Assessment of the Significance of Crises:
Through Examples from Various Industries and the use of a Development Model
Our Lives, Corporations, Projects
Can be seen as a never ending succession of cycles of growth, peace, turmoil, i.e. cycles
of great changes we call crises.
Fast growth can be seen as a positive crisis: in some cases it can, however, suddenly turn into a negative
crisis.
A crisis is a decisive moment, particularly in times of danger or difficulty.
Generic Phased Crisis Model
ERM excellence criteria:
- Risk/reward optimization
- Enterprise wide view of risks
- Control processes for risks including:
- Hazard identification
- Risk evaluation
- Risk management and loss control
- Benchmarking against predefined risk tolerability criteria
A Simplified Model of Public Reactions can be Suggested to Evaluate Crises Acceptability…
but this approach is not sufficient to allow proper allocation of mitigative funds.
Many Companies Start by Using Qualitative (indexed) Approaches to Risk Assessment.
These approaches are ok at screening level. They may help technical people, but fail to properly inform decision makers and the CFO…do
not help comparing risks throught the Entreprise...
All along this presentation we will show a simplified form of Quantitative Risk Assessment applied to world-wide famous cases.
Some companies
use ERM, some do not.
Of those that use ERM, some use overly crude systems that blur reality either in too dark or too rosy tones.
The future lies in using Risk to weigh decisions, rather than just guiding mitigation.
Example 1
Tailings Dam Failure at Los Frailes: Boliden Shares Quotes
Direct costs: appx. 150MUS$
A useful metrics to measure, after the facts, the “Enterprise disservice” of a company can be: the Share Value drop in case of a
crisis, which, of course, compounds with the direct costs of such a crisis.
Examples of other metrics that can be used:
- Loss of habitat (km2)
- Loss of species (biodiversity, number of species)
- Loss of human lives (number of casualties)
- Any complex metric that can be derived for example by using “multiple portfolio” analysis.
Generic Phased Crisis Model Example:
Loss of share value appx. 95%, still not fully recovered in May 2007.
The Dam Failure Occurred 04/98, but the latency started many years before
the crisis.
A priori Estimates of the probability of the disservice to happen (F. Oboni & C. Oboni, Improving
Sustainability through Reasonable Risk & Crisis
Management, Appendix 3, A Specific Tool for Estimating a Probability, 2007).
A priori Estimates of the probability of the disservice to happen.
Was that crisis tolerable, when compared to a “large company” tolerability curve?
TOLERABLE from a large company’s tolerability point of view. As a matter of fact, Boliden did not fold up, it even sustained two similar
accidents. Another company, Placer Dome, sustained a similar blow at Marcopper and also survived…
The latency lasted a few years before
the crisis.
Tolerability is interpreted very differently from site to site:
Each dot on the graph represents the centre of a risk scenario.
Other examples of tolerability curves:
Application to Terrorism Risk Assessment and Management:
It is in the Latency Phase that the best returns are to be expected from:
- Analysis of what could go wrong, and how much it would “cost” the company: Risk Assessments
- Analysis of the means to bring the risks towards a tolerable level in a sustainable way: Risk Management
- Analysis of how to behave when a residual risk hits, i.e. Crisis Management
Risk management is a balancing exercise between mitigations, investment and residual exposure:
Example 2
Information warfare attack May 16th 2007: Apple Shares Quotes
Direct costs: Nil
Loss of Share value: almost nil because crisis was perfectly contained (but some people did lose a total of 4BUS$, as other made that money).
Latency
is not applicable in this case.
Generic Explosive Crisis Model
A priori Estimates of the probability of the disservice to happen (F. Oboni & C. Oboni, Improving
Sustainability through Reasonable Risk & Crisis
Management, Appendix 3, A Specific Tool for Estimating a Probability, 2007).
A priori Estimates of the probability of the disservice to happen
Was that crisis tolerable, when compared to a “large company” tolerability curve?
A priori INTOLERABLE from a large company’s tolerability point of view. Risk was mitigated by implementation of Information Warfare counter
measures.
The latency is not applicable to this type of crisis.
The crisis got contained and dealt with right away thanks to proper planning
and crisis management. Someone did an analysis similar to this one and designed proper risk management measures. You most likely did not
even know about this crisis.
Example 3
Project over costs lead to project suspension: Nova Gold Shares Quotes
Direct costs: appx. 250MUS$
Generic Explosive with “long latency” Crisis Model Example:
Loss of Share Value 50%.
Latency started 6months to several years before the crisis.
A priori Estimates of the probability of the disservice to happen (F. Oboni & C. Oboni, Improving
Sustainability through Reasonable Risk & Crisis
Management, Appendix 3, A Specific Tool for Estimating a Probability, 2007).
A priori Estimates of the probability of the disservice to happen
Was that crisis tolerable, when compared to a “large company” tolerability curve?
BARELY TOLERABLE from a large company’s tolerability
point of view.
The latency lasted at least six months to several years before the crisis.
It was time to pull the plug on this project, and
the company’s JV with a major mining company did exactly that.
The JV is now reexamining the project. The major company’s losses were
contained, and the minor JV member did not undergo immediate life breaking losses.
Various ways of risk representation exist, a few examples follow:
Hazard at Road (Small Scale Events)
Tolerability for Risks on Pipeline and Road
Examples of concrete actions suggested after a Risk Assessment:
- Buses escorted like chemical trucks to the mine
- Mining trucks parking policy in the pit
- Check-in procedure for executives at hotels
- Behavioral recommendation for people traveling with sensitive data
- Pipeline monitoring (instrumentation and patrolling)
- Transportation network modifications
- Building an entire processing plant on a fill
- Installing rockfall nets
- Implementing proper crisis communication procedures
Over the years we have identified a list of project potential risks as follows:
3 phases and a total of five steps in the life of a project:
- Design/Implementation/Construction
- Infrastructure (setting the bases…)
- Superstructure (implementing…)
- Life/Service
- Service (using, developing, …)
- Maintenance (repairing, adapting…)
- Disposal/demolition (ending, releasing…)
Each step has its own hazards and related risks…
CDA uses these potential project risks to evaluate and compare alternatives all along their expected life in a transparent way.
CDA eliminates well known NPV approaches pitfalls.
- Tools exist and do work
- Experience is eloquent
- We all prefer to succeed rather than fail
- Thinking and fixing before it happens is way cheaper than fixing afterwards
- Thanks to specific techniques each decision you make can be supported by transparent and rational evaluations
- ERM will not eliminate losses but reduce them and allow for quicker rebound
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