Being a Cool Dude - The Missing Ingredient in Good Risk Management

Decisions are not only based on risks and benefits, but also the identity that a given choice communicates to others

A new study into the targeting of public health campaigns has significant – and far reaching – implications for the current school of thinking in relation to risk management.

Have we been putting all our eggs into one basket when it comes to minimizing risky behaviors in corporations?

***

Public health campaigns intended to reduce unhealthy behaviors like binge drinking and eating junk food often focus on the risks of those behaviors.

The study in the August 2008 edition of the Journal of Consumer Research suggests a relatively simple but surprisingly effective strategy to improve consumer health.

Authors Jonah Berger (University of Pennsylvania) and Lindsay Rand (Stanford University) found that linking a risky behavior with an "outgroup" (a group that the targeted audience doesn't want to be confused with) caused participants to reduce unhealthy behaviors.

***

The studies began by identifying groups of people who study participants liked, but with whom the participants would not want to be confused—"outgroups."

In the first study, the participants were undergraduates and the "outgroup" was graduate students.

When participants were led to believe that graduate students (seen by undergraduates as overly serious) consumed more junk food, they chose 28% fewer junk-food items than participants who thought their group ate more junk food.

In another study, researchers placed fliers in freshman dormitories on a college campus.

In one dorm, the fliers emphasized the health risks of binge drinking. In another dorm, the fliers linked binge drinking to graduate students. Participants in the dorm with the second flier consumed at least 50 percent less alcohol than those who saw the health risk fliers.

In a third study, students on their way to a campus eatery were surveyed about perceptions of the media. A control group read an article about politics and pop culture, and a second group read an article associating junk-food eating with online gamers (an "outgroup").

When research assistants observed the two groups ordering food, they found that the group who had read the article about online gamers made healthier choices.

These studies highlight the importance of identity in health behavior and suggest promising directions for future health promotion appeals, the authors believe.

***

The study has ramifications for the current execution of risk management.

Have we focused as a politic of people interested in its proper execution only on the “supply side” of the equation (ie – the risks and benefits that a decision maker is exposed to of a particular event, control, process etc) to the exclusion of the “demand side” of the equation (ie – the identity that a given choice communicates to others).

If this hypothesis then holds true, corporations should expend greater efforts on linking undesirable corporate behaviors to outgroups either within the corporation or within the broader business community.

How does this work out without ostracizing Joe – the poor, underperforming clerk in Accounts?

Perhaps choose as an outgroup either a type of person within the organisation (eg – a lazy or unproductive employee who wont be given a bonus … that is a grouping that rationale thinking employees are not likely to aspire to) or seek out such examples in other environments (ie – the acknowledged non team player on the local sporting franchise).

In the end proper risk management isn’t any one strategy – to date, however, could it be argued that corporate risk management theories have focused more on the outcome of the action than on the signal that the action sends?

Food for thought for when you next choose an apple because you just saw an online gamer eating a donut!

The Four Minute Mile's Importance for Internal Auditing

If a standardised criterion doesn’t exist are we condemned to the treacherous valley of subjectivity?

Ladies and gentlemen,

here is the result of event 9,

the one-mile:

1st,

No. 41,

R.G. Bannister,

Amateur Athletic Association and formerly of Exeter and Merton Colleges, Oxford,

with a time which is a new meeting

and track record,

and which - subject to ratification - will be

a new English Native,

British National,

All-Comers,

European,

British Empire,

and World Record.

The time was 3...

***

The crowd roared – the four minute mile (1,609.344 metres, 5,280 feet) had been broken.

The historic event took place on Thursday May 6th, 1954 during a meet between British Amateur Athletics Association and Oxford Univery at the Iffley Road Track in Oxford, England.

The breaking of the – until then – unimaginable four minute mile is rated as one of the great sporting achievements of the 20th century.

It should also be considered one of the great stories of measurement and verification of the 20th century.

***

In 2004, former 200 metre world record holder – Peter Radford – now a Professor of Sports Studies at Brunel University (and a former Chairman of UKAthletics) proposed – based on an examination of sports entries of newspapers and magazines, dating back to the 18th century – that the first four minute mile was actually run in 1770 by a man called James Parrot.

Parrot ran on the streets on London on a course still visible today – a flat course on a wide road.

