Change and Opportunity

Change brings risk.  Wherever you find change – change in products, processes, personnel, systems, regulation, laws, markets, environments, whatever, – you will find risk.  And those risks to your existing products, processes, etc, need to be understood and managed.

Where we do consider change-driven risks, we normally focus on preventing or treating the downside risk – answering the “what could go wrong here?” question.

But change also brings opportunity to do things differently, to disrupt the status quo, to innovate – i.e. to exploit upside risk.

At the 1968 Olympics in Mexico City, a little known 21-year old engineering student from Portland, Oregon – someone considered to be an average athlete – stepped up to take the high jump, and shocked the watching world by jumping over the bar backwards. Not only that, but he won the gold medal and set an Olympic world record as well.  Dick Fosbury had invented the “Fosbury Flop” and leapt from anonymity to being considered one of the most influential athletes in history.  Every high jump gold medal winner since then has used Fosbury’s technique.

Traditionally, high jump pits had been sand or sawdust, so you really wanted to land on your feet on the other side.  Then, foam mats were introduced, and Fosbury’s high school was one of the first to introduce them.  They meant that you wouldn’t get hurt if you landed on your back or side. Fosbury then started experimenting, and he said that the style just evolved within him.  But it was the environmental change (the introduction of foam mats) that allowed the innovation to happen.

Risk management is about managing things that affect achievement of objectives, and that includes exploiting the upside.  And change brings that opportunity.

 

 Source: Wikipedia, mayooshin.com

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Understanding Gaps

On a cold winter’s morning in Saint Petersburg, the University Professor of General Chemistry was waiting for a sleigh to take him to the railway station.

Dmitri Mendeleev had been working on a chemistry text book and was stuck on how to categorise the elements.  This was 1869; Mancunian John Dalton had already come up with the concept of the atom, and atomic weight; and Swede Jacob Berzelius had established one- or two-letter symbols for the elements and how to create formulae for compounds (e.g. salt is NaCl, water is H₂O, etc).

Mendeleev was an inveterate player of Patience, the card game where you group the cards by suit and in order of value.  As he waited for his sleigh that February Monday morning, he remembered a dream where he had seen the elements grouped according to their shared properties, like suits of cards, and ordered by their atomic weight, as if in a game of Patience.  He then created cards with the symbols of the elements and their atomic weights and ordered them as he had seen in the dream.  At the time, there were only 63 known elements, but Mendeleev realised that he had to leave gaps to make the model work. So, he left those gaps, guessing that there must be elements there, and describing their properties.  By and large, his predictions have been fulfilled, and the result is the Periodic Table we now have.

A risk universe does a similar thing.  It is a table of risks listed by category.  Usually the risks are generic (e.g. people), and in performing a risk assessment, you decide whether that risk type applies or not, and then you specify it to the level of  detail relevant to your area of assessment.  The table works as a completeness check: it helps you work out if there are types of risks that are missing, that you have not thought of.  It can also let you order your final table of risks by various types of measurement, within each category.  Those measurements may include impact, proximity (as indicated by data, KRIs,etc), capability (controls/mitigants), capacity, how many other risks it is related to, environmental drivers, etc, or any aggregation of those measures.  The result is a table that explains the world of risk in relation to the company, division, function or process you are assessing in a similar way to how the periodic table explains the world of chemical elements.

 Source: The Economist magazine (on the 150th anniversary of the creation of the periodic table)

 

Blindness to Risk

An experiment was run at Harvard University that has been repeated frequently since.  Spectators at a basketball game were asked to maintain a count of the number of successful passes one of the teams made.  In the middle of the game, a person dressed in a gorilla suit ran on to the court, stood in the middle, beat their chest, then ran off.  When spectators were asked if anything unusual had occurred during the game, half of them had not seen the gorilla.  When they were shown the video, some of them claimed that the video must have been doctored.  This phenomenon is known as “inattentional blindness” – when you are focusing hard on something (here, counting the number of passes), you can completely miss a dramatic event occurring before your eyes.

