crisis is a decisive moment, particularly in times

Riskope International SA ©, 2008-*, www.riskope.com

Desired Level of Emergency that

One crisis cycle (time)

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

* A mathematical model is used

Of the 14 initial scenarios, seven are above

Riskope International SA ©, 2008-*, www.riskope.com

Let’s define probability and “magnitude” of

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Level 1:Persistance, or Status Quo, i.e. generalized

[1] cuts are already being performed in various countries,

•Level 2:Generalized Poverty, unemployment up to

[3] already reported in some G20 countries including recent

Riskope International SA ©, 2008-*, www.riskope.com

•Level 3:Severe Impoverishment unemployment over

[4] example: reduction of RR network and service

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

These will be different for every

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

0.55 Critical Evolution

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

Riskope International SA ©, 2008-*, www.riskope.com

These results can help building

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