We live in a world that is increasingly complex, and yet businesses and other organisations want to understand their operations more clearly. They want detailed insight into what could go wrong; what impact it will have; and what it will cost. They want high levels of confidence for all of this, and more. Fortunately, risk advisory can provide the answers, as Simon van Wyk of global engineering and infrastructure advisory company Aurecon explains.
Modern day risk analyst, statistician and essayist Nassim Nicholas Taleb, believes that in today’s evolving world, uncertainty is rising with increasing severity. Because rare events are impossible to predict, he argues that we need to make peace with uncertainty and reduce our negative exposure. Yet ‘uncertainty’ remains one of the most prevalent issues in the lives of many people. Whether related to the global economy or geopolitics – or something far more trivial – we are surrounded by talk of uncertainty.
So, what does the acceptance of uncertainty mean to business owners, governments, insurance agencies and the general public?
“Most people don’t want to deal with it; or are scared of it. However, it is an unavoidable issue we engineers have to deal with in our wide-ranging work. Should we recalibrate our design criteria because ‘one in a hundred year events’ might now happen once a decade?” asks Van Wyk.
Making peace with uncertainty
In the world of science, the Heisenberg uncertainty principle states that both the position and velocity of an object cannot be measured precisely at the same time. Indeed, the more precise the determination of an object’s position, the less precisely its momentum can be determined ̶ and vice versa. While this complex principle relates to quantum physics, it holds many important lessons for engineers, the most important of which is accepting that uncertainty is an ever-present. This is at the heart of what we do in risk advisory at Aurecon.
We strive for a world in which unknowns can be identified, assessed and evaluated. Then with this information we can help clients improve their end product – whether that’s a process or facility or some other project. Managing risk is about leveraging predictive capabilities that extend to the unknown, so uncertainty is replaced with expectancy. This is called ‘risk buoyancy’.
At Aurecon, our approach to risk is changing from traditional ‘risk management’ to ‘risk advisory’. As you might expect, this means more than simply changing the name of what we do – it’s about advancing our approach to risk, and bringing greater efficiency and profitability to our clients. ‘Risk advisory’ better encapsulates our work, namely: providing ongoing, consultative, collaborative, robust and holistic risk consultancy.
“In recent years, risk advisory has grown significantly as businesses recognise the increased benefits it brings. At the same time, both organisations and projects are becoming larger and more complex, which naturally demand a deeper analytical understanding of risk to inform sound decision making,” says Van Wyk.
What is risk, and how to prevent it?
Risk is a subjective word. What one person perceives as risk, another sees as acceptable or even an opportunity. But while there might be some disagreement on how risk is defined, there is no disagreement on one thing – risk involves a level of uncertainty, which can lead to disruption, and with some level of financial consequence attached. “Today’s risk advisory is about more than simply averting the consequences of risk. It’s about ‘turning uncertainty into certainty’ with a higher level of confidence,” explains Van Wyk.
According to a 2015 survey from the Project Management Institute, for every $1 billion spent on projects, $51 million is lost because of poor understanding of the requirements at the outset. That’s why it’s critical that risk advisory work starts as soon as possible in a project’s development. It should begin by assessing the Critical Success Factors (CSF) for each workstream within a project to help bring better integration to processes; more efficiency to the use of resources; and better adherence to the project’s schedule.
“By ‘turning uncertainty to certainty’, companies can understand how losses arise and how they can be ultimately prevented,” add Van Wyk. During this process, our core challenge as experts is to determine what could go wrong before our clients know about it, so we can advise and add genuine value. “At Aurecon, we take this part of what we do very seriously, relentlessly researching risk and striving for eminence. Doing this means we understand the complexity around a project or operation, and this enables better decision making,” says Van Wyk.
At the crux of everything we do is a desire to answer the questions clients should be asking themselves: ‘How do we optimise our operations to best meet our business imperatives?’; ‘Which project is going to cause me the most delay?’; ‘How much should I invest to get the most out of this portfolio?’; and ‘Which of these options has the highest likelihood of succeeding?’ Interestingly, these questions aren’t only being asked at an operational level but all the way up to the C-Suite.
Technology selection and application too plays an important role in today’s risk advisory. Aurecon uses a range of techniques and tools, often integrating the outputs from them to deliver the best decisions for any activity. Examples of techniques we use include: Monte Carlo Analysis (MCA); Fault, Event and Decision Tree; Bow Tie; Hazard Studies (HAZOP); FMEA; and Bayesian Networks. This gives us the best possible insight into the precise level of uncertainty associated with any particular scenario.
There are three notable areas where understanding uncertainty can deliver clear benefits to a project owner.
- Capital Contingency. Historically, a contingency budget would be a single figure determined arbitrarily based on a project’s or organisation’s costs. But this method has clear limitations. By using MCA, we can bring more certainty to understanding the financial impact of a range of potential scenarios and the likelihood of them occurring. By understanding this, clients can optimise their contingency.
- Estimate Risk Analysis. This helps clients get a better understanding on estimate accuracy and uncertainties that influence cost overruns. By looking at direct costs on a project and the risks that affect each of them, we can develop a picture that shows the likely cost and influence each risk has on a project. We can then work with stakeholders to define the consequence of a particular risk and, of course, its associated costs, which informs the potential magnitude of the identified risk.
- Schedule Risk Analysis. With any project, there is an acceptance that schedule overruns are a risk. We use MCA to model potential schedule delays and associated costs with a high degree of certainty. This analysis provides predictions on the likelihood of a project being completed on time. It naturally provides clients with more accurate insight into their target dates, budgets and other project management expectations.
The certainty of uncertainty
“Our ability to understand the risks in clients’ operations has grown consistently over the years and we combine that with our unique experience of infrastructure, and particularly mega-infrastructure, to deliver some of the most advanced risk advisory work in the industry. Similarly, by using pioneering new skills, technologies and tools, we are at the leading edge of risk advisory, analysis and data management,” says Van Wyk.
In an ever-changing world, radically underscored by uncertainty, one thing we can be sure of is that we will never know whether we can eliminate all unpredictability by determining our unknowns. But we do know that we want to create an environment where unforeseen factors can be integrated into the creative process to deliver an asset that is risk buoyant.
Simon van Wyk is Aurecon’s Risk Uncertainty Leader. He is also an Associate Member of the Institute of Risk Management South Africa (IRMSA); a Corporate Member of the Disaster Management Institute of Southern Africa (DMISA); and a Professional Natural Scientist with the South African Council for Natural Scientific Professions (SACNASP).