On the night of 29^th December 1972, Eastern Air Lines flight 401 flew from JFK airport, New York, to Miami.  As it came in to land, the undercarriage was lowered but the light confirming the nose-wheel was locked did not come on, so the pilot requested to circle while they sorted out the problem.  They put the plane on auto-pilot and both the pilot and co-pilot focused on the light.  They removed it, blew the dust off it, stuck it back in, but in the meantime, they had inadvertently disengaged the auto-pilot.  The plane was losing height fast, the altitude alarm sounded and the altimeter showed rapid loss of height, but the pilot and co-pilot neither heard the alarm (which can be clearly heard on the black-box recording) nor saw the altimeter dial dropping fast, despite being within their line of sight. One of the last things heard on the recording is the co-pilot saying “we’re still at 2,000 feet, right?”. Seconds later, the plane crashed into the Everglades, killing 101 people.  The light bulb was faulty and the nose wheel was correctly in position.  The plane crashed as a result of the failure of a $12 light bulb.

Flight crew training has since been adapted to ensure that pilot and co-pilot duties are segregated.

Focusing on one risk can mean that you become blind to other risks that may require attention before they do you serious harm.

 Source: “The Luck Factor” – Richard Wiseman, “Bounce” – Matthew Syed, Wikipedia

Failure to Imagine Risk

In 2011, Texas governor Rick Perry entered the race to be Republican candidate for President of the U.S.A.  As part of his programme, he said that he would eliminate three government departments.  When he was asked to name them, he said: “Commerce, Education… and…” but could not remember the third.  Later, he informed the press that the third one was Energy.

The U.S Department of Energy spends about half of its $30bn annual budget on maintaining and guarding the nuclear arsenal.  That includes hunting down weapons-grade plutonium and uranium at loose in the world.  Between 2010 and 2018, they recovered enough material to make 160 nuclear bombs.

When the presidency changes, a transition team moves into every government department on the day after the election (consequently, both candidates have to have a full transition team ready in case they win).  The transition team then has until the inauguration to get up and running as on that day, all the people who have been in the top stratum of  jobs in each department simply leave.

On the day after the Trump election victory, staff in the Department of Energy waited for the transition team to arrive.  Nobody came.  The same happened in every government department.  Nobody turned up at Energy for a month, and then didn’t stay long.  By the following June, (one eighth of the way through the presidential term) only one person was in place at the Department of Energy, the new head – Rick Perry.

Perry admitted at his congressional appointment hearing that when he had vowed to scrap the department he hadn’t really known what it did, and that since then he had had meetings with the previous head (who was a nuclear physicist and who was the lead negotiator on the Iran nuclear deal).  When staff were asked how many hours Perry had spent with the outgoing head, the answer was that the question was using the wrong unit of account – it wasn’t hours, it was minutes.

The risk in all this is that we do not know what risks are being run by not having a proper transition (all previous transitions between rival parties have followed the process and gone very smoothly), and by having people in charge of government departments who do not necessarily know what they are doing, or who are not terribly interested; and as author Michael Lewis concludes: “It’s what you fail to imagine that will kill you.”

 Source: “The Fifth Risk” – Michael Lewis

Risks as Big as your Appetite

Jaguar Land Rover is Britain’s largest car-maker.  The Indian conglomerate Tata bought it from Ford in 2008 and it was initially very successful.  However, it has made losses in four of the last five quarters, has written down £3.1bn (about one-third the company’s value), and is cutting 4,500 jobs in the UK.

A few years ago the CEO reminded analysts that as a smaller company than most manufacturers (about a quarter the size of BMW, and tiny in comparison to the likes of Toyota and GM), it gets hit sooner and harder by global trends.  Volvo, which was also sold by Ford (to Chinese company, Geely) and which is a similar size,  says the outlook is tough, but it has not suffered in the same way as JLR.

JLR’s strategy has been to take on BMW across the whole of the range, with several models in each price bracket e.g the Jaguar F-Pace SUV, the Range Rover Evoque and the Land Rover Discovery Sport.  The Range Rover Velar similarly competes with their own, lower-end Land Rover Discovery and caused sales of the Discovery to fall 40%

It also had a dependency on diesel and on China; both of which have been blamed for JLR’s current situation.  And whilst all car manufacturers have been hit by the slowdown in Chinese growth, JLR’s sales were hit much harder and fell by half in the last quarter, something that was put down to poor management.

