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Managing Risks - Towards a Safe and Efficient
Society
Human Behaviour & Business Aspects
Brian Spedding
A presentation to the Participants’ Forum at European Research 2002
11th November 2002
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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
Potential
Rewards
Balancing
behaviour
Perceived
danger
Accidents &
hazards
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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
Processes
Hazards
Risk
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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
Technology
Personnel
Integration
Environment
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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)
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PFI - 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”
or
“Maximum Risk
Transfer”
X
?
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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
Operating Profile
Pre-Operation
Tasks
% Availability
Post-Operation
Tasks
Operation
Available
Resource
Operating Hours
Operations Performed
No
Servicing
Failure?
Yes
Manpower
Pool
Maintenance
Tasks
Facilities
Pool
Component
Resupply Time
Work Shop
Tasks
Spares
Pool
Support
Equipment
Pool
Usage
Man hours
%Utilisation
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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