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Is Our World More Volatile?

February 8, 2011

Commenting on my recent blog, ‘Why Agility Matters’, David Rajakovich raised an interesting question. While broadly agreeing with the important role that contracts can play in improved communication and the management of risk, he questioned my statement that market volatility is increasing. He suggested that this might be a view ‘based on randomness’.

There are certainly many who share the opinion that the world of business today faces greater volatility than in the past. But is that a legitimate view? Might it be that we simply face different types of volatility today?

To take an example, there is little question that trading relationships are more international and that businesses are potentially more vulnerable to events in far-off places than they were 20 years ago. Globalization has shifted many sources of supply and increased the direct dependency on labor forces, political, economic and environmental events in overseas locations.

But does this in fact increase volatility, or simply change its sources? There is a counter-view that says wider market choice actually helps to immunize business from volatility by increasing choice and that the real point is more that we must tackle greater complexity, rather than greater volatility.

A recent report by The World Bank examined the volatility of prices in 45 major commodities going back to the 18th century. It concluded that “structural breaks marking increased price volatility are followed by breaks marking declines in volatility so that there is no upward or downward trend in volatility over time” – but of course this does confirm that there are periods of greater or lesser stability and we do appear to be in one of those at present.

Another factor that may lead to this impression of increased volatility is the speed of technological change. An article in the Financial Times recently suggested that the period of competitive advantage from innovation has reduced by more than 90% in the last 150 years. So to the extent that ‘volatility’ relates to ‘speed’, there appears little question that things are becoming more volatile.

In a  speech at the end of 2010, Richard Lambert (Director-General of Britain’s CBI) made a compelling argument that today’s business conditions are indeed substantially more volatile, when compared to the relative stability of the previous 10 years. He suggested that the extent of that volatility is substantial and will have major impacts on the way that businesses organize, on employee relations and on the scale and nature of investment.

Volatility – and stability – are always relative terms. Overall, I will stick with the view that we are operating in a period of relatively higher volatility; and of course this matters because it increases uncertainty and therefore risks are greater. And for those in the world of contracting, it means we must structure agreements (and management systems) that can cope with this uncertainty through greater flexibility.

One Comment
  1. Great post Tim…conventional wisdom is squarely on your side of the volatility debate. May be fodder for an additional blog post for me when I get a chance to look further into the issues you raise. However, definitely a well-developed argument.

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