RISK MANAGEMENT – 24 – Design Implementation Processes

Post 26 -by Gautam Shah

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Risks and Human Endeavours : A great deal is expected from human endeavours set up with expense of resources, effort and time, be it entities, events or organizations. Human endeavours, when fail to take off, perform adequately, or satisfy its stack-holders, pose risk.

Endeavours fail on two counts : Human endeavours do not work for the conceived functions or the original functions do not remain relevant.

● For the first case, the fault may be that it was not adequately conceived or the functions were not properly defined.

● In the second case, between the planning and operations phase the circumstances change and it is not feasible to recast the programme.

Anthropogenic hazards are those hazards caused directly or indirectly by human action or inaction.

train_wreck_at_montparnasse_1895
Train wreck at Montparnasse station at place de Rennes side (now place du 18 Juin 1940) Paris France 1895 > Wikipedia image

What is a Risk? Risk is any set of such conditions that adversely affect a human endeavour. One can avoid, manage or accommodate, risks to a limited extent, but beyond these, the effects of risks have to be compensated, replaced or transformed in such a way, that there is a sense of equilibrium. One may not be able to reestablish the lost entity, reenact the missed event or resurrect the dead organization, but one may, indemnify against such losses.

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Union Carbide Plant gas leak at Bhopal India > Wikipedia image by Simone.lippi at it.wikipedia 

Defining Risks : ‘Risk is any factor that affects an activity or object, denoting a likely negative impact from some present process or future event’. Contrary to this some believe risks often have an advantage, like a lottery that may provide unusually large gain for a very small loss. Risk if negative is valued against the scale of loss and frequency of occurrence.

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Irish Potato Famine Memorial in Dublin > Wikipedia image by AlanMc on en.wikipedia

Types of Risks-I : Purchasing a lottery ticket is a risky investment with a high chance of no return and a small chance of a very high return. But since the amount lost is small and the gain very large, lots of people go for it. In contrast investing money in a company involves a large investment, so we take care to find out the identity of the company. A government bond though provides a small interest is considered less risky. In finance the greater the risk, higher is the potential return.

Types of Risks-II : Risks in personal health are reduced by preventive actions, like avoiding illness causing situations. Secondary prevention can come by early diagnosis and perhaps preventive regimen and treatment. Third level of action is directed in terminating negative effects of an already established disease by restoring function and reducing disease-related complications.

Categories of Risks

● Natural Risks: These originate from outside the system due to the context or changes in the environment. This could be perceived as an advantage in a system which can be isolated with a barrier. Some interactive systems must flourish with the environment have to ‘manage’ the environment.

● Circumstantial failures: These are accidental, i.e. unpredictable in scale (size) and time of occurrence. The circumstances, within which an endeavour takes place is continuously variable and unpredictable, so is perceived as a natural failure.

● Intentional Risks: These are due to avoidable or malicious acts. Avoidable acts include adventurism, neglect, destructive tendencies etc.

● Man-made failures: These occur due to faults in conception, observance or operations of the system. These can be set right by foresight, flexibility of approach (such as adopting ‘open system or open-ended architecture’), provisions of additional capacities, and by including escape or safety procedures.

Man-Made Failures occur, because:

1. System is not designed or adequately equipped (technically) to serve the nominally expected functions.

2. System is required to serve functions for which it is not designed and there no processes to regulate the overuse, misuse or under or non-use.

3. System has a rigid design, structure or setup regimen which prevents corrections or improvisations.

4. System is so liberal (loosely or irregularly structured) that a coordinated emergency action plan cannot be enforced.

640px-u-s-_air_force_personnel_unload_relief_supplies_destined_for_earthquake_victims_in_india_from_a_c-5a_galaxy_at_andersen_air_force_base2c_guam
Relief supplies for Earthquake disaster for Jan 26, 2001, Gujarat, India by C-17 Globemaster III  aircraft > Wikipedia image

What is a Risk Management System? When endeavours fail to perform then a fresh effort is required. Risk management deals with such eventualities. It determines the chances of an occurrence, de-intensify the affectations, and create means to mitigate the losses.

risk-management

Types of Risks

● Determinable Risks are predictable and suitable risk avoidance measures can take care of it. Certain factors trigger such risks, so observance and reportage mechanisms for such conditions can help avoid it.

