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    Economic downturn crisis forecast November 2008

    Contact us to know details on economic downturn crisis forecast

    graphic results of economic downturn crisis forecast November 2008

    Economic Downturn Magnitude and Duration Quantitative Study by Riskope (http://www.riskope.com), November 2008

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Can we stop misrepresenting reality to the public?

We gave a presentation in Toronto, at the CIM 2013 conference.

The main points made are the following:

  • You cannot manage (your) capital if you do not understand risks.
  • You will not be able to make proper decisions if you do not understand risks.
  • You will not be allowed to operate if people do not believe, trust and understand you and your risks.
  • You will miss opportunities and blindly expose yourself to risks  if you do not understand risks.
  • If you understand your risks you can go and see your bankers with better indicators than the sad, obsolete and misleading NPV.
  • With better understanding of risks you can beat insurance denial problems and come up with win-win solutions either with your insurer, or with you key contractual counterparts.
Sadly, the recent collapse of the nine-storey Rana Plaza factory in Dhaka, Bangladesh, one of the worse industrial disaster in the world since the 1984 Bhopal gas explosion, confirms the above.

 

No failures, no progress.

A British engineer, named Pugsley, said in 1966 that “a profession that does not make mistakes is a profession that does not progress” (Pugsley A.G. 1966, The Safety of Structures, Edward Arnold Publishing ltd, London). In his pioneering book on the safety of structures, Pugsley related that fighter pilots in WWII went up against the enemy even when there was a high chance of being shot down. However, the same pilots demanded design changes if the structural failure rate of their aircraft was more than 5/100,000 per flying hour.

Almost half a century later later, large companies (Tata Group for example, India’s largest conglomerate) reportedly hand out an annual “Dare to Try” Prize for “the best failed idea”.

Ratan Tata, the former chairman of the group used to say that failures are like a gold mine for a company. We would add absolutely, yes, and it has been so since Humans started to wander around and feed on unknown plants and fruits, tried to build a fire.

Tata is not alone. Since the ’90s Eli Lilly, a large drug maker, similarly organizes “failure parties”.

Both these companies and other that follow similar paths have understood Pugsley’s message and that innovation cannot occur without failures.

No failures, no progress.

Success and failure are equally important learning experiences, provided they do not “kill” you or your organization, hence the necessity to “properly measure” the risks before jumping in.

That’s where risk management fits in the context of innovation.

Real life ISO 31000 compliant quantitative transport alternatives risk assessment example.

Riskope was contacted by a client to develop an ISO 31000 compliant Quantitative Risk Assessment to be used to support the decision among possible personnel transportation alternatives running between a country’s capital city and a remote operation.

Numerous Man-made and natural hazards impinge on the buses path

Numerous Man-made and natural hazards impinge on the buses path

The operation had run a shuttle bus service for its personnel from and to the capital city for a decade with no major bus accidents when there was a single fatality accident with a company’s vehicle (not a bus). The driver lost direction and went over the side of the slope, ending up approximately 200m below.  Then, in short sequence, another fatal accident occurred, this time with a bus.

Repeated traffic accidents, all over a country, have the potential to trigger crises and violent reactions against a specific company.

Repeated traffic accidents, all over a country, have the potential to trigger crises and violent reactions against a specific company.

The operation immediately invested more than 1MUS$ in (national) road improvements encompassing 15km of heavy-duty guard rails, in follow-up to a list of almost 20 actions defined by a preliminary road safety risk assessment.

Mitigation along a highway may include a variety of techniques whoseimplementation should be a risk based decision process.

Mitigation along a highway may include a variety of techniques, the implementation of which should be a risk based decision process.

The operation publicly declared having the goal to reduce to the lowest possible, but sustainable and reasonable level, the chances of fatal accidents during the shuttling of its personnel. To attain that goal the operation requested that three alternatives would be compared in terms of risks, efficacy, efficiency and sustainability.

A) Status Quo, i.e. a bus service on the road “as is” up to date (base-case).
B) Investing (capital expenditure and increased ongoing maintenance) in mitigation of the existing road.
C) Building a private airport and shuttling personnel from the airport to the operation with buses.

For the study of quantitative relative risks of the three alternatives, it was decided to exclude from the analyzes business interruption and concentrate on accidental harm to people. The study also assumed that the impact of climate changes would be comparable for the three alternatives, reducing the need to develop complicated and very disputable scenarios.

