A proactive approach to identifying, analysing and evaluating country risks is an essential element of horizon scanning and the wider resilience model; so for me there is something deeply unsatisfying about relying on an Internet search engine at a time of crisis to “come up to speed” on the country risk and figure out whether and to what extent the incident is likely to affect the organisation.

For some industries such as mining, energy and finance (investment) a methodical approach to horizon scanning is pretty much common practice given the economic and political trends to which long term projects in high risk countries are exposed.  Companies operating in such countries have adapted to the high levels of uncertainty with increased controls on both sides of the “bow-tie” (see earlier posting).

However, globalisation of markets and supply chains means that companies operating in other sectors are now also affected by country risks, so it is becoming mandatory to develop the processes and capability to account for and monitor country risks.  Two specific trends spring to mind: the first is to be found in manufacturing where new exposures are originating as a result of sourcing from or manufacturing in South East Asia; and the second is the off-shoring of IT services to countries such as India.

At this point it is worth noting that we are not just looking at so called “downside” risk.  Off-shoring is a good example of the need for country risk insight both on the upside, e.g. skilled labour force at lower cost than onshore, as well as the downside, e.g.  a new concentration risk where services may not be quickly repatriated once the retained organisation has been transformed, as well as a new location risk, as was seen with the clustering of the hard disk industry in Thailand at the time of the floods.

So if we look into country risks in more detail, what would be the 10 questions that would help you understand the exogenous factors (catalysts or “cause of causes” if using bow-tie analysis) that may be acting upon your organisation and its supply chain?

1. What are the short term and longer term economic prospects for the country? This can shape demand and investment potential; economic slow-downs can lead to mothballing and restricted capacity, which can even accentuate problems at the point of transition into upturn.  Likewise the financial stability of suppliers in such markets requires vigilance in line with changes in the economy.
2. What are the political risks of the country; considering both the short and longer term in planning?   One of the interesting aspects of the Arab Spring and the removal of a number of dictators was how some organisations were not prepared for the enforced succession, while others had already acknowledged that there would be a natural end to these regimes and had already run scenarios around how the political environment may change with new leadership.
3. What are the environmental risks of doing business with companies in this country?  Research here will consider natural disaster trends to the level of detail necessary to understand location risk. It is also worth checking whether public investment is following natural disasters to assess whether the likelihood or impact of future events is being mitigated.  One example has been the delay to investment in flood protection by the government in Thailand following the floods in 2011 – it should not be assumed that action has been taken.
4. What is the capacity and resilience of critical infrastructure? This one is somewhat self-explanatory:  understanding transport capacity, bottlenecks and alternative routes will help you understand the fragility of the system and allow contingency plans to be put in place; likewise energy infrastructure and the reliability of grids and the need for back-up generators etc.  It’s interesting to note that it is not just emerging markets that now have challenges with the resilience of energy grids.
5. What is the potential for social unrest?  This risk has taken a much higher profile in recent years as it can affect countries at all stages of economic development.  Its manifestation may range from protests and direct action such as the Occupy Movement to cyber attacks, boycotts, riots and extended shut-downs of government, commercial centres and transport hubs.
6. What does the natural resource dependency look like? For manufacturing companies, it is worth considering where critical materials originate and whether there are resource constraints at lower tiers in the supply chain.  In my experience some companies actually take an interest in tier five and six suppliers located in Liberia or Kazakhstan that provide iron ore to steel manufacturers in Europe.  Some companies have re-engineered consumer products to take account of supply market conditions for rare earth metals.
7. How attractive is the labour market? An understanding of the size, cost, age and education of the labour market is an established parameter for many businesses today. It is not just about wage arbitrage, of course.  For IT services delivered from offshore locations it is as much about availability, skills and attitude.
8. What do we know about the business environment? The most popular risk I have seen in this area is corruption perception, often used as a filter to direct anti-bribery and corruption efforts.  A policy of “when in Rome…” is no longer acceptable in the eyes of law makers in the US and UK, in particular.  On the positive side, there are indicators of how easy it can be to set up a business in countries, which is equally important as countries position themselves to play a part in global supply chains.
9. How adequate are health and social care systems? This is worth considering in the context of pandemic preparations. The 2009 swine flu epidemic originated in Mexico and one of the reasons attributed to its rapid expansion was the poor quality of public health care infrastructure in Mexico.  If you are reliant on supply chain partners in countries with weak public health infrastructure, then additional controls should be considered.
10. Do we have a good understanding of the regulatory and legal environment?  Regulatory change is usually a downstream consequence of political action, so understanding the public policy environment is essential in getting ahead of the regulatory environment.

I haven’t called out sustainability as a specific risk question because in my mind a number of the questions above help to build the sustainability lens for the organisation, one which is no longer restricted to environmental concerns.

One challenge that many organisations will face in trying to get to grips with country risk is building the processes and capability to integrate country insight into decision making. In the absence of recruiting a team of economists and other risk specialists, a good starting point would be to consider the use of country risk indicators from specialist providers.

Country risk indicators can serve two purposes:

1. They can help you understand the relative risk of operating within countries as a first level pass.  If you use a single composite country score, then that’s as far as it will go, but if you look at indicators for the risks that most concern you e.g. environmental or social unrest, then you will learn more.
2. Changes in these risk scores provide a “Key Risk Indicator” in the same way that a heat sensor is a good indicator of an impending fire.  Changes in either direction reflect a change in uncertainty, and therefore should trigger changes in the control environment.

They do, however, come with some health warnings:  these indicators can be lagging indicators in spite of the best efforts of the analysts developing them.  However, they can alert organisations to an environment in which events or incidents are more likely occur. Another challenge in using these scores lies in their interpretation.  They are typically developed by economists rather than operational managers and it can be hard to translate the underlying qualitative assessment into practical action without additional work (e.g. bow-tie analysis).  And as with all third party scores, they are an opinion ultimately, and should be an input to the decision that the business or risk owner makes  – and not a substitute.