Whilst Volvo exploits a niche with a limited range of models, JLR has made big bets on a multi-brand range against very established competition.  Clearly, it has had the risk appetite to do this; but if you choose to make big bets, you have to fully understand the risks (e.g. dependencies, economic outlook, cannibalisation across brands), otherwise you can lose big, too.

Source: Financial Times website.

The Yin and Yang of Risk Management

This week, we moved into the Chinese Year of the Earth Pig.  Traditionally, it is meant to bring ease and affluence (..we’ll see).

One fundamental concept of Chinese philosophy, going back 2,500 years, is the principle of Yin and Yang.  The idea is that for everything, there is an equal and opposite thing, such as male-female, dark-light, good-evil, young-old.  Thus for every disease, there is a cure (you just have to find it); for every poison, an antidote; for every risk, a control.

Obviously the yin for your yang may not be easy to find.  But sometimes, it can be something quite simple.  It is just not realised or known.  Here are a few examples:

Quinine – In 1623, Pope Urban VIII was elected by a conclave of cardinals.  He contracted malaria almost immediately and was unable to exercise his duties for several months. Eight of the cardinals who elected him died of the disease.  This was a time of missionaries going out to the newly established European colonies, and the pope charged them with finding medicines.  The Jesuits in South America noticed that the Quechua people used an infusion of the bark of a certain tree (the cinchona tree) to treat chills.  The bark contained quinine which is still the main cure for malaria.  In 1658, Oliver Cromwell – Lord Protector of England, Scotland and Ireland – died of malaria.  It is not clear (there are rival versions of this bit of history) whether he, a puritan, refused quinine because it was a Jesuit product, or whether the Jesuits refused to let him have it.

Flaxseed – A study by the Gates Foundation covering 50 countries and 100,000 data sources found the highest risk-of-death factor in the world to be high blood pressure.  A double blind trial (one where neither the subject nor the person administering it know whether they are giving the placebo or the test product), documented in the journal Hypertension, found that 25g of ground flaxseed a day reduced the risk of stroke by 46%.  In tests on prostate cancer patients, three tablespoons of ground flaxseed a day stopped the proliferation of cancer cells.  These results are reported in Michael Greger’s book “How Not to Die”.

Mint – It is becoming more common for people to have waste food composters in their gardens.  Yet some people do not get them on the grounds that they attract rats.  According to the Royal Horticultural Society, the easiest way to avoid rats (other than not having a composter), is to grow mint around the composter as rats do not like the smell of mint.

So in searching for a control, firstly consider whether there is a simple control that could be implemented… don’t over-complicate.

Sources: “How Not to Die – Michael Greger, MD; Royal Horticultural Society website; Wikipedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Know your dependencies

How could a flood in Thailand stop car production in Japan and slow down laptop sales in America?

Well, a third of the world’s hard drives are made in the Bangkok area and some key auto parts suppliers are in the same area.

A flood hit Bangkok in 2011 and lasted for two months.

As a result, Toyota had to halt production in Japan (at a cost of $2.5bn) and Ford had to stop producing Fiestas.  Apple and Dell laptop production slowed to a very low level, and supplies to customers were rationed right through 2012.

None of those companies realised the criticality of these dependencies, nor, apparently, that Bangkok was an area prone to flooding, which it is, owing to its tropical savannah climate and big rivers.

Since then, Dell has set about performing business continuity assessments of all its suppliers and, as a consequence, started diversifying its sources of supply.

 

Source: “Mastering Catastrophic Risk” – Howard Kunreuther and Michael Useem

The Best Laid Plans…

“Wee, sleekit, cow’rin, tim’rous beastie” is the opening line of Robert Burns’ poem To a Mouse, on turning up her Nest with the Plough, November 1785. Burns, “the Ploughman Poet”, although actually a pretty lousy farmer, wrote poetry and songs in Lallands, the dialect of the Scottish Lowlands. That opening line addresses the mouse as “Small, sleek, cowering, fearful creature..”.