The main aim of the risk assessment was to determine the probability of an event causing single or multiple fatalities for each alternative and from there define a preliminary evaluation of relative risks.
The “differential” relative risks between alternatives can then be used as a preliminary discriminant in the selection of the alternative to be implemented, unless other factors come into play and a long-term comparison shows that the risk profile/uncertainties inherent to each alternative could lead to significant differences in the long term cost and sustainability.

In order to cope with discrepancies and lack of data, like in many other cases, Riskope had to derive ranges of probabilities from incomplete data developed in other countries, other environments, in such a way to cover, to the best of Riskope’s knowledge and understanding, what is expected to be a valid range in the considered cases. Riskope had already successfully used such approaches in ERM efforts for with complex multi-modal transportation system including air, road, rail, barges and ocean going vessels to full client’s satisfaction.

International reputable sources were consulted to allow the definition of expected consequences of accidents, which remain, of course, subject to great uncertainties and can only be defined with broad ranges. Given the lack of data and great uncertainties surrounding this study Riskope adopted a prudent approach and considered large ranges of fatality rates per accident unless data were clearly indicating that smaller values were pertinent and possible.

Pertinent readily available data on road accidents were studied and summarized from the site specific data. The values finally used in the study constitute a blending of all these incomplete information and to remain on the safe side, Riskope adopted rather wide ranges, strutted, however, by factual data gathered to date of consequences and probabilities.

Under various assumptions (see table below) the quantitative total risk ( from ORE) was found to be lower for Alternative C (37% to 65% of Alternative A), with Alternative B having a total risk 73% to 98% of the highest risk Alternative A).

Scenarios Alternative A
Total Risk
Alternative B
% of A
Alternative C
% of A
Minimum 100 87 51
Maximum (worst case) 100 73 37
Average (2007 data based) 100 73 37
Reduced Scenario (assumed 2010) 100 84 50
Average without Hgs (purely theoretical) 100 98 65

Aircraft shuttling (Alternative C) would reduce risks to the lowest relative level among the two considered alternatives  despite the necessary residual bus shuttling from the airport to the operation.

Total Risk for the three alternatives. Vertical axis is Total Risk (units are casualties per year). The various colors correspond to the contribution to total risk by various hazards as coded in the legend (sorry, but we have to preserve client's confidentiality!).

Total Risk for the three alternatives. Vertical axis is Total Risk (units are casualties per year).
The various colors correspond to the contribution to total risk by various hazards as coded in the legend (sorry, but we have to preserve client’s confidentiality!).

As mentioned in the study’s report, there are scenarios that could make this aircraft alternative less attractive than it seems (for example if pulmonary edema, dental problems, raising to significant levels because of repeated flying from sea level to the operation).

In summary, this ISO 31000 compliant study concluded that quantitative relative risks could be reduced half by building an airport and completing the shuttling service by bus, under the large set of assumptions that had to be made to cover knowledge and informational gaps.

ISO 31000 IEC, ISO 31010 and Tolerability, Risk Ranking, Crisis and Reputational Impacts

If properly understood and managed, even an unexploded bomb can become an instrument for social gathering and community safety.

If properly understood and managed, even an unexploded bomb can become an instrument for social gathering and community safety.

Back in 1999, in a course we were giving on a regular basis at UBC (Continuing Education, University of British Columbia), entitled “Design of Risk Management Systems”, then in the book entitled Improving Sustainability through Reasonable Risk and Crisis Management ( A guide to Making Better Decisions ISBN 978-0-9784462-0-8we were promoting a strong linkage between Risk Management and Crisis Management as well as the need for robust, science based, risk ranking methodologies.

We spoused the principles that constitute ISO 31000 before it was written, like many serious Risk Management professionals, I am quite sure, and started reading IEC/ISO 31010 with lots of expectations.

IEC/ISO 31010 covers lots of ground indeed, including lists of available tools to identify hazards (in various contexts), determine probabilities (and their approximate distributions, if need be) and consequences of hazards. For each tool (like Monte Carlo simulation or Bayesian estimates, etc…) IEC/ISO 31010 defines applicability. Many welcomed this thorough international “house-keeping” effort, although some criticisms have been formulated, sometimes arising from very specific fields, that will most likely be covered in future editions.

