Risk Practice McKINSEY WORKING PAPERS ON RISK Upgrading your risk assessment for uncertain times Number 9 Martin Pergler January 2009 Eric Lamarre Confidential Working Paper. No part may be circulated, quoted, or reproduced for distribution without prior written approval from McKinsey & Company. Upgrading your risk assessment for uncertain times Contents Introduction 2 1. Consider “risk cascades” rather than individual risks 2 2. Think through the risks to your whole value chain 4 3. Understand your and others’ likely responses 6 4. Stress-test strategy with plausible extreme scenarios 7 5. Address the implications of risk, not just the risk map 8 6. Be aware of the limitations of insight 9 McKinsey Working Papers on Risk is a new series presenting McKinsey's best current thinking on risk and risk management. The papers represent a broad range of views, both sector-specific and cross-cutting, and are intended to encourage discussion internally and externally. Working papers may be republished through other internal or external channels. Please address correspondence to the managing editor, Andrew Freeman,
[email protected] 2 Introduction As shock waves from the financial crisis reverberate and the pain of a global economic downturn makes its way through the economy, many companies are asking increasingly demanding questions about risk assessment. How severely will we be affected by today’s situation? How can we anticipate the next round of challenges and be nimble in responding to them? Can we confidently identify and act on opportunities now, and will we be able to do so as the economy eventually recovers? What can we do to avoid being surprised by the next economic cycle? Some companies are in active crisis-management mode, struggling to ensure the necessary short-term liquidity for survival, or dealing with huge immediate counterparty risks.