The Rise of Geopolitical Risk

Geopolitical risk has been dominating headlines throughout 2014. Russian-backed military fight Ukrainian forces in the Crimea, Thailand's government was overthrown in April by yet another military coup and at the time of writing a fragile truce exists between Hamas and Israel after weeks of intense fighting. At the same time sunni extremists in Iraq and Syria have declared an Islamic State straddling both countries and engaged in armed conflict with government forces. Large parts of West Africa are battling to control the largest ever outbreak of Ebola virus.

As organisations increasingly turn to outsourcing functions to lower cost locations these events represent operational risks and issues of business continuity. Third parties may suddenly find themselves unable to provide the functions they have been contracted to do. In one example a Russian IT provider recently relocated from Ukraine to Switzerland causing large problems for several UK banks.

Issues of supply chain logistics, reporting lines, information flow, staff safety and access as well as essentials such as food, water and electricity all come into question. Another example is Russian energy giant Gazprom threatening to cut gas pipelines to Ukraine. Such an action would have a huge impact on the rest of Europe which receives a large proportion of its natural gas through Ukraine.

Data security is another important issue. Treaties on data security may suddenly be rendered void by changing circumstances making outsourced vendors non-compliant. Reputational risk is another area difficult to quantify if a firm is found to be doing business with a state-owned company or nation suddenly out of favour.

Ensuring outsourcing partners have their own business continuity plans becomes essential. However it also requires outsourcing firms to understand the activities of their outsourced partner, their other customers and dependencies. Scenario analysis by global firms is also an important process, to stress test the impact on key activities and functions, as well as costs of production such as oil and electricity prices, interest and exchange rates.

Some firms are now finding that maintaining a global supply chain of activities is making business models overly complex giving rise to "nearsourcing" in some industries, accepting higher costs of local production and services in return for reduced operational risks.

One thing is for certain, the importance of identifying, measuring and preparing against geopolitical risks to a firm's operations is growing increasingly complex and in an integrated, global economy.

#geopoliticalrisk #riskanalysis #operationalrisk #businessdevelopment #scenariomodelling

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