Managing Risks - Towards a Safe and Efficient

Society

Brian SpeddingA presentation to the Participants’ Forum at European Research 200211th November 2002

Human Behaviour & Business Aspects

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“The ability to understand, measure and weigh risk is at the heart of modern life”

Peter Bernstein, “Against the Gods: The Remarkable Story of Risk”

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Importance & Issues

• Changing trends and features increase complexity, vulnerability and uncertainty

• Affect society’s structures and communications, industrial production and peoples' use of new products and technologies

• Increases the levels of uncontrolled risk for fundamental functions of society and business life - as a consequence generates increased lack of safety in people's perceptions

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Importance & Issues

• Increasing complexity of technical systems and products makes them more difficult to understand, monitor and control– more vulnerable to internal failures and malfunctions

– more vulnerable to external attacks

• Recent events demonstrate the need for improved safety and security

• Financial losses can be considerable

• Hazards in technical systems may result in loss of human lives and environmental pollution

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Risk Management is a balancing act

Propensity to take risks

Perceived danger

Accidents & hazards

Balancing behaviour

Potential Rewards

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Benefits

• New business models for extended products and enterprise networks

• More efficient use of assets and networking SMEs with larger companies

• Prevention of accidents and events causing human losses and affecting human health, environmental pollution and economic losses

• Safer and more humane surroundings for the citizens

• Improved competitiveness for European industry

Human Factors

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People

Risk

Hazards

Processes

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Human factors

• Measure impact of human factors in risk identification, assessment and management

• Assess possible results of improving human factors– improvements in human-

technology interaction

– addressing skill sets and training needed by operators in different environments, using different systems - both real and simulated

Personnel Technology

Environment

Integration

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Improved HTI

• Safety-relevant changes in psychological work demands– while implementing ICT

• Optimising modalities in man-machine interface

• Contextual assessment of organisational culture

• Integrated assessment of human reliability in probabilistic analyses

• Means for promoting transfer of experience and organisational learning

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Improved HTI

• Incorporate qualitative and quantitative evidence– Adopt techniques such as Bayesian Belief Nets and influence

diagrams

– Use risk-based indicators to follow up the risk during operation.

• Link technical and organisational parameters by identifying the key safety barriers to control– Safety barriers assessment

– Interview techniques

– Identification of a typology of risk

– Performance factors of an organisation and assistance in implementing projects

Business Aspects

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Business aspects

• Promote effective risk and reliability management– Develop new tools based on strategic decision making, economic

risks, statistics

– Develop and evaluate new and innovative business models -

extend our concept of "value"

• Companies moving from giving guarantees to delivering capacity and making life-long availability agreements– Require systematic consideration of reliability and safety in

design, operation and maintenance

– Robustness and flexibility will reduce risk and uncertainty, and add economic value

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Cost of risk

• Increased exposure to risk is a consequence of:– globalisation of economic activity

– mobility of capital flows across national boundaries

– widespread privatisation of public sector enterprise (e.g. utilities)

– intensified competition

– high volatility in international financial markets

• Determine which assets are worth protecting, given the cost of doing so

– “Cost of risk = insurance premium paid”

– self-insurance, administration costs, hedging

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Examples in business

• Private Finance Initiative (PFI)

• Asset management

• Business continuity planning

• Risk-based regulation

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PFIs

• Investment/financing decisions involving allocation of resources under uncertain conditions are associated with some risk– assumed (in the expectation of a higher return) or

– transferred to others (through hedging and/or contracting arrangements)

• Principles of infrastructure project finance deals (eg PFI)– allocate specific risks to the parties best able to bear them

– control performance through incentives

– use market hedging instruments (eg derivatives) to cover market-wide risks (eg interest and exchange rate fluctuations)

18PFI - different risks at different stages• Construction

– completion

– cost over-run

– performance

– environmental

• Operation– performance

– regulatory

– environmental

– off-take

– market

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PFI - handling the risks

• Moves towards fee-based project financing makes risk management of greater importance

• Analyse project exposure to risks – from different perspectives– bargaining between stakeholders– economic viability– Monte Carlo simulation to assess uncertainties– variation over time

“Optimal Risk

Allocation”

“Maximum Risk

Transfer”Xor ?

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Asset Management

• Increasing adoption of ever more complex technology and communication systems– greater dependency on complex technology brings a higher

risk of business interruptions due to the failure of some of, or all, the systems and services supporting them

– traditional maintenance management pays little attention to managing risk

• Asset management– scheduling of maintenance activities - “living with defects”

– trade-offs between risks and costs of downtime/disruption

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Asset Management

• Critical equipment/systems should be considered as assets supporting business critical processes

• Positive management of these business-critical systems is needed

• This enables:– better understanding of complex inter-dependencies, at all

levels

– management have better control, and flexibility to meet the demands of changing business needs

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Asset Management

• Effective asset management represents one of the main components in the reduction of organisational business risk

• The key to effective asset management:– the ability to accurately predict the future performance and

associated life cycle costs of assets

• Develop an understanding of their current condition and service potential

• Then apply advanced asset management techniques to this knowledge base

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Asset Management

• Life Cycle Planning– provides a strategic planning

capability to compare projected NPV LCCs of various assets whilst still at the asset planning

stage

• Asset Renewal Optimisation– optimise renewal options for

assets currently in service

– maximise ROI

– risk analysis, maintenance history and opportunity costs into consideration

% Availability

Man hours%Utilisation

Operating HoursOperations Performed

Usage

Operating Profile

AvailableResource

Pre-OperationTasks

Post-OperationTasks

Operation

Servicing

Work ShopTasks

ComponentResupply Time

Failure?No

MaintenanceTasks

Yes

ManpowerPool

FacilitiesPool

SparesPool

SupportEquipment

Pool

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Asset Management

• Failure Mode Analysis– Consequences of Failure

– Probability of Failure

• Valuation Analysis – manage infrastructure

valuation requirements

– report on asset valuations, depreciation, capital expenditure, disposals, acquisitions etc

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Business continuity

• Turnbull report

• From March 2001 companies listed on the London Stock Exchange have been required to make annual governance statements referring to their identification and mitigation of risk

• More specifically the report "..places an obligation on listed companies to establish a sound system of internal control and incorporate risk management within their normal management and governance processes."

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Risk-based Regulations

• More flexible than the more traditional rule-based regulations

• Risk analyses can help prove that new solutions are acceptable and even safer than traditional ones

– but taking into account how people view risks is a challenge

• Regulatory authorities able to concentrate efforts on areas were the risk is considered least acceptable, and where the effect in terms of risk reduction is highest

• Need high-quality, robust risk analyses

Conclusions

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Conclusions

• People are an inescapable part of the risk equation

– perception/identification of risk

– management of risk

– individually and in an organisational context

• Business aspects of risk have many ramification

– risk allocation

– asset management

– risk-based regulation

• Transnational & cross-sector issues will be key