Last weekend’s IT glitch at British Airways affecting 1,000 flights in Heathrow and Gatwick demonstrates how vulnerable are all industries to ‘Connected Risk’.
In today’s connected world, a single event like BA’s IT glitch can affect a company at multiple levels. BA’s meltdown is part of the wider vulnerability of the aviation industry to disruptive forces of Connected Risk as it links travellers, economies and businesses and insurers at the same time.
In this case, the technical hitch was caused by a power surge in BA’s communication system, which knocked out all BA’s London operations. In such a nightmare scenario, a backup system would be rebooted, minimising any disruption. Yet, the backroom staff who had been moved offshore to India as part of BA’s excessive cost efficiencies were unable to work the system creating chaos over the weekend.
Consequently, Chief Executive Officer, Alex Cruz was unable to identify the cause when confronted by TV news reporters, leaving consumers angry and frustrated. Stocks in BA’s parent company, IAG, collapsed to 589 pence when markets opened on Monday, a drop of 4.1 percent.
With service now resumed, angry consumers are demanding compensation. Under EU Flight Compensation Regulation 261/2004, passengers can claim compensation from British Airways for sums ranging from €250 to €600 per passenger. Potentially, BA could be facing a bill of £100 million, mirroring the same bill that US airline Delta paid out last year.
As the fallout continues, and more claims and counter-claims are made, one thing is becoming clearer: This meltdown is the bitter taste of the power of Connected Risk. A power that turned an IT glitch into a larger phenomenon that caused disruption to consumers, paralysed airports and wreaked severe reputational and economic damage to BA and its Parent Group, IAG.
Events like BA’s IT glitch are classic ‘black swan’ events, but when fused with Connected Risk create a new deadly world of risk. For in this new world, contagion from a small event is not just confined to local networks. Rather, it creates a ‘butterfly effect’ and unleashes a cascade of further events through the network, impacting numerous corporations along the way.
The failure of BA to deal with Connected Risk will have a disproportionate effect on the company itself, its supplier and partner organisations and the entire industry. It’s a real concern for all CEOs who may be aware of the urgency of Connected Risk, yet are unsure how to proceed.
The lessons for insurers and corporate risk managers advising the boardroom is simple: adopt an integrated risk management framework that quantifies bottom-up exposure, manages risks and in so doing delivers superior return on equity. Only, then will large organisations like BA be able to steer through the rough and stormy seas of Connected Risk.