From our perspective IEC/ISO 31010 has however some “shadow areas” that should be discussed:

1) Risk “tolerability/acceptability” is used, but not defined (not even a method is discussed, although historic published examples exist from various countries). This leaves the door open to major confusion and misrepresentations, inefficiencies and mitigative funds misallocation as pointed out by various authors in the last decade.
2) Risk “Ranking” is mentioned but a proper procedure is not defined. An example? In a top-ten risk list developed using common practice approaches, one will usually find high likelihood/ low consequence and low likelihood/high consequence risks mixed-up.
3) Crisis and Reputational impacts are not even referred to…despite the strong exposures these types of impact can have on the balance sheet of a corporations.
4) Complex consequences metrics needed to cover environmental, long term, etc… risks are not neither developed nor supported.

At Riskope we believe that until a code will stress these points and define proper methodologies (although it may remain a non prescriptive code like ISO 31000) we will be in a situation where a ISO compliant Risk Management approach could lead to confusion and misrepresentations with potential nefarious consequences.

What is your opinion?

Looking Back To Move Forward – The Risk Analysis Legacy of The TITANIC

Riskope thanks Evelyn Ramsey for this interesting post.

Photo Sipa Press Rex Features

The Titanic Photo: Sipa Press/Rex Features

This post is less a history of the disaster of the Titanic and more an insight into the legacy that the incident left to future risk analysis professionals. All data and information has been collected from public sources and will be identified where relevant.
The events of April 14th 1912 are infamous; the Titanic hit an iceberg on her maiden voyage and 2 hours and 40 minutes later she sank, leaving 1,503 passengers and crew dead. The unthinkable had happened to the unsinkable (it should be noted that the White Star Line company never used the ‘unsinkable’ phrase and this was later attributed to post sinking press coverage).
There are various facts that contributed to the tragic loss of life that night that could have been avoided:

  • Too few lifeboats available; only enough to accommodate 1200 passengers on a ship transporting 2200.
  • Despite warnings of potential ice flow the captain was instructed to increase speed
  • The lookout had not been provided with binoculars
  • The crew were not confident in the use of the brand new on-board wireless system

Lack of risk analysis

All of these factors are the result of money management being placed above risk analysis in the hierarchy of ship building. This was common practice in the early 1900s as competition became tight and shipping companies fought for passengers. However, the Titanic disaster led to an investigation of procedures and decision making that transformed the ship building industry and almost created the risk analysis industry overnight.
In his essay “The Titanic Disaster; An Enduring example of Money Management v Risk Management” Roy Brander (P. Eng) states that “most of the problems all came from a larger systemic problem. The owners and operators of steamships had…taken larger and larger risks to save money”. It seems barely credible today that such common sense decisions were being overridden by such purely financial reasoning.
The case of the lifeboats (or lack thereof) is the perfect of example of how the owners designed the Titanic with profit, not safety in mind. It was decided that the lifeboats took up too much deck space which – on a travelling monolith like the Titanic – was of a premium. The decision to allow passengers more space to enjoy a daily promenade or to play deck games was backed up by the fact that the regulation of lifeboats was undertaken by a committee “dominated by shipbuilders”. Lack of independent guidance with regards to such vitally important risk management decisions meant that mistakes – or even just plain bad decisions – were validated. In the aftermath of the tragedy the rules regarding lifeboat provision changed overnight. The money management based formula was immediately disposed of and a more simple idea – a seat for everyone – was introduced. This legacy of the Titanic disaster remains “never…questioned” to this day.

Concerns ignored

Other risk management concerns were swept aside by the ship’s owners. One claim was that the captain was instructed to speed through an area known for icebergs in an attempt to break existing Atlantic crossing records. The kudos of having such a record to the Titanic’s name would be worth thousands in extra bookings and so the risks of navigating through ice flow at speed were ignored.
In a bid to seem future proof the owners ensured a new wireless system was installed in time for the maiden voyage. However, due to poor training and untested procedure “not all warnings reached the bridge” and later SOS  calls from the Titanic were missed. With the vast technological advances this and last century have witnessed it seems unlikely this would happen again. What were applications only available to the military are now available to the average person, with technology and communications choices being wide and affordable. Training is also now a big part of risk analysis implementation with procedures put in place at every step to ensure mistakes are picked up immediately and resolved without delay, as well as more stringent procedures when it comes to checking new equipment and staff training.

