August 1, 2013 by David Bowcott
Managing risk requires imagination and experience. In a lot of ways you’re trying to predict not only the future, but also all the steps you need to take prior, during and after a risk event occurs. This precognitive skill could mean the difference between profit and loss—or worse between company survival and failure.
Here’s a trick you can apply to your next project’s risk inventory. What am I talking about? Well, the concept is a Fault and Event Tree (FET). Basically, once you have established your project’s risk inventory and prioritized risks that are likely and severe, you simply run each risk through the FET.
The FET takes the specific risk you are focusing on and applies it to a timeline. Right in the middle of the timeline is the risk event. Prior to the risk event are all of the likely events that could lead to that risk—Fault portion of the FET. Just after the risk event on the timeline are all of the potential impacts to your project—the Event portion of the FET. Once you have identified all Faults and Events associated with a major risk facing your project, you’re ready to treat the risk throughout the risk manifestation timeline.
For instances that could lead to the Faults, you will need to apply risk controls (also known as best practices). These risk controls prevent and mitigate the full impact of the risk event. As a compliment to the risk controls, you will need to apply risk finance tools to mitigate the full impact of risk events. Risk finance are tools, similar to insurance, that provide you mitigation cover, which advances insurance funds prior to the full impact of a risk taking place. You need to be aware of policies
that have such mitigation covers in order to apply them to the Faults of your risk.
After the risk has taken place you need to treat the Events of the risk. Treatment for these events relies more heavily on risk finance solutions, however, will require continued application of risk controls. When risks take place they lead to unexpected costs to your project and thus you will be looking for sources of recovery in order to right your project. These are often your risk finance solutions, and if you’ve done your FET for risks facing your project, you increase the likelihood those solutions are there when you need them.
FETs are powerful tools. Having employees and partners with imagination and experience will ensure your FETs are best in class, and thus consider all Faults and all Events associated with a specific risk. Being able to identify the Faults and Events is powerful, but knowing the solutions available to treat those risks is even better. Do you have access to the latest risk controls and risk finance solutions in order to effectively treat risk? If you have employees and partners that do not have the imagination, or worse, the experience (battle scars) then you are likely in need of a new team. Battle scars are vital to prevent and mitigate future risk events, and having people with them involved in your project could save your company.
David Bowcott is senior vice-president, national director of large/strategic accounts at AON Reed Stenhouse Inc. Send comments to firstname.lastname@example.org.