Control & Reduce Risk

If risk has been effectively analyzed then this information can be used to reduce risk.

Risk reduction measures fall into several key categories. The category adopted will be dependent on the cost/benefits derived. The categories are:

• Reduce the probability of the failure by:
  • Improving asset rehabilitation or replacement
  • Other advanced asset management techniques.
• Reduce the impact of the failure by:
  • Insuring the risk exposure
  • Developing failure management plans.

Of course, many levels of risk are experienced in our normal daily lives. Actions can be taken which can reduce our asset's exposure to risk, such as driving carefully in our car, or ensuring that our home is securely locked.

However, there are some events that are improbable, or the cost of avoiding the risk is too high. In these cases, insurance companies have provided alternatives where the risk can be offset by the payment of nominal premiums so that the insurance company carries the risk.

This is an option for major service authorities, which could suffer unforeseen catastrophic failures that no amount of risk management can reduce to acceptable levels. The risk of such failures can be transferred to insurance companies specializing in this area.

Insurance companies apply good risk management techniques in analyzing and accepting risk for a premium. To a certain extent organizations could perform their own insurance function, providing the risk is adequately appraised.

Example of typical insurance cover

The organization acts as its own insurer but carries the following underwritten insurance cover:

• Workers Compensation Insurance ($500 000 excess)
• Public Liability including Professional Indemnity ($1 000 000 excess)
• Directors and Officer's Liability (often included above)
• Property and Asset Damage ($4 000 000 excess)
• Motor Vehicle 3rd Party
• Contents and Operational Losses ($3 000 000 excess).

No assets or events have specific policies. However, the policies above do specify exclusions e.g. loss of work under construction, low voltage, failure to supply energy, oil seepage from corroded tanks, design error, faulty materials or workmanship, transmission lines, electrical power lines and below-standard roads.

The organization's officers have responsibility for:

• Occupational health and safety
• Loss control
• Insurance
• Legal.

Consultants are used for advice as required. The organization is self-insured, except for major events costing over the excess sums.

Even where a risk is transferred to an insurance company, the premium will relate to the confidence with which the insurance company can assess the risk. Therefore organizations that have substantial asset management plans, where the renewal and maintenance programs are driven by accurate risk reduction assessments, will pay lower premiums than those where such risk is totally delegated to the insurer.

Advanced asset management techniques and information systems will thus play an integral part in the overall risk reduction activities of asset owners.

Whenever an asset fails, the consequences will impact on the business of the asset owner. Consequences can range from very minor events and impacts up to major or catastrophic events that could include loss of life or high property damage.

Avoiding failure of some assets, eg infrastructure assets is not always economically viable. In such cases service authorities will aim to reduce the overall risk to the organization from infrastructure failure.

The mode of failure can usually be identified, as can the outcomes or consequences of that failure. However, the factors that affect the eventual life of long-lived assets are complex and varied, and defy accurate predictions.

Some asset failures are therefore unavoidable, and it is essential that asset failure management plans be put in place to reduce the impact of the failure on the customers and the organization.

The methodology involves:

• Failure or fault analysis
• Economic quantification of the effects or outcomes of the failure
• Determination of the most cost effective technical and financial option to reduce the risk to acceptable levels (ORDM).

The question that then needs to be answered is — is this work economically viable?

• If YES, then complete the works and reduce the risk.
• If NO, then we need to assess:
  • When is it likely to be completed?
  • What is the current risk cost?

A more detailed approach can be taken once the level of risk is more clearly identified. This involves completing an interim computer analysis of the risk of the components failing. From this, a more detailed approach can then be instigated.

The following table shows this approach:

Having determined the level of risk exposure we then need to take appropriate control actions. This is shown by the flowchart below:

Failure management (contingency) plans

If it is not economically viable to avoid or reduce these failures by renewing or replacing assets, then the organization can reduce the impact of failure by having plans that allow them to:

• Restore the service as quickly as possible, by reducing the time to repair
• Reduce the probability of some of the major consequences of that failure, for example, loss of life.

The organization should develop failure management plans to suit the different levels of risk cost.

There are many common examples of failure management plans throughout our communities such as disaster plans for:

• Bushfires
• Earthquakes
• Toxic chemical spills.

These plans apply to external events and do not relate to the failure of individual assets. These plans come under a variety of names such as:

• Contingency plans
• Emergency plans
• Failure management plans
• Hazard plans
• Mitigation plans.

Asset owners may consider the failure of an asset, identify the consequences of that failure, cost them economically and identify those assets that are most critical to the delivery of this service. They can even determine the current risk cost to the business by looking at the probability of that failure occurring at a given time.

This risk cost (together with other benefits) may justify the replacement or renewal of the asset to avoid the risk exposure. However, this may not be economically viable, and the organization must defer the renewal works until the probability of failure and therefore the benefits (or return on investment) is much greater.

Cost effectiveness

The effort put into developing failure management plans should be commensurate with the benefits that are likely to be achieved. In this case the order of the current risk cost should determine the degree of sophistication with which the organization develops its failure management plans.

If we assume that the failure management plan could reduce the risk cost exposure by 25% then we could expend up to 15% of this value developing a management plan as part of a long-term asset strategy. In this way asset managers can allocate a logical budget amount for their failure management plans.

Failure plan methodology

In developing failure management plans, asset owners need to follow a logical methodology to the degree of sophistication required by the risk exposure.

A flow chart that outlines the Failure Management Plan decision tree is shown below.

Levels of sophistication

The level of sophistication of the failure management plan should relate the risk exposure. For example:

Accessibility

Failure management plans should be readily available to any staff, to retain flexibility and mobility in the workforce and to have many people capable of responding to a variety of emergencies.

The best way to achieve this is to link the failure management plans to the asset register system or the maintenance management system so that any staff member can quickly refer to the key parts of a failure management plan to ensure that they take the most appropriate action.

Structure of the failure plan

The table of contents of the failure plans should be consistent for all assets. Staff will be able to quickly reference the plan and identify the sections that are needed in an emergency.

The detail and sophistication should be varied to suit the risk exposure as per the decision flowchart above.

Experience of failure

One aspect of failure management plans that is very difficult to accommodate is the human elements involved in some critical failures.

Example 1

In the Australian Ash Wednesday bushfires of 1983, many water authorities had detailed failure management plans that involved staff taking up special positions and undertaking special activities to ensure the appropriate reliability and distribution of water throughout a bushfire event. These plans neglected to take into account the fact that the fire may threaten the lives of the staff, their families and property. Due to the intensity and size of the 1983 fires, over 95% of all staff had to be given permission to give up their prescribed duties and go and protect their families (if they had not been given permission to do this, they would have done it anyway).

It is very important for those drafting failure management plans to:

• Visualize what would really happen if the event took place
• Ask themselves if they asking too much of individual staff.

Example 2

Another typical example of this issue can be found in failure plans for a dam overtopping a possible maximum flood (PMF).

The plans clearly outline that the operator should open all gates as the flows continue to build. However; some gate operation mechanisms are located in places where the peak floods may reach. The operators may be required to enter operating chambers within the dam wall to carry out this activity. We need to picture the terror and other emotions of an employee who is asked to enter the gallery in such circumstances.

Just as many of our customers will not have experienced major failures in service delivery, neither have many of our staff experienced major disasters and it is important that we have in place realistic plans that address these issues.