● Indeterminable Risks have very low probability, or the twin aspects such as scale of affectation and pattern of occurrence are indeterminable. The damage and suffering cannot be predicted. Its mitigation is left to the concerned age and society.

● Probable Risks are predictable but within limits of probability. Here the trigger factors are not easily definable. Historical experiences show us what could be the scale of affectation and pattern of occurrence. Affectation can be spatially isolated and temporally limited, by design of the joints, connections, and by spacing and distancing. The occurrence schedules may be matched with a timed action, or even planned dormancy. Additional capacities (factor of safety, safe margins), are provided for such contingencies.

RISK Management Standard ISO 31000

Risk management processes are applied to project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, and public health and safety. Risk Management has been recognized as a generic standard under series ISO 31000.

  • ISO 31000:2009 -Principles and Guidelines on Implementation
  • ISO/IEC 31010:2009 -Risk Management -Risk Assessment Techniques
  • ISO Guide 73:2009 -Risk Management -Vocabulary
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End to End Risk Management Process ISO 31000 > Wikipedia image by Stuart G Hamilton

Managing the Risks : One can avoid, manage or accommodate risks to a limited extent. Beyond these, the effects of risks have to be compensated, replaced or transformed in such a way, that there is a sense of equilibrium. One may not be able ‘to reestablish the lost entity, reenact the missed event, or resurrect the dead system’, but one may indemnify against such losses.

indemnity

Dorfman 1997 prescribes four way strategies for managing the risks:

  • Tolerate (retain),
  • Treat (mitigate),
  • Terminate (eliminate),
  • Transfer (buy insurance, hedge).

Ideal use of these strategies may not be possible as some of them may involve trade offs that are not acceptable to the organization or person making the risk management decisions. Another source (US Department of Defense) calls this ACAT, for

  • Accept,
  • Control,
  • Avoid,
  • Transfer.

Risk Avoidance is just one important aspect of risk management. It means ‘controlling all detrimental activities’. But all risks cannot be avoided and thereby managed. Some risks are delayed, hastened, diverted, or even embraced. Avoiding risks also means losing out a very high gain potential situation. Many take a ‘calculated plunge’ for a small or rare risk.

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Hierarchy of Hazard controls > Wikipedia image by National Institute for Occupational Safety and Health

Risks in Business : In business taking on a client (a new project) does not always translate into extra income. Because a new project may entail dealing with an unusual or odd client or requiring additional resources and it may mean less or no profit for the organization. Similarly taking on a prestigious assignment is a challenge, but the outlay on handling could be far more in comparison to a nominal project. Another example would be procuring a non standard product or system (without a full guarantee and warrantees) for an acute need, could mean greater cost of corrective measures.

Ways of managing Risks

● Risk Reduction, involves strategies to reduce the severity of the loss. In buildings this include fire escapes, controlled use of combustible materials, installation of sprinklers with fire detectors, etc. The cost of such risk reduction systems are checked in terms of what it can save or prevent.

● Risk Retention, means the person or the party bears the loss resulting out of an event. This is a viable strategy for small risks where the cost of insuring and getting compensation would be greater, like in minor illness or injuries. All risks that are not avoided or transferred are presumed to be bourn or retained by the person or party.

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Risk transfer through Leaf springs > Wikipedia image

● Risk Transfer to another party by contract or by hedging (as in betting). Insurance is one type of risk transfer that uses contracts. Risks are transferred to another party, schedule to other time, shifted to different / separate location. The pace of transfer is often hastened or slowed, and the affectations are concentrated or spread. Risk of injury due to local impact (and so intensive) are spread to a wider area by means such as a helmet, a car air-bag, knee pad, a seat belt, etc. Impact buffers and such stopper mechanisms absorb the impact or divert it.