The issue was that such records and events were not ratifiable and hence – the concept of records (and possibly measurable process improvement) was not well developed and generally accepted.

With the establishment of the British Amateur Athletics Association and the formalisation of athletics around 1880, a very standardised sport on a very standardised running track was born.

Bannister was the first person to run in standardised conditions where a dispassionate, yet interested, observer could verify all of the details.

***

The above case study has an interesting analogy to internal auditing.

Can we as auditors seek to assess / verify the true nature of the event that we are reviewing if we don’t standardised criteria against which to make our judgement?

If that standardised criteria doesn’t exist are our views condemned to the treacherous valley of subjectivity when what we are paid for is to be an independent commentator free of bias.

***

As an aside – and keep in mind that this post is written by an Australian – Bannister’s record lasted for 46 days before being beaten by the brilliant Australian runner, John Landy.

Currently, the mile record is held by Hicham El Guerrouj, who set a time of 3 minutes 43.13 seconds in Rome in 1999.

No woman has yet run a four-minute mile. The current women's record holder is retired Russian Svetlana Masterkova, with a time of 4 minutes 12.56 seconds.

New York's Sewer Mapping System

This is a whole different way of thinking about your assets.

New York City's sewer system, an engineering marvel and a murky source of an urban legend about sewer residing alligators contains 6,600 miles of mains and pipes.

Placed end to end, the city's sewers would stretch from Times Square to Alaska and back.

About 70 percent of that vast sewer system consists of combined sewers, which carry runoff from storms as well as waste from sinks, tubs and toilets.

Some of the pipes still in use were laid 150 years ago when the modern sewer system began.

For decades, city workers and contractors who want to make any change to New York’s vast water and sewer networks have had to retrieve browning maps, drawn by draftsmen and stored away in each borough hall and the department offices in Queens.

To help them find the sewer and water main maps — some dating back to the Civil War — city clerks have had to consult indexes, created by each borough before the city was unified in 1898.

The maps were cataloged on 3-by-5-inch cards.

In the coming months, though, visiting the department or borough halls to get maps, or calling to get the information on them, will become unnecessary.

For nearly a decade, the department has been scanning, reformatting and piecing together the tens of thousands of linen, Mylar and vellum maps of the city’s water mains and sewers.

More than just digital replicas, these maps are linked to millions of bits of information, or attributes — the size of the pipes, the dates they were built and repaired, what they were made of — that can be called up and sorted with the click of a mouse.

The maps can be updated instantly when water mains and sewers are installed, removed or repaired.

Thanks to global satellite positioning technology, the maps are accurate to within 18 inches.

And because they are on a central database, a growing number of department workers will have access to them not just on office computers, but outdoors on laptops using the city’s new wireless data network, NYCWiN.

It is expected that the maps to make department workers more efficient by cutting down the time spent retrieving them.

By feeding customer complaints, repair records and other information into the map database, the city hopes that planners and engineers can spot trends and anticipate problems.

“They are going to make people a lot more productive because they are not going to have to climb down in the sewer and not have to drive back to the office,” said Emily Lloyd, the commissioner of the Department of Environmental Protection.

“Having to move people around to collect information is very time-consuming.”

A consolidated database may also break down walls between city agencies by making it easier for, say, the Department of Transportation engineers to figure out where sewer mains are before they start building roads.

The foundation for the online water and sewer maps was laid in the 1990s.

Planners recognized that they needed a map of the city above ground that could serve as a precise geographic anchor for the underground maps.

This led to the creation of NYCityMap, an interactive database linked to a quilt of aerial photographs of the entire city.

The map, which was made available to the public in 2001, divides the city into 1,873 2,500-square-foot “tiles.”

It includes the exact locations of every manhole cover, sewer and fire hydrant the department maintains.

Those points of reference became the framework for the water and sewer maps. The maps of the city’s water mains had been scanned in the 1990s, but only in the last few years have they been reformatted and linked to a database of attributes.

In 2002, a process began to scan all the sewer maps, which took nearly a year, and to digitally stitch them together so the more than 6,000 miles of sewers would form a seamless map.

Fusing the maps was challenging because each borough uses its own measurement systems.

Unlike NYCityMap, which New Yorkers can use at gis.nyc.gov/doitt/cm/CityMap.htm, some of the information on the sewer and water maps will be kept from the public because of security concerns.