In the poem, he empathises with a mouse whose nest he has inadvertently destroyed whilst ploughing his field.  The mouse had worked hard to build the nest to see her through the winter, and suddenly and unexpectedly, it is wrecked, with no time to build another before winter sets in.  For all her diligence and preparation, the mouse is left homeless: “the best laid schemes o’ mice an’ men gang oft a-gley” (the best laid plans of mice and men often go wrong) – catastrophic events can and do happen.

The poet then considers that the mouse is lucky in that it only deals with the present time (lucky, despite being destitute), whereas humans may lament the past and dread the future.

He concludes the poem with the line:  “An’ forward, tho’ I canna see, I guess an’ fear”.

Guessing and fearing is pretty much where the 18^th century was with risk management, and in some cases now, too…

Sources: The Complete Works of Robert Burns, Wikipedia

And by the way, tonight is Burns Night, commemorating his birth on 25 January 1759, enjoy yer haggis…

The China Dependency

Dependency risk is where you rely on a person, a process, a product, a supplier, a market, or any other factor, to a very high degree such that failure or disappearance of that person, process, etc, or simply a problem for that factor,  can have a serious impact on your business.

Recently, Apple, Samsung, VW, and Jaguar LandRover have warned markets that they are being hit by a slow-down in China (the largest smartphone market in the world and the largest car market in the world), partly attributable to the trade war with the U.S.  China has a population of 1.4bn and accounts for 16% of the global economy; however it has also accounted for 30% of worldwide growth over the past decade.  A slow-down in China has been shown to have an immediate impact on the prospects of some of the biggest international brands.

The same occurs for countries.  Australia is the most China-dependent country in the developed world (it’s North Korea in the developing world) with 35% of its exports going to China.  Coal, metals, minerals, wine, tourism, and education (receiving students from China is worth A$ 9bn to the Australian economy each year) are big sales from Oz to the People’s Republic.  But suddenly, fast-expanding overseas tourism by Chinese people is reversing, and the same is happening with studying abroad. So, Australia is starting to feel the pinch as China dependency risk kicks in.

The same may not be true for the source of the dependency.  Whilst Western companies are subject to short-term share-price fluctuations that may affect their future, and the economic prospects of the governments of countries can determine the longevity of the parties in power, China follows a very long-term strategy (e.g. to be number 1 in scientific research, to be number 1 in electric cars, to be number 1 in fuel cell technology) that enables them to ride out these cycles.

Sources:    The Financial Times, Bloomberg

Contraindications

Invasive species often pose critical risks to native flora and fauna.  Animals in New Zealand are particularly susceptible as they evolved in an environment without mammals (except for a couple of species of bat).  Local bird and reptile populations were then devastated by rats that arrived with the Maori colonisation in the 13^thcentury, and by stoats and possums that came with the European settlers.  Risk mitigations, particularly environmental ones can sometimes have side effects or raise protests, and the benefits must then be weighed against the contraindications.

More than 800 native species have now been pushed to the brink of extinction as a result of these invasive species, so the New Zealand Department of Conservation (DOC) has been trying to save them by dropping pellets laced with 1080 (Sodium Fluoroacetate) from helicopters on to government-owned forests.  1080 is a highly effective poison that does not affect native species, and which biodegrades and therefore does not seep into the water supply. 1080 is particularly effective against possums which transmit bovine tuberculosis and of which there are around 30 million in NZ.

Despite the beginnings of recovery of bird populations, including the iconic kiwi, there have been widespread and sometimes violent protests against these actions.  Hunters protest that deer may be killed, and some animal lovers object to the mass killing of any animal.  Also, in spite of assurances, some people believe that the poison will get into  the water supply (there has been water pollution from intensive dairy farming but not from 1080).

Protesters have sabotaged DOC vehicles and also threatened to put 1080 into baby milk formula on sale in supermarkets.  Photos of dead kiwis have been circulated on social media but later proven that the kiwis had been killed by dogs.  The issue now for the NZ government is whether the side-effects of the mitigation are worth the overall benefits of the scheme, or whether they should re-think the mitigation.

Sources:    The Economist magazine, Wikipedia