The Most Effective and Widely Used Methods of Risk Analysis - Coursework Example

Hazards Risk Management College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Introduction Risks can have destructive effects to any organisation and people. For this reason, regulatory bodies require organisations to identify hazards and put in place effective risk assessment measures to curb whichever risks that may possibly occur. Some activities are more risk averse than others and hence call for detailed risk assessment. Numerous methods have been developed to help out organisations make out potential risks they possibly will face in their day to day operations (Benson & Twigg, 2004). This report reviews some of the most effective and widely used methods of risk analysis. To give the report a lively outfit, the report analyses the methods of risk assessment in relation to Leighton Holdings, a construction company based in Australia. The company was chosen because construction operations are among the highly risk averse activities that require in-depth risk assessment. The company employs a huge number of people, about 56, 000 individuals. To draw, hold on to and motivate this huge number of employees, Leighton Holdings has got to indicate that it is able to guarantee their safety as well as the safety of others at large. The company too runs sensitive operations such as mining that could be very detrimental to the environment if potential risk factors are not assessed well and the correct measures put in place to counter the risks (Leighton Holdings, 2014). Ahead of analysing the various methods employed in risk assessment, the report first defines what hazard and risk assessment entails. Hazard and Risk Assessment Hazard and risk could literally be taken as synonyms. However, the words have a slight difference between them. A hazard is a probable harm that may well crop up from native property or nature of something to cause damage whereas risk is the possibility that somebody or something of value will be harmfully affected in a particular way by the hazard. In other words, risk could as well be defined as "the possibility of danger" (ECLAC, 2003). Risk has two main elements: Element of probability of harm that symbolizes the level of chance or possibility, and; Element of severity of impact that symbolizes the degree of the adverse impact. Risk assessment is a detailed and careful examination of any project undertaking that may well cause harm to people, property, or the environment. Risk assessment takes into account both elements of probability of harm and severity of impact, hence it smoothes the progress of estimating the potential risks (Andrews & Dunnett, 2000). Risk assessment could either be quantitative or qualitative; Quantitative. It involves assessing the likelihood of a risk occurring in terms of frequencies and estimating the effects in terms of exact numbers. Qualitative. It involves assessing the likelihood of a risk occurring and estimating the effects by means of scales such as from "very low" to "very high". PESTLE Analysis PESTLE is an acronym that stands for Political, Economic, Social, Technological, Legal and Environmental factors. These factors form a somewhat sophisticated tool that can be used to understand an organisation along with its external factors. More importantly, the analysis is, in general, employed to help out an organisation to make out and identify with the external environment in which it operates and the manner in which it ought to function in the future. In particular, PESTLE analysis is part of the broad risk assessment process. The analysis can either be macro (cover a wide geographical area) or micro (at the level of the organisation). The factors, also called the ‘drivers of change’ force change in an organisation so as to steer clear of disasters. Therefore, PESTLE is a strong foundation for future planning as well as strategic decision making (Mechler, 2005). Below is the PESTLE analysis for Leighton Holdings; External political factors: national as well as local governments’ regulation, political stability in the various countries, taxation policies, electoral systems, and terrorism. Internal political factors include promotions, organisational policies and structure. Economic factors: GDP growth and per-capita income in various countries, business openness and efficiency, banking systems, labour issues, levels of inflation, stage of a country’s economic development, internal sources of finance, organisation’s budgetary process and interest rates. Social factors: demographic structure, level of education, population growth and distribution, health systems, peoples’ lifestyle, and mobility of the population, key cultural events, media penetration and freedom. Technological factors: business innovation, organisational research and development, influence of technology at the workplace, patents and copyrights as well as licensing, and rapid changes in technology. Legal factors: proposed home and international legislation, labour laws, environmental laws, and industry-specific laws. Environmental factors: ecological concerns, national and international environmental matters, organisational culture and morale as well as attitude of the staff. Risk Ranking with FN-diagram There are two forms of risk assessment criteria. These are individual risk and societal risk. Individual risk is the risk of life and risk of health of people open to the hazards of a particular activity. Some undertakings or projects are wide in scope. Such activities calls for comprehensive risk assessment criteria that ought to consider the likelihood of major disastrous occurrences to society and guarantee that risks resultant from such occurrences are controlled. In that case the severity of their outcomes as well as the frequency of occurrence of such incidents should be taken into account. The FN-diagram is a quantitative risk assessment method that has been used extensively in such situations. The FN-diagram is in the form of a graph. It plots