Key Terms

These are some of the key terms used within Systemic Risk Management.  They reflect a systems thinking approach.

Feel free to suggest improvements to these definitions and also to suggest other key terms and their meanings.

System.  A system is a number of elements that interact to deliver the behaviour and outcomes of the whole.   In organisations, systems exist for a purpose .  For that purpose to be achieved , elements such as structures, processes, rules, policies, beliefs (culture), and skills  must work together successfully.   Building effective organisational systems is complex  long-term work and is a key role of senior leaders.

Systematic. Systematic approaches to problem solving involve a series of pre-determined steps, and assume that problems can be solved through the use of appropriate methods provided that enough knowledge and capability is applied.  Examples include traditional project management (e.g. PMBOK), traditional risk management (e.g. AS/NZS 4360), operations research, systems dynamics, dynamic modelling and systems engineering.  Such methods can be very powerful when applied in the right circumstances, such as when the problems faced are quantifiable, measurable, well understood and are predictable at least in the way in which interactions occur.

Systemic (Approaches). Systemic approaches to problem solving assume that problems cannot be solved in a predetermined manner, and that an iterative and adaptive process of inquiry and learning is necessary.   Systemic approaches are based upon a soft systems thinking view of the world.  Applied to organisations, the focus of systemic approaches is on understanding the dynamics driving performance, as a basis for making long-term sustainable decisions.   See the definition of systems thinking below.

Systemic (Risks).   This term is generally used to refer to risks whose impacts are pervasive, across many elements of organisation.  For example, if poor OH&S practices exist across an organisation (are pervasive), the risk of harm to staff is also pervasive, everywhere.  In that case, both the source of risk and the impact of the risk are systemic in the sense of being pervasive.

Systems thinking practitioners may recognise a conceptual difference between something being pervasive and it being systemic.  One does not automatically mean the other.   However in human organisations the analogy is generally reasonable.

Systemic Risk Management.  The term ‘Systemic Risk Management’ refers here to the Manex Pty Ltd (Australia) approach to risk management.  It is a systems thinking approach that can be applied to all types of risks in all types of organisations, including complex, intangible, or sensitive risks that cannot be managed well using “systematic” approaches.   Using this approach, it is possible to find and manage previously hidden risks and to prioritise and optimise risk effort as a systemic whole rather than risk-by-risk.  Systemic risk analysis can also be used to drive organisational development work and as a vehicle for assessing the effectiveness of governance as a whole.

An internet search quickly reveals a number of risk management methods and approaches that claim to be ‘systemic’.  However closer review reveals that in almost all cases the underlying thinking and practice is “systematic”, not systemic.  Many are also very constrained in their application – for example, the term ‘systemic risk management’ is often applied to pervasive financial risks in financial institutions and across financial markets.  However the approaches described for dealing with those financial risks seldom if ever reflect systems thinking principles or methods.  The risks may (or may not) be systemic, but the methods applied to those risks are not.  More accurately, they should refer to ‘the management of systemic financial risks’ – not to ‘systemic risk management’.

Systems Thinking.  Systems thinking is “a discipline for seeing wholes“. It is a framework for seeing interrelationships rather than things, for seeing patterns of change rather than static snapshots” (Senge, 1992).   Soft systems thinking assumes the world is messy and emergent, and that many real problems, especially those involving humans, are wicked problems.  For a deeper understanding refer to the works of authors such as Senge, Checkland, Flood, Jackson and Rosenhead.

Risk. A risk is “a threat to the maximum possible achievement of the purpose where the final impact is uncertain.”  Organisational risks are often very complex and even wicked because they involve many  interrelated and intangible factors including human behaviour.   Because of this, managing organisational risk effectively requires a systemic rather than a systematic approach.  This definition is more powerful and is more universally applicable than the ISO 31000 definition:

  • It does not require users to think of risk as ‘positive’, and yet it still deals with opportunities and innovations as well as threats.
  • It seeks to identify risks to the ‘maximum achievement of the purpose’, rather than to objectives.  This includes the requirement to consider threats, opportunities and innovations to the purpose, not just to the particular strategy and objectives currently in place.
  • It makes it clear that ultimately the only uncertainty that matters is uncertainty in effect or impact.  The event or factors leading up to the effect may or may not be uncertain.  As long as the final impact is uncertain and it is a threat to the purpose, it is a risk.

This  systems thinking definition of risk is less constraining and contains less assumptions than the definition used by ISO 31000.  It is also clearer in its intent and meaning, and allows the term ‘risk’ to be used in the way that almost all people feel comfortable with.

Wicked Problems.  Wicked problems are highly complex and involve many-to-many interrelated issues that are difficult to quantify, measure or to predict.  Applying systematic approaches to wicked problems does not work, and often leads to outcomes that are worse than the original problem.  Systemic approaches are necessary.