Effective risk management can prevent expensive consequences

Southwest Airlines experienced operational breakdowns during the holiday season and New Year’s. Severe weather conditions and outdated technology contributed to the issues. The CEO’s decision to slow operations to recover will come at a high cost.

As many were celebrating the holidays and ringing in the New Year alongside family and friends, thousands were stuck in limbo due to the cataclysmic operational failures of Southwest Airlines, which were originally incited by extreme weather events but seem to have been exacerbated by outdated technology and missteps along the way. And while we continue to learn the details of what went wrong, it’s clear CEO Bob Jordan’s decision to significantly slow operations to enable the organization to regroup and resume normal activity effectively will prove to be a costly one.

The Consequences of Poor Risk Mitigation

Following what was a brief return to regular operations, the Federal Aviation Agency (FAA) experienced a significant outage that impacted air transportation for all air carriers. This was an issue with the ability of the FAA to provide Notice to Airmen (NOTAM) that provide pilots with up-to-minute and expected weather conditions. These NOTAM reports are vital pieces of information that are printed on dot-matrix printers. — an outdated system ill-suited to serve a critical piece of American infrastructure in 2023. This issue caused a day’s worth of delays for many carriers, but the impact to Southwest was more outsized.

While we await all the answers to some of the questions and challenges that will be revealed by Southwest and unearthed by reporting and investigations, there are already risk mitigation learnings that organizations should take note of. It’s already clear that some of the risks to the business have come as a result of antiquated technology, but technology faults weren’t the only problem — Southwest’s failure to respond also contributed to the debacle.

While Southwest is a leading domestic airline traveled by millions, it’s now apparent that the airline is still vulnerable to mistakes that leave elements of its business exposed. Southwest’s outdated technology did not allow for the airline to respond to risks to the organization, and its response and steps taken to mitigate risk were inadequate. This event, which has dominated news cycles and demanded government attention, serves as a call for organizations of all industries and sectors to implement and refine risk mitigation plans.

Taking Control of Risk

Now more than ever, risk is the common thread between businesses — whether airlines, manufacturers, or technology companies. Risks are due to both internal and external factors. Internal factors such as staffing, leadership, and system integrity put the ball in leaders’ court, and external factors such as regulatory bodies and industry-impacting events present a planning opportunity for organizations to minimize the impact of uncontrollable events.

It’s important to realize that there will always be risks on the horizon but identifying and mitigating those risks will undoubtedly put businesses on their front foot and minimize the dreaded reactive crisis management that could result in financial and reputational harm. While risk mitigation steps decrease the likelihood of exposure, potentially harmful events are still a possibility — albeit one that is of a lesser extent and more manageable.

Nonetheless, organizations should perform evaluations to assess its risk exposure and the associated potential costs if they haven’t done so already. These risk assessments are performed by organizations big and small, and perhaps one of the biggest misconceptions of these assessments is that they are one-time events and that the business has a full understanding of its exposure after undertaking a single assessment. Instead, risk assessments must be performed on a regular basis, as well as when as when components of the organization and industry evolve, or as the risk environment changes.

Key Components of Organizational Risk

  • People: In today’s environment, many organizations are operating significantly differently than when they did give years ago. The shift to remote work has enabled a new approach to work that has necessitated new solutions to be quickly operationalized and enabled to facilitate the remote work environment.
  • Process: Along with remote work, the processes for important tasks has evolved accordingly. In some cases, this has pushed organizations to adopt positive change, but there still may be some processes where outdated systems were the only possible solution.
  • Technology: The transition to the cloud and SaaS solutions has significantly changed the technology landscape, especially over the past five years. Coinciding with this shift, new systems are being introduced while legacy systems are past their useful life. In this case, many organizations must ask themselves if these applications are creating risks that may cause undue operational, reputational, or financial risks to the organization.

As trusted business advisors, Altum has been able to assist clients in making critical decisions around risk and help their business work efficiently. With a diverse perspective grounded in expertise, Altum advises organizations on where risks may exist.

Business risks are all around us, and impact organizations in many ways. Southwest Airlines’ and the FAA’s crises give organizations a case study that reinforces the importance of risk mitigation, and they now can undertake proper measures to anticipate and minimize risk effectively. The catastrophic consequences of failures to assess and mitigate risks are too great to be ignored, and organizations that do not heed this call to prepare — regardless of industry — could find themselves in a similar costly and undesirable situation.

  • Date June 30, 2023
  • Tags Insights, Life Sciences Insights, Manufacturing Insights, Private Equity & Venture Capital Insights, Resilience, Risk & Governance, Resilience, Risk & Governance Insights, Restaurant, Retail & Hospitality Insights