risk mgmt v1 0c
DESCRIPTION
Summary of the principal issues of risk managementTRANSCRIPT
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Risk managementA management perspective
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Plan
What is risk ?
Risk Governance
Risk management
Risk and culture
Risk taxonomy
Risk Metrics
Wrap-up
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IntroductionWhat is risk ?
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A definition of risk
Pb(event) x impact
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Risk has two meanings
In English, Risk is an umbrella term, with two varieties:
opportunity which is a risk with positive effects
threat which is a risk with negative effects
Hillson(2001)mercredi 28 avril 2010
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Risk is not uncertainty
Risk refers to situations where the decision-maker can assign mathematical probabilities to the randomness which he is faced with.
Uncertainty refers to situations when this randomness "cannot" be expressed in terms of specific mathematical probabilities.
Knight, Frank H. (1921)mercredi 28 avril 2010
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Risk and uncertainty
The terms risk and uncertainty have become interchangeable, and one can often be found in the description of the other.
Beck(1986)
Risk and uncertainty will be defined and used accordingly as separate issues of the same complex phenomena, that of hazard management.
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Risk is formal
Risk can be considered as a systematic way of dealing with hazards.
If it is assumed that there is uncertainty associated with any prediction of a hazard occurring, then there is only uncertainty because there is only ever a prediction of the likely occurrence.
Beck(1986)mercredi 28 avril 2010
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Uncertainty is not risk
By uncertain knowledge, (...) I do not mean merely to distinguish what is known for certain from what is only probable.
uncertainty is present when there is no scientific basis on which to form any calculable probability whatever.
We simply do not know.
Keynes(1937)mercredi 28 avril 2010
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Risk and probability
The very assignment of numerical probabilities - even if subjective - implies that it represents choice under "risk"
These probabilities are merely expressions of what is ultimately amorphous belief and thus may seem more like "uncertainty".
Savage(1954)mercredi 28 avril 2010
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Risk is about outcomes
Risk is the probability that an event will occur.
In epidemiology, it is most often used to express the probability that a particular outcome will occur following a particular exposure.
Last JM, (2001)mercredi 28 avril 2010
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What is the problem ?
Risk is an old concept, classically measured as a product of outcome, usually negative, and a measure of uncertainty, such as probability, balancing bad, but unlikely, outcomes with less bad but more frequent ones.
The problems arise in defining
what one means by an outcome and
how one assesses the probabilities.
Hudson(2003)mercredi 28 avril 2010
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time 0
Util
ity Risk
management RISK
Risk Management
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A more complete definition
R! (E,A,!) "
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E : element at risk
Element (asset, process, system, etc.) or group of elements that have an expected utility (u) for a given period of time (Δt) in a finite space (s)
A : Hazard (real, foreseeable or perceived)
Event or sequence of events resulting from the exploitation of a vulnerability (ψ) of an element at risk (E) which can cause a dammage (δ) which results in a reduction of the expected utility (u) for a given period of time (Δt) in a finite space (s)
ψ : vulnerability
Fragility (relative) of an element at risk (E) to a hazard (A)
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θ : resilience
Capacity of an element at risk (E) to overcome a hazard (A) by minimizing damages (δ) or by using adversity as a catalyst for improvement. It is linked to organisational maturity
δ: damage (real, foreseen or perceived)
Reduction of the expected utility (u) of an element at risk (E) by a hazard (A)
t : time
s: space
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The risk triangle
Hazard or thre at
Vuln
e rab
i l it y
Damage or impact
Risk(E,t,s)
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Risk governanceA management perspective
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Ecosystemic view
http://www.neok12.com/php/watch.php?
• A system formed by an ecological community and its environment that functions as a unit.
• The interconnectedness of organisms (plants, animals, microbes) with each other and their environment.