(This post is based on the article “Old Sewer Mapping System Undergoes a Welcome Update” by Ken Belson, New York Times, August 19 2008)

Snap: The Middle East Network Breakages

Most had done good network planning and made sure they get bandwidth from several service providers

Between 4.30am and 8am on Wednesday January 30th 2008, two ships 2,500 kilometres apart in the Mediterranean Sea dropped their anchors off Alexandria, Egypt and Marseilles, France.

They both managed to drop their anchors directly onto, and breaking, two separate undersea cables buried fifty centimetres in the sand – the cables were about the diameter of a human wrist.

It should be noted that the anchors breaking the cables is supposition – neither cable company has directly said that the cables were broken by the dropped anchor; this is, however, the generally accepted rationale for the breakages.

The cables carried approximately 75% of international data and voice network capacity in the Middle East and south Asia.

Two days later on Friday morning February 1st, a third cable is severed by an abandoned anchor embedded in the sea floor off the coast of Dubai severing the link between Oman and Dubai.

To finish off the week, two days later on Sunday February 3rd a fourth cable goes down, this time between United Arab Emirates and Qatar – a result of a power failure.

Network traffic disruptions of 70% in Egypt and 60% in India were reported, along with network issues in Bahrain, Bangladesh, Kuwait, Maldives, Pakistan, Qatar, Saudi Arabia and the United Arab Emirates. Multinational call centres in India reported being impacted by the outage.

There has been subsequent discussion that the breakages were an act of sabotage.

***

The breakages tested the business continuity plans of those impacted.

The unexpected collapse in service forced internet providers across the region to seek alternative connections most using backup bandwidth sources under contract for just such an emergency.

According to the ISP Association of India, service providers in India adapted to the cuts relatively quickly.

Traffic from business customers were given top priority on networks, with consumer traffic taking second place.

Many companies had learnt from the disruption caused in December 2006 when an earthquake off the coast of Taiwan severed seven major undersea cables that served India as well as east Asia.

The Association said “most had done good network planning and made sure they get bandwidth from several service providers … but there were people who did not have redundancy in their networks.”

***

Interestingly, the events are far less exceptional than they seem because cable cuts happen all the time.

On average cables cuts happen once every three days.

Due to many alternative cable routing options a cut in a cable cross the Atlantic would have no significant effect.

The issue in this incident is that the Middle East is served by a small number of cables – hence a lack of macro infrastructure network redundancy had an impact on businesses that they could not control.

A lesson that not all risks are controllable by your business – but all risks can be managed or mitigated.

Stuck in Traffic

Most crashes happen on dry roads, on clear sunny days, to sober drivers. For this reason, roads that could be straight are often constructed with curves – simply to keep the driver more alert.

Traffic has always been bad.

By studying chariot “rutways” and “wear patterns on curbstones” archaeologists have determined that the citizens of Pompeii had to contend with construction detours and one way streets.

In the New York of 1867 horses were killing an average of four pedestrians per week (a rate higher than today’s rate of traffic fatalities).

In the new book – Traffic: Why We Drive the Way We Do (And What It Says About Us) by Tom Vanderbilt, the history, challenges and theories of driving are explored.

The conundrums raised make for an interesting parallel to the world of internal controls and risk management.

***

According to a study by the Texas Transportation Institute, merging is the most stressful single activity we face in everyday driving. Sometimes this is based on the mechanics of driving – entering a stream of traffic flowing at higher speed than yourself.

More likely, however is the stress caused by the perception of reward denial – we seem to register losses (ie – the inability to merge) more powerfully than gains (ie – the ability to merge) and the registering of the losses enhances stress.

Adding to that is the fact that researchers have estimated that there are anywhere from 1,500 to 2,500 skills and activities we undertake while driving.

As Vanderbilt notes:

“We are operating heavy machinery at speeds beyond our long evolutionary history, absorbing (and discarding) huge amounts of information, and having to make snap decisions – often based on limited situational awareness, guesses about what others are going to do, or a hazy knowledge of the actual traffic law.”