Risk Synergy Systems exist in some biological systems, pliant compositions and pseudo intelligent entities (e.g. some equipment with fuzzy logic and neural networking). These have capacity to self regulate or organize to accommodate the conditions of change. Such systems are inherently restricted or finite in capacity. Their risk sensing and accommodative functionality are available so long as required energy and other inputs are available. Designers strive to emulate such systems by integrating the risk handling features (such as: gas and fire detectors, auto sprinklers, auto open-shut opening systems, burglar alarms, earth quake and heavy wind load absorbers, etc.), into their creations.

Strategies for Handling Risks

risks-managed

Prioritization in Risk Management : A process of prioritization has many facets. Saving lives is given a higher priority then salvaging goods and equipments. Evacuation of human beings has greatest priority then saving a structure. But many countries feel sacrificing a human life may be unavoidable then surrender to a terrorist hostage situation. Risks with greater probability, higher monetary loss (of replacement), are handled first.

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Saving lives is given higher priority than salvaging goods and equipments > Wikipedia image by Jacoplane

Cost aspects of Risks : Risk management include equating the cost of controlling the risk versus the cost of compensating the losses. It also includes the evaluating the cost of recovery against the expense for compensation. Justifying the cost of being prepared over a long duration for an event that has low probability.

Economics of Risk : Risks result into losses, delays, setbacks and deaths (humans, flora-fauna and diffusion or termination of the systems). Ideally, the expenditure on risk management must be minimized, while maximizing the risk-safe zones and periods (MTF =meantime between failures). Yet, sometimes risks are indulged into, or ignored in view of the benefits (often called a gamble or calculated risks).

Commercial Risks : In the commercial world risks are of two types: Inherent risks are part of any business operation, and affect the profits or opportunities negatively. Incidental risks are natural, and not always part of, or due to the business activity.

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Wikipedia -NASA image

Intrinsic and Extrinsic Risks in Projects : Projects are work entities to accomplish certain goals, with a set start, process of run or operation and end or termination of the endeavour. Any condition that does not allow these objectives being achieved, is a risk. The risk could be intrinsic or extrinsic. The intrinsic risks could be handled through good design, management, and modalities of accommodation. The origins of extrinsic risks, are beyond the organization, so their nature, schedule, frequency of occurrence and scale of affectation must be identified.

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Shanghai Cloud Nine shopping Mall – vacant store – China’s real estate failures > Wikipedia image by WiNG

Risks in Projects : Risks in projects are identified by enacting various scenarios (combination of various possibilities occurring together). The scenario, if risky is further probed to assess its potential severity and extent of loss. These two quantities are simple to measure, and then set as the value of the damaged component. The probability of occurrence, however, is difficult or impossible to assess as an event, mainly due to lack of its history.

History of Risk or Rate of Occurrence : The fundamental difficulty in risk assessment is determining the rate of occurrence, since in many instances the statistical information is unavailable. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for immaterial assets (with emotional value). Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of consideration.

Cumulative effect of Risk Measures : Provisions for various risks tend to have a cumulative effect. For example a building foundation is designed to carry the load of the building, with additional provisions for an earth quake, hurricanes, temporary loadings, etc., but not all of these are likely to occur simultaneously. Similarly we provide extra for individual considerations: loads calculations, strength of cement concrete and steel bars. These, if not properly attuned, these can add up to substantial over spending. All provisions for risks need a careful working for the individual, as well as cumulative effect.

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Collapsed portion of Mississippi Bridge 2007 > Wikipedia image by Kevin Rofidal US Coast Guard

Design Projects and Risks : Design Projects fail to satisfy a client, or are commercial losers for a variety of reasons like, shift in taste, changes in market demands, arrival of new technologies, prices, etc. Many of these factors begin to be affective when projects’ execution is long drawn or delayed. Finishing of projects on schedule, eases many such problems. Projects become risky due to poor definition of the project requirements, and lack of complete understanding and acceptance of the project profile report by the client. Interior Design projects often fail due to ironclad specifications, which may not allow correction or improvisation during execution. The risks on this count can be taken care of, for example by keeping ‘open certain windows’ for later formulation or decision. These are often done by hiring other agencies for work that is likely to occur in different time and space.