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Governance structure
Executive
Strategic
Tactical
Operational
Corporate directors
Professionals
Governance comitee
Management comitee
supports
directs
manages
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Role of the Board of directors
Management Stockholders Employees
Board of directors
Lenders SuppliersOther
stakeholders
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Roles and responsibilities
Mission statement and values
Sets culture and normative framework
Arbitrage
Exercises authority
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Subsidiarity
Responsability for actions must be alloted to the smallest possible entity that can resolve it
Decision making as close as possible to the end-user or customer
Act locally: responsabilize the actors
Empower local competencies and decentralize
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Risk governanceBasic ethical principles
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Due diligence
Organisations need to demonstrate that they are being diligent
They need to be able to demonstrate that they have in place formal processes to ensure that risks are known and managed
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Precaution
When there is the possibility, event if unlikely, that hazards may cause grave or irreversible dammages, the absence of absolute scientific certitude can not become a pretext to avoid taking actions to prevent the degredation of the situation
Contrary to rational theory, precausion justifies taking decisions in cases of incomplete information to avoid irreversable damages. It justifies non optimal solutions that may satisfy all parties (minimum regrets)
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Continuous improvementDeming’s wheell approachRecurrence feedback loopsEvolution of solutions aligned withthe availability of ressources
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Evaluation
Must determine, a priori:ObjectivesFollow-up parametersControl and corrective action plansA space for all stakeholders to review information
Finality:Create mecanisms that allow the conversion of data into usefull planning information
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Risk ManagementFormal processes
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IPMa process
Identify risks
Prioritize
Mobiize ressources
Audit
IPMamercredi 28 avril 2010
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Qualitative or Quantitative ?
In the absence of solid historical data, all data is subjective.
Sources of historical data:
Past events, hazards and incidents in the organization
Data from similar organizations
Regulatory bodies
Gartner group, IDC, Forester Research and litterature
Standards (ITU, ISO, IEEE)
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Scenario based risk mgmt
Using scenarios is the most ‘human sensitive’ approach to risk management
it’s simpler to get people to tell you a story
What if ...
Then ...
This would result in ...
But, we could do ... to prevent it or to reduce it’s impacts.
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Incidents are central
Using past incidents is a key to risk management
Quantitative data finds it’s source in historical data
It is a chance to improve
individuals has to feel that they can, and must, report incidents
Management has to support this
A risk registry, or journal, serves this purpose
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IPM process
Identify
Hazards
Vulnerabilities
Damages
Prioritize
Mobilize ressources
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Cognitive processesThe cognitive operations of individual decision makers involved on decisions about risk are (in order) :
Identify the scenarios to consider
Predict the consequences for each scenario and estimate their likelyhood
Identify the variables susceptible to influence utility and ajust them to account for the context
Evaluate the probabilities to assign to contexts that have been retained
Apply a decisional strategy
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Transferrisk
Avoidrisk
Acceptrisk
Mitigaterisk
D a m a g e s
Likelihood
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Transferrisk Avoid
risk
Acceptrisk Mitigate
risk
D a m a g e s
Likelihood
Tolerate risks
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Biaises that may affect decision makers
Errors in reasoning
Cognitive dissonances
Heuristics
Cultural variations
Limitis of vigilance
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Methodologies
Several are available
All have their limitations
Choice of variables
Scientificity
Validity (internal and external)
Must consider maturity
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Risk Management FrameworkAn integrated risk framework allows organisation to integrate all the organisational, regulatory and scientific requirements in a cyclical approach (continuous improvement).
Should include:
Business processes
Standard Operating Procedures
A governance model
Risk awareness, education & training programs
Workflow management tool (software)
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Change management
Implementing a RMF is a Change management problem
five (5) stages of change
Denial
Resistance
Decompensation
Resignation
Integration
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How to facilitate change ?
Education, training
Setting normative factors
Rationalization
Consensus
Other (dictatorship, coersion,esoteric)
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Risk and cultureRisk, culture, perception and subjectivity
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Risk, culture and perception
According to one cultural theory, people choose what to fear as a way to defend their way of life.
The theory hypothesizes that adherents of a hierarchical culture will approve of technology, provided it is certified as safe by their experts.
Competitive individualists will view risk as opportunity and, hence, be optimistic about technology.
And egalitarians will view technology as part of the apparatus by which corporate capitalism maintains inequalities that harm society and the natural environment. Widavsky (2002)
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Difficulty to assess risk
Risk is not always easy to assess, since the probability of occurrence and the consequence of occurrence are usually not directly measurable parameters and must be estimated by statistical or other procedures.
Risk constitutes a lack of knowledge of future events. Typically, future events (or outcomes) that are favorable are called opportunities, whereas unfavorable events are called risks. Another element of risk is its cause.
Kerzner, H. (2003)mercredi 28 avril 2010
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Risk tolerance
Risk tolerance looks at acceptable/unacceptable deviations from what is expected.
In financial investments, The extent to wish an investor is willing to accept more risk in exchange for the possibility of a higher return.
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Risk appetite
Where do we feel we should allocate our limited time and resources to minimise risk exposures?
What level of risk exposure requires immediate action?
What level of risk requires a formal response strategy to mitigate the potentially material impact?
What events have occurred in the past, and at what level were they managed?
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Predictable outcomesMany activities undertaken by organizations do not have predictable outcomes
One can’t predict the return from a new project, for example.
Occurrence of these types of events can only be described in terms of a range of possible outcomes and the likelihood or probability of each outcome.
The lack of predictability of outcomes is referred to as risk.
The concept of risk does not imply all possible outcomes are adverse, only that the precise probabilities of the outcomes are unknown.
Lewis(2003)mercredi 28 avril 2010
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Distribution of outcomes
According to classical decision theory, risk is generally understood to be the distribution of possible outcomes, their likelihood, and their subjective values.
In project management, this definition can be applied to time, cost, performance, and many other influential factors in any project that impact these three concerns.
March and Shapira (1987) in Kwak(2005)mercredi 28 avril 2010
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Reference points
The reference points that people use to evaluate risky prospects affect risk-taking.
In this respect, risk tolerance is a subjective notion in the absence of clear and uniform communication and tools for risk analysis.
Kahneman and Taversky (1979) and Taversky and Kahneman (1992) in Kwak(2005)mercredi 28 avril 2010
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Risk taxonomyCategories of organisational risks
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Risk categories
There is an infinite number of categories of risk
Depends on :
organisational culture
legislation
many other factors
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Risk Taxonomy
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What is needed ?
For each incident identified, information needs to be collected about :
direct monetary losses caused by the incident
Annualized (or aligned on budgetary strategy)
indirect losses (reputation damage or lost business)
with an estimate of the monetary losses resulting from these indirect losses.
Blakley, B., McDermott, E., Geer, D.(2001)mercredi 28 avril 2010
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Risk register
Dates: As the register is a living document, it is important to record the date that risks are identified or modified. Optional dates to include are the target and completion dates.
Description of the Risk: A phrase that describes the risk.
Project Management Institute Body of Knowledge (PMBOK)mercredi 28 avril 2010
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Risk register
Risk type (business, project, stage): Classification of the risk, business risks relate to delivery of achieved benefits, project risks relate to the management of the project such as timeframes and resources, stage risks are risks associated with a specific stage plan.
Likelihood of Occurrence: Provides an assessment on how likely it is that this risk will occur. Examples of classifications are: L-Low (<30%), M-Medium (31-70%), H-High (>70%).
Project Management Institute Body of Knowledge (PMBOK)mercredi 28 avril 2010
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Risk register
Severity of effect: Provides an assessment of the impact that the occurrence of this risk would have on the project.
Counter Measures: Action to be taken to prevent, reduce or transfer the risk. This may include production of contingency plans.
Owner: Individual responsible for the ensuring this risk is appropriately managed and counter measures are undertaken.
Project Management Institute Body of Knowledge (PMBOK)mercredi 28 avril 2010
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Risk register
Status: Indicates whether this is a current risk or if risk can no longer arise and impact the project. Example classifications are: C-current or E-ended.
Other columns such as quantitative value can also be added if appropriate.
Project Management Institute Body of Knowledge (PMBOK)mercredi 28 avril 2010
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Risk metricsA management perspective
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The use of metrics
From the governanced based risk management perspective:
Risk assessment
Continuous improvement
Evaluation
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Identifying variables
Metrics are about measurement
Attributing values to variables
Values depend on measurement scales
There are rules on how to use measurement scales
nominal, ordinal, interval, proportional
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Example of measurement scales
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Scientificity and reliability
Scientific data must meet certain criterias
trust, repeatable, verifyable
We must be able to justify the choices we make
in data and in manipulation (formulas)
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