Translate that to the world of risk and internal controls and rephrase the sentence and you can see if you understand the dynamics of traffic you start to understand the dynamics of risk. Here is a feeble attempt to do just that:

We are operating strategies in markets not well known to us, absorbing (and discarding) huge amounts of information, and having to make snap decisions – often based on limited situational awareness, guesses about what others are going to do, or a hazy knowledge of the regulatory environment.

No wonder managing a complex organisation is stressful!

***

The concept of familiarity and its dire consequences is also relevant.

Accidents are more likely to occur closer to home. Mostly this is because we do most driving closer to home, but studies show that we pay less attention to signs and signals on local roads, because we “know” them, yet this knowledge actually gives us a false sense of security.

Additionally people drive faster around curved roads that are marked with signs telling them the road is curved. We tend to behave more cautiously in the face of uncertainty.

Most crashes happen on dry roads, on clear sunny days, to sober drivers. For this reason, roads that could be straight are often constructed with curves – simply to keep the driver more alert.

What then are the implications for overt or visible preventative controls in a workplace as compared with covert or hidden preventative controls?

The desire for transparent / visible / overt controls has been strong over the last decade but perhaps we need to consider whether that is in the best interests of the organisation.

Would it be better to enshrine covert or hidden controls within a process to ensure that management always act with caution? What then are the implications on entrepreneur spirit?

***

Finally of interest is the benefit of having an opinionated back seat driver – relevance perhaps for justifying the role of Internal Audit in an organisation!

Statistics show that people are less likely to crash when they are accompanied in a car (except, tragically, teenage drivers).

Why is this the case?

Firstly, driving as an activity often lacks regular feedback – we are often not aware in the moment of how close to a crash we almost came, or own capability.

Secondly, drivers tend to self enhance. We all tend to thing that we are better than average, or at least average drivers. Passengers are not caught in this dynamic and can provide more objective assessment of the quality of our driving.

Hence the link with Internal Audit – that Internal Audit is not joined to the mechanics of a decision / strategy derived by Management the same way the manager who is making the decision does makes Internal Audit more relevant in providing feedback.

Internal Audit’s challenge is to be seen not as a traffic cop!

And the Winner Is ...

I am proud and happy to proclaim that you have presented to the world the best Olympic Games ever.

Today as we celebrate the start of the Games of the XXIX Olympiad it is timely to look back on what is still considered the greatest sporting event ever staged – the Games of the XXVII Olympiad in the year 2000 in Sydney, Australia.

***

The endorsement of a National Olympic Committee is required by the Olympic Charter in support of a city’s bid for the Games.

The contract for the endorsement of the Australian Olympic Committee for Sydney’s candidature for the Games was signed by the President of the Australian Olympic Committee, the Mayor of Sydney and the Premier of New South Wales on Wednesday 1st May 1991.

Sydney won the right to host the Games on Thursday September 23rd 1993 after being selected over Beijing (by two votes), Berlin, Istanbul and Manchester in four rounds of voting at the 101st International Olympic Committee (IOC) Session in Monte Carlo, Monaco.

Re-live the moment of the announcement:



Cathy Freeman’s lighting of the Olympic Flame signified the commencement of the Games on Friday 15th September, 2000.

***

In 1999, the New South Wales Audit Office (an independent body that reports directly to the Parliament) reviewed the processes used in the preparation of the estimates (of costs and revenues) to host the Games. The review also commented on certain risks to the success of the Games.

It noted that “risks may arise as a direct result of hosting the Games for example, disruption to the Games because of world events such as war, or the level of an ongoing risk may increase for example a transport failure, because of the Games.”

The staging of any Games was considered to impose additional risks to Government, its agencies and the population over and above “normal” risk that exists in a non-games period.

These extra risks were likely to arise because of more intense operating conditions, more resources in use, more activities being undertaken and to some extent the inexperience of personnel engaged in the delivery of the Games and associated logistics.

The significant but temporary increase in the population of Sydney was seen as bringing an added pressure to service delivery.

Law enforcement agencies for example, were expected to be under pressure to manage responsibilities associated with the Games and the intake of visitors and at the same time to maintain community policing.

***

The New South Wales Government guaranteed to underwrite the cost of staging the Sydney 2000 Games.

The guarantee referred to the revenues and costs of the Sydney Organising Committee for the Olympic Games (SOCOG) and games related costs incurred by other agencies of the Government.

The guarantee was given by the then Premier of New South Wales as part of Sydney’s bid in a letter to the president of the IOC.