the number of fatalities (N) alongside the frequency of the number of fatalities or additional fatalities (f) (Park & Vining, 2000). The FN-diagram has two distinct lines that divide the space in the box into three sections based on risk acceptability. The three sections cover intolerable risks, risks that require further assessment and reduction and the acceptable risks. The acceptance criteria vary across different sectors and this is usually pointed out by the slope of the lines (Park & Vining, 2000). Below is an example of an FN-diagram; Figure 1: FN-diagram 16 15 14 Intolerable Risk 13 12 11 f 10 Further Assessment 9 and Reduction 8 7 6 5 Acceptable Risk 4 3 2 1 10 100 1000 10000 100000 N Hazard and Operability Analysis (HazOp) Hazard and Operability Analysis (HazOp) is a well thought-out and organised method for scrutinising systems and assessing risks. It involves the scrutiny of a designed process or active operation so as to identify and assess inconveniences that possibly will characterise risks to people or apparatus, or avert their efficient functioning. The method is founded on the assumption that risk events emanate from design variations or from operational intent. Although HazOp was at first developed to evaluate chemical processes, the method been extended to other process systems including composite processes and software systems. Today there are four key types of HazOp processes: process HazOp (the original method for assessing process systems), Human HazOp (focused on human faults), Procedure HazOp (reassessing procedures/operational series), and Software HazOp (detection of errors by means of software) (Andrews & Dunnett, 2000). HazOp is a qualitative method as it involves the use of ‘guide-words’ and is conducted by a multi-disciplinary team. The team organises meetings that entail serious brainstorming in order to identify probable hazards in a system and classify operability trouble expected to cause nonconformity of products (Zhu & Sun, 2010). The method is also inductive or employs a bottom-up risk detection approach, given that its sensation relies on the capacity of experts to foretell variations based on prior incidents. Leighton Holdings can organise such meetings where their expert employees brainstorm probable hazards that may well lead to risks in their operations. This will enable them to identify variations in systems and operations and institute preventive corrective action (Chow & Kritzman, 2001). Fault Tree Analysis A fault tree is a logical chart that is used to identify all faulty events that could cause failure or an accident. It is therefore founded on the principle of multi-causality. This method of risk assessment could be qualitative or quantitative depending on the availability of data. This is because it incorporates both graphical illustrations for easy comprehension as well as statistical tools focused on crucial areas (Crispin, 2003). The fault tree diagram is drawn from the top downwards. At the top lies the undesired event of interest (top event). After that, the immediate causal error circumstances that could cause that event are worked out and drawn. This process repeats itself and could therefore be infinite, although, in reality one will obviously be expected to end it after getting the key failures. The most important part of the fault tree is essentially working out the order of failure dependencies. It is also important to understand their modes and causes and to put a figure on their involvement to system unpredictability (Chow & Kritzman, 2001). Fishbone Analysis Fishbone analysis is conducted using a fishbone diagram. The fishbone diagram was developed by Kaoru Ishikawa, a Japanese Quality guru; and so it is also called the ‘Ishikawa diagram’. The Fishbone diagram embodies a fish. The diagram forms a qualitative tool that can be used for risk assessment. It graphically exemplifies the link involving a particular result and every factor that has an effect on the result. The tool helps to classify, sort, and show probable causes of a particular risk hazard. It mainly involves brainstorming sessions in teams, where team members list the supposed core sources of a hazard as regards the outcomes and for this reason it supports a balanced approach. It does not merely rely on indications. The analysis focuses on five key areas that are, man, measurement, machine, method, material, and environment (Zhu & Sun, 2010). These core areas are particularly important for Leighton Holdings given that it mainly operates in construction and other activities that rely on these areas on a daily basis. Figure 2: Fishbone diagram Man Machine Measurement Risk (Effect) Method Material Environment Reliability Block Diagram A reliability block diagram is a tool used to carry out system reliability as well as availability analyses on big and multifaceted systems. Just as the name suggests, it uses block diagrams, employed to replicate compound systems, to illustrate the association involving various networks. The arrangement of the block diagrams describes a logical relation of failures within a system that could be risky. Triumphant functioning systems call for at least one path to be sustained linking the system input to the system output. Reliability block diagram is both a qualitative and quantitative risk assessment tool as it relies on drawings as well as calculations. Boolean algebra is employed to express the least permutation of failures required to originate a system breakdown (Park & Vining, 2000). The logical flow of a network diagram originates from an input node at the left hand side of the diagram to an output node at the right hand side of the diagram. This is illustrated by the figure below; Figure 3: Reliability block diagram Input B Output A C E D Event Tree Analysis The event tree analysis is a qualitative and quantitative risk assessment method used to identify and assess the chain of events in a probable accident setting following an initial occurrence. Event tree analysis makes use of a visual logