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Explore the importance and issues surrounding risk management in society and business, including the impact of human factors, hazards, and the need for improved safety and security. Learn about new business models, risk-based indicators, and strategies for promoting effective risk and reliability management.
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Managing Risks - Towards a Safe and Efficient Society Brian Spedding A presentation to the Participants’ Forum at European Research 2002 11th November 2002 Human Behaviour & Business Aspects
“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”
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
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
Risk Management is a balancing act Propensity to take risks Potential Rewards Balancing behaviour Perceived danger Accidents & hazards
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
People Processes Hazards Risk
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
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
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 • 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
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
Examples in business • Private Finance Initiative (PFI) • Asset management • Business continuity planning • Risk-based regulation
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)
PFI - different risks at different stages • Construction • completion • cost over-run • performance • environmental • Operation • performance • regulatory • environmental • off-take • market
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 X “Optimal Risk Allocation” “Maximum Risk Transfer” ? or
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
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
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
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
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
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."
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 • 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