There are a myriad of examples of how risk management was ignored in the building and execution of the Titanic in order to make a profit but the legacy of independent checks, regulation and lessons learned are still in place to this day. As Ray Brander states, the disaster “ripped away blindfolds and changed dozens of attitudes, practices and standards almost literally overnight”.
Riskope are proud to continue this code of independent risk analysis, working with businesses to make the correct decision in difficult circumstances whilst steering your projects across an ocean of uncertainties. Contact Us to discover how we can help your business navigate towards reasonable, sustainable, rational solutions compliant with your tolerability and acceptability criteria.

L’Aquila earthquake verdict explained from a Risk & Crisis Management point of view.

Data for this summary have been gathered through media and publicly available records. Details we consider “irrelevant” to this discussion have been omitted because of space limitations.

We will start this post by summarizing the tragic tale of L’Aquila, a city featuring many historic public buildings and centuries old residential structures located in Italy, a country where retrofitting of old (privately owned) structures to meet new seismic safety criteria is reportedly not enforced (OPCM 3274/03, art. 2, comma 6).

The area is seismic as witnessed by major earthquakes recorded since the year 1349, then 1452, 1461, 1501, 1646, 1703, 1706, 1958 and 2009. This last quake led to 309 casualties, 1600 wounded (200 very severely), 65,000 evacuated in the city and damages for over 10B€. Numerous studies had been conducted on the seismicity of the area, including long-term predictions made in 1995. It is well known, that predictions in this field are always surrounded by large uncertainties. Other studies had shown that local conditions may have amplified the effects of a quake in the area. A 1999 study on the vulnerability of public, strategic and “special” buildings showed critical vulnerabilities, which were never addressed in many buildings (including, reportedly, all those that ended up collapsing during the last earthquake).

Prior to the tragic event a “swarm” of foreshock earthquakes with almost 100 times the average rate was recorded in and around L’Aquila. The swarm triggered a crisis status due to public’s panic, further fuelled by independent scientists opinions. The swarm had started in December 2008 (M=1.8), then in January with M=3 gradually and continuously evolving with increasing intensity and frequency to the date of the major event.

An official government body called the National Commission for the Forecast and Prevention of Major Risks had six top officers participating in a meeting with the public on 31st March 2009, six days before the nefarious earthquake (Mw=6.3/Richter 5.9), and a day after the latest, and strongest event in the swarm.
Reportedly six commission members and one civil protection officer worked together as a collective unit during the meeting at the request of the head of the Civil Protection Department, G. Bertolaso, to carry out what Bertolaso had called a “media operation,” which meant that the experts spoke directly with the public rather than via the civil protection department. Still the public’s concerns were entirely dismissed and people were told to relax instead of being on guard. As a result some of the town’s residents changed their behaviour of seeking shelter outside, as they were used to doing when tremors happened, staying indoors instead.
The seven were brought to trial for manslaughter in September 2011 for the advice they gave in that meeting.

Our Analysis

L’Aquila was a very vulnerable “portfolio”, exposed to a natural hazard which had occurred in the past, and had a chance of occurring again in the future.
Both the hazard and the vulnerability were well documented. The only unknown was the timing. The discussion whether the 2008-2009 swarm was a beneficial energy release or, as it actually happened, a series of foreshocks leading to a stronger main event is, in the long run, quite irrelevant.

From a prior post on Negligence (see prior post for more detail on Negligence) we know that in some countries tort law uses the somewhat vague standard test of the “reasonable man” to judge liability of negligence. Following the test, an entity may be deemed negligent only if Mitigative moneys spent (per annum) are less than the annualized risks. Clearly transparency and rationality constitute a strong a priori defence in case something would go wrong.

In that post, using two real-life examples, we showed that the legal negligence test is not a critical factor for safety, health and risk and crisis management, but constitutes a bare minimum. The negligence test is not an end, but only the start of a continuous process.

How would the test score for L’Aquila case?

Even if one decided to be madly optimistic and not consider human victims, the wounded etc., but consider only the replacement cost of the public infrastructure (excluding private residences), loss in tax revenues, the cost of rescue and emergency management, the overall cost of the catastrophe could have been very optimistically estimated ahead of the quake at 5B€. Below are the replies of the test (at L’Aquila) for various probabilities of occurrence:
p= 1/100 C (B€)=5 Minimum Mitigative Moneys=50M€/yr
p=1/1000 C (B€)=5 Minimum Mitigative Moneys=5M€/yr

The reason for selecting a probability of 1/100 derives from the nine major recorded events in approximately 700 years. However, even if one would consider, again in an overly optimistic way, a probability ten times lower, thus 1/1000, the Minimum Mitigative Moneys would still be 5M€/yr.

Apparently nothing was done in l’Aquila to mitigate or prepare for the “next big one”. As far as we can read, no one ever performed a negligence test, a proper risk assessment, where not only the hazard, but also the consequences are considered.

Furthermore there was no transparency in the information to the public, to say the least.

What the Judge has ruled

The judge stated that the seven members of the Commissione had analyzed the risk of a major quake in a “superficial, approximate and generic” way and that they were willing participants in a “media operation” to reassure the public. He ruled that this failure led to the deaths of 29 of the 309 people killed in the quake and to the injuries of four others (showing a detailed approach to the causes of death). “The deficient risk analysis was not limited to the omission of a single factor,” he writes, “but to the underestimation of many risk indicators and the correlations between those indicators.” Here we would add that unfortunately the convicted seem to have performed hazard analyses, but not risk analyses, i.e. they did not consider the potential effects of the hazard and what the mitigative options could have been (not only retrofitting, but preparedness, drills, etc.).

The statement above summarizes very well Riskope’s understanding and analysis of the facts available to us.
All the discussions and commotion about the sentence (saying that “science has been killed”, that “the last time a scientist was judged in this way was Galileo”, etc.) are misplaced comments that show the ignorance of their authors of the basic rules of risk analysis. As a matter of fact, Scientific American (David Ropeik, The L’Aquila Verdict: A Judgment Not against Science, but against a Failure of Science Communication) rightly wrote that “this was not a case against science, the Judge recognized the non predictability of such an event already in the indictment, but a judgement against the failure of scientific communication (of risks).”
It is time that geoscientists, seismologists and engineers, who are very capable and respectable hazard specialists, recognize that risk assessments are an area which requires specific knowledge, in which they are not cognisant.
Risk assessments should be prepared by risk specialists and hazard knowledge constitutes at most half of the equation.
Judges have grasped the difference.

Riskope 5 day course on Risk and Crisis Management for top managers and key personnel.

Riskope were recently asked to provide a comprehensive five day course addressing Risk and Crisis Management, Risk Based Decision Making, Project Evaluation for top managers and key personnel at Investment Banks, Oil & Gas, Energy and Transportation.
Although companies willing to commit the resources for a five-day intensive courses remain limited, we felt like it would be a good idea to share the program with our readership, as an example.

A course for decision-makers, key personnel, CxOs in any industry, any country

A course for decision-makers, key personnel, CxOs in any industry, any country

Of course our courses are scalable, from a couple hours up to this exhaustive review and custom tailored courses can be set-up by selectively picking the themes that most interest you/your organization. You can download the example file here.

Contact us today to discuss your custom made in-house Risk and Crisis Management, Risk Based Decision Making, Project Evaluation! Armed with the skills you will learn from Riskope you will have a competitive edge on your competitors, your ideas will be more defensible and sustainable, and your chances of success will multiply.

Riskope’s Blog 2012 in Review

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

600 people reached the top of Mt. Everest in 2012. This blog got about 3,700 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 6 years to get that many views.

Click here to see the complete report.

Trains, Commuters, Sandy and Decision-Making… another case for ORE cockpits.

We have been writing our last two posts in Italian, commenting on the “poor Italian risk-culture” (we were not talking about politics, but on cases like Taranto wide-spread contamination or L’Aquila earthquake sentence), but now we have another interesting subject of conversation linked to hurricane Sandy and its consequences to N.J. Trains.

How a well balanced risk-culture would help against earthquake and flooding.

How a well balanced risk-culture would help against earthquake and flooding.

We are not going to discuss, as we do not trust “reporting scoops” in general, if the trains were actually flooded or damaged by some other hurricane-linked phenomenon; instead we are going to focus on processes telling you first how the story probably developed, then how it could have developed in a well balanced risk-culture.

1. How the story probably developed

Once upon a time a railroad network needed to build a shelter for locomotives and passenger cars.

A nice flat location was found. It was 20ft above the rivers.
No other specific siting study was commissioned and no one would blame that, as once upon a time no one was thinking about climate change and hurricanes wandering in those locations (although there were legends about an older era during which they had occurred).

Many happy years passed by and despite nothing unpleasant ever happened, some “general” studies revealed that the area could be damaged in case of some exceptional event.
No one listened.
No one prepared a Risk Assessment, Business Continuity Plan, Crisis Plans….

Then one day a hurricane started drifting towards the area.
There was a lot of pressure to prepare, to minimize damage; big concerns on Health and Safety for workers and passengers.
It was decided to stop the trains, to shelter them for later use…

Where to shelter them was not even a question: there was a shelter!
No one remembered the unpleasant descriptions of the “general” studies.
Once the trains are in the shelter, they will be safe, no questions asked.
Sandy gave an eloquent demonstration a couple days later.

2. How the story could have developed. 

ORE Risk Assessment, Business Continuity Plan, Crisis Plans

ORE Risk Assessment, Business Continuity Plan, Crisis Plans

Please rewind the tape of the prior section….play it to “No one listened”.
At that juncture start replacing with the following.

Risks were measured, integrated into strategic planning of the network to create value.

Business Continuity Plan, Crisis Plans were prepared and trained (drills), the resiliency of the system, including the interdependencies to other critical infrastructures enhanced.

Then one day a hurricane started drifting towards the area.

There was a lot of pressure to prepare, to minimize damage; big concerns on Health and Safety for workers and passengers.

All the prepared Procedures, Plans, Mitigations were deployed.

Where to shelter the trains was not even a question: there was a rational plan minimizing risks.

Not only the situation was well documented, but managers had a very clear vision of the multifaceted situation through a ORE (Optimum Risk Estimates) cockpit.

Sandy passed by and decided to seek revenge somewhere else.

Talking with People about Risks

It is not uncommon, when people ask me what I do for a job that, once I tell them I am a Risk Management Consultant, they ask: “do you work on financial risks?”.

I generally reply that if they mean risks linked to banks I do not, but at the end of the day all risks are financial!

If a lightning takes down the electric substation and your factory is out of electricity for one month, the consequences are financial; you might even go into bankruptcy, right?
If you spill a toxic compound, the environmental damage will also end up as a financial consequence.

If a government let’s industries unduly pollute the air, people will get sick, and at the end the financial impact on public money can be staggering.

With a Riskope Risk Corporate Cockpit managers have a clear vision of the risk landscape of their organization and have at hands valuable support for their decision making.

With Riskope Risk (ORE) Corporate Cockpit managers have a clear vision of the risk landscape of their organization and have at hands valuable support for their decision making.If a government let’s industries unduly pollute the air, people will get sick, and at the end the financial impact on public money can be staggering.

Obviously, for clarity, we have to give names to risks, but lots of confusion arises (even in very authoritative studies performed for large corporations) when, as it is commonly done, risks are named following the consequence (Health and Safety, Environmental, Financial) and/or the hazard, or what is considered to be the hazard (fire, earthquake, terrorism).

At first sight one may think we are splitting hairs, but if you think about, this very common mistake creates a lot of trouble in risk assessment in terms of shear confusion, double counting, unclear decision making support, etc. The results? Financial consequences in terms of mitigative overspending, poor allotment of funds, etc.

At Riskope we take great care in developing rational Hazards & Risks Registers that avoid this pitfall using ORE (Optimum Risk Estimates), our flagship methodology/ application.
The advantage is not only to avoid double counting and other unwanted fuzzyness, but also to allow fully drillable Hazards & Risks Registers that can then be organized in structured cockpits with multiple dashboards.
With a Riskope Risk Corporate Cockpit managers have a clear vision of the risk landscape of their organization and have at hands valuable support for their decision making.
Riskope’s Risk Corporate Cockpits yield a dynamic, updated and customized vision of key performance indicators thanks to a business intelligence integration.

Stay tuned for our next post on Riskope Risk Corporate Cockpit!

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