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    Economic downturn crisis forecast November 2008

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    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.

 

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.

Parlando un po’ di rischio e di ORE

Riskope ringrazia Luca Calderan per questo suo contributo.

All’estero quando si parla di Consulenza Manageriale nella gestione del Rischio le persone associano l’idea al rischio finanziario, ai grandi rischi aziendali, alle catastrofi naturali e di origine umana.
In Italia invece in genere le reazioni sono due: gli imprenditori ritengono che il rischio sia trascurabile o che comunque non toccherà mai a loro, mentre le persone comuni sono convinte di essere protette dalla scaramanzia nella vita di tutti i giorni e pertanto saranno restie a rivedere il loro modo di procedere.

Ma è davvero così?

In azienda la risposta a cui ci si troverà davanti sarà: si è sempre fatto così, non vedo perché dovremmo cambiare adesso. Ma in un contesto di cambiamento continuo ha senso rimanere ancorati a queste idee?
Vi è poi un filone di persone che associano il rischio unicamente al rischio finanziario e perciò lo ritengono legato unicamente al mondo bancario e perciò distante dal proprio campo di lavoro.
Ma siamo sicuri che un’attenta gestione del rischio non possa contribuire ad evidenziare eventuali carenze che magari abbiamo sempre avuto sotto gli occhi ma che non abbiamo mai preso in considerazione?
Un’attenta valutazione dei rischi permette di quantificare con più esattezza quali aree necessitino di un intervento o di una revisione e può perciò essere un elemento preziosissimo per la gestione di interi settori o di un’intera azienda.
Comunemente si tende ad associare il rischio con la sua diretta conseguenza: Salute e Sicurezza, Ambiente, finanziario) e/o il pericolo, o quello che è considerato il pericolo (incendio, terremoto, terrorismo, ma questo genera confusione.
Scorporando i singoli fattori e misurando separatamente il loro tasso di rischio potremmo accorgerci di avere una situazione diversa da quella attesa e che magari richiede strategie diverse da quelle che si sono sempre adottate perché “si è sempre fatto così”.

Il cuore di ORE é la determinazione esplicita del limite di tollerabilità, rep. di appetito al rischio per il caso specifico studio (azienda, progetto, impress, etc.

Il cuore di ORE é la determinazione esplicita del limite di tollerabilità, rep. di appetito al rischio per il caso specifico studio (azienda, progetto, impress, etc.

Una delle operazioni più difficili è quella di separare i rischi razionali da quelli irrazionali, che magari derivano dal fatto di aver sempre operato nello stesso modo o dal fatto che si tramandino avvertimenti che non vengono più verificati.
Un metodo per non incorrere in questo problema è il metodo ORE (Optimum Risk Estimates), ovvero la Stima Ottimale dei Rischi.
I vantaggi sono notevoli, primo tra tutti il fatto di permettere ai manager di avere la situazione sotto controllo con pesi reali e basati su uno studio dei fattori interni ed esterni, senza doversi improvvisare contabili, ma avendo una stima reale dei settori che presentano fattori di rischio, con un’analisi dettagliata che può essere d’ausilio per chi deve prendere decisioni in campo direzionale, per una scelta di business o anche solo per valutare la fattibilità di un investimento.

A presto per parlare ancora di Riskope Risk Corporate Cockpit.

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.

Seasons’s Greetings from Riskope

Seasons's Greetings from Riskope for a Serene and Productive 2013!

Seasons’s Greetings from Riskope for a Serene and Productive 2013!

Trenes, traslados, Sandy y toma de decisiones… un caso más para puestos de mando ORE.

Hemos hecho nuestros dos más recientes anuncios en italiano, comentando la “pobre cultura de riesgos de Italia” (no estábamos hablando de política, sino de casos como la extensa contaminación en Taranto y la sentencia de terremoto de L’Aquila), pero ahora tenemos otro interesante tema de conversación relacionado con el huracán Sandy y las consecuencias para los trenes de N.J. 

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

ORE ayudaría una cultura de riesgos bien balanceada en caso de terremoto e inundaciones.

Como en general no confiamos en los “reportes informativos”, no vamos a discutir si los trenes realmente se inundaron o si sufrieron daños por algún fenómeno vinculado con el huracán; en lugar de eso, vamos a concentrarnos en un relato de cómo se desarrolló probablemente el asunto y después en una versión de cómo podrían haber sido las cosas si hubiera existido una cultura de riesgos bien balanceada.

1. Cómo se desarrolló probablemente el asunto

Había una vez una red de vías de trenes que necesitaba un refugio para locomotoras y para los vagones de pasajeros.Se encontró un buen lugar plano para hacerlo. Estaba 20 pies (7m) por encima de los ríos. No se comisionó ningún otro estudio de terrenos y no se puede culpar a nadie por eso, ya que en aquellos tiempos nadie pensaba en el cambio climático ni en que a un huracán se le ocurriera dar la vuelta por esas zonas (aunque había leyendas sobre una época antigua en la que habían llegado huracanes).

Pasaron muchos años felices y a pesar de que no pasó nunca nada desagradable, algunos estudios “generales” revelaron que la zona podría resultar dañada si ocurriera algún evento excepcional. Nadie escuchó. Nadie realizó una Evaluación de Riesgos, ni un Plan de Continuidad de Negocios, ni tampoco Planes para Crisis…

Entonces, un día, un huracán empezó a dirigirse a la zona. Hubo mucha presión para prepararse y minimizar los daños y una gran preocupación por la Salud y la Seguridad de los trabajadores y pasajeros. Se decidió detener los trenes y ponerlos a buen recaudo para usarlos después.

Dónde ponerlos no se puso siquiera en duda. ¡Había un refugio! Nadie se acordó de las desagradables descripciones de los estudios “generales”. Una vez que los trenes estén en el refugio, estarán seguros, sin lugar a dudas. Sandy dio una elocuente demostración de lo contrario un par de días más tarde.

2. Cómo podrían haber sido las cosas.

Favor de rebobinar la cinta hasta la sección anterior… Avance hasta lo de “Nadie escuchó”. Justo ahí reemplace con lo que sigue. Se evaluaron los riesgos, integrándolos a una planificación estratégica de la red para crear valor.

Se prepararon y pusieron a prueba los Planes de Crisis y un Plan de Continuidad de Negocios (por medio de simulacros), y se mejoró la resistencia del sistema, incluyendo las interdependencias a otras infraestructuras críticas.

ORE Risk Assessment, Business Continuity Plan, Crisis Plans

Evaluación de Riesgos ORE, Plan de Continuidad de Negocios, Planes

Entonces, un día, un huracán empezó a dirigirse a la zona.

Hubo mucha presión para prepararse y minimizar los daños y una gran preocupación por la Salud y la Seguridad de los trabajadores y pasajeros. Se pusieron en marcha todos los Procedimientos, Planes y Mitigaciones.Dónde poner los trenes no se puso siquiera en duda:había un plan racional para minimizar los riesgos.

La situación no solo estuvo bien documentada, sino que además los gerentes tuvieron una visión muy clara de la situación multifacética a través de un puesto de mando ORE (Optimum Risk Estimates, Estimaciones óptimas de riesgo).

Sandy pasó de largo y decidió buscar venganza en otra parte.

 Translated by Ana María Zúniga from AZ World Translation and Interpretation 

 

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.

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