A Designer must be extremely careful of individual warrantee and guarantee that when read as a combination often cancels out each other. Complex Interior Design projects formed of several systems (offered by equally varied vendors), have conflicting provisions.

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Governors of the Wine merchants’ Guild sought methods to minimize risks since early times > Wikipedia – ART work by Ferdinand Bol (1616-1680)

Insurance : Insurance is a risk management investment. By paying a small sum, the premium, risks are conditionally insured. The compensation is invariably for providing an equivalent product or commercial value (at the time of loss or more commonly the depreciated value of the original or cost of replacement) in monetary terms. Insurance is an indemnity against loss. It is a way of contracting out of a risk. A person, company, an organization, or government, pay a small amount -premium, to protect own self from a potential large loss. In case of risk insurance, however, only risks that are stated distinctly in the contract are included for premium compensation, all other risks (including unknown and indeterminable ones) are presumed to be bourn by the party (insurer).

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Lloyd’s coffee house London was the first Marine Insurance Company > Wikipedia image

Other losses of Risks : Emotional and such other associated considerations (nose of an actress) are often insured, but by determining a fixed value for it, before a contract is made. Value for the loss of life, is an example of similar nature. Loss of opportunity such as earning, business, etc. due to sickness, injury, strikes, riots, war, etc. can also be insured. Loss due to certain happenings like flood, riot, calamity, malicious damage by any person, devaluation of currency, sudden drop or rise in prices, defaulted business services, blames, lawsuit expenses, fines, compensation payments, etc. can be provisioned through insurance.

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High value horses may be insured > Wikipedia image by ThebluZebra at En.wikipedia

Distribution of Risks by Insurance company : A typical insurance company working on life insurance has a large clientele consisting of people of various age, vocation, etc. Of these only few will die, in a year, for which compensation is paid. The premium rates are based on historical data, such life expectancy, rate of natural deaths and caused by accident, etc. An actuary is an expert who compiles and analysis’ statistics in order to calculate insurance risks and premiums.

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Geographical distribution of earthquake risk > Wikipedia image by CC-by-sa PlaneMad/ Wikipedia (Link https://commons.wikimedia.org/wiki/File:India_earthquake_zone_map_en.svg)

 Reinsurance by Insurance Companies : An insurance company can be in a problem zone, if in one locality many people were to die simultaneously. In such an eventuality, the sudden demand for compensation can be very difficult to meet. To provide for such an eventuality, the insurance company re-insures itself with another company that perhaps has no such liability in the same geographic region. This reinsurance strategy spreads the risks, over time and space.

640px-fema_-_14947_-_photograph_by_jocelyn_augustino_taken_on_08-30-2005_in_louisiana
Hurricane Katrina storm and floods caused widespread damage at a location / Insurance Cos save themselves from such eventualities by Re-insuring > Wikipedia image by Jocelyn Augustino

Geographical affectations of Collective Risks : The insurance company operates on the premise that not all risks happen simultaneously and to all the insurers. Insurance companies plan their business in such a way that in comparison to their premium income the amount to be paid out for compensation is less, resulting in meeting the administrative expenses of business and a reasonable profit.

Often for a very large risk like insurance for nuclear power plant or a space craft, the insurance company or some other commercial entity acts as an underwriter. It may not on its own insure any risk personally, but as a professional body with very strict rules of conduct, manages everything about insurance and takes the first liability. It than, divides and transfers the risk, to several insurance companies by sharing the earned premium.

types-of-insurance

24 RISK MANAGEMENT –part of the lecture series DESIGN IMPLEMENTATION PROCESSES

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Gautam Shah

Former adjunct faculty, Faculty of Design CEPT University, Ahmedabad and Consultant Designer

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