Apart from cancellation of the Games, harm to the Olympic Family and terrorism, the main exposure in underwriting the cost of the Games was seen as budget reliability.

The main risk management technique used by the Government and SOCOG to control these exposures was a regular and rigorous budgeting process combined with a transparent approach to monitoring the achievement, or otherwise, of the revenue and expenditure streams.

SOCOG had assessed its risk exposure based on a probability model that identifies weighted operating risks, macro economic exposures and the operational contingencies of staging the Games.

SOCOG adopted an incremental or staged approach to insuring its exposure to risk. It had insured risks in regard to its buildings, public liability, workers’ compensation and some specific test events and supporting equipment.

SOCOG had entered into contracts with overseas companies and received revenue from and incurred expenditures with those companies denominated in currencies other than the Australian dollar.

Most significant were SOCOG’s revenues from broadcast rights and the IOC international marketing program which were denominated in US$. Broadcasting rights revenues alone amounted to over $1b.

To meet this risk the Government gave a guarantee on exchange rates in regard to revenues receivable by SOCOG of up to US$737m

The Audit Office noted that “risks created by the Games are significant, diverse and complex.”

It concluded that the Government, through its agencies, was managing those risks in a reasonable way even though “certain risk have not been quantified.”

SOCOG’s response to this was:

it should be noted that it is not feasible to quantify and include all risks associated with the Games.

Some risks are extremely remote.

(We) will, when financial risks appear likely to be realised, update estimated costs on an ongoing basis.

As a bit of auditing trivia – SOCOG’s auditors were Arthur Anderson.

The Dabbawalas of Mumbai - Getting Your Lunch on Time

There is one mistake per 6,000,000 deliveries.

As the warrior king who defeated the Mughals and founded the Maratha empire of Western India in the 17th century, Shivaji Bhosle is remembered as a tactical genius as well as a benevolent ruler.

The direct descendants of his Malva-caste soldiers are also developing a reputation for organisational excellence.

Using an elaborate system of colour-coded boxes to convey over 170,000 meals to their destinations each day, the 5,000-strong dabbawala collective has built up an extraordinary reputation for the speed and accuracy of its deliveries.

Word of their legendary efficiency and almost flawless logistics is now spreading through the rarefied world of management consulting.

Impressed by the dabbawalas' "six-sigma" certified error rate—reportedly on the order of one mistake per 6m deliveries—management gurus and bosses are queuing up to find out how they do it.

The system the dabbawalas have developed over the years revolves around strong teamwork and strict time-management.

At 9am every morning, home-made meals are picked up in special boxes, which are loaded onto trolleys and pushed to a railway station.

They then make their way by train to an unloading station.

The boxes are rearranged so that those going to similar destinations, indicated by a system of coloured lettering, end up on the same trolley.

The meals are then delivered—99.9999% of the time, to the right address.

Harvard Business School has produced a case study of the dabbawalas, urging its students to learn from the organisation, which relies entirely on human endeavour and employs no technology.

For Paul Goodman, a professor of organisational psychology at Carnegie Mellon University who has made a documentary on the dabbawalas, this is one of the critical aspects of their appeal to Western management thinkers.

"Most of our modern business education is about analytic models, technology and efficient business practices," he says. The dabbawalas, by contrast, focus more on "human and social ingenuity", he says.

Firms, both Indian and foreign, are similarly curious.

Tata, Coca-Cola and Daimler have all invited dabbawalas to explain their model to managers.

Last month it was the turn of delegates at an accountancy conference in Dubai. There are even plans within the organisation to create a consulting business.

The dabbawalas, who all receive the same pay, are also seen as paragons of "bottom up" social entrepreneurship. C.K. Prahalad, a professor at the University of Michigan's Ross School of Business, says they show how a home-grown business can help lift workers at the "bottom of the pyramid" out of poverty.

They also contradict the stereotype of developing-world labourers as low-wage economic victims.

In Salman Rushdie's 1988 novel "The Satanic Verses", one of the main characters, Gibreel Farishta, worked as a dabbawala before going on to become a film star. The deliverymen no longer need a career change to get noticed.

(Based on an article from The Economist - July 10th 2008 - The Cult of the Dabbawala - thanks to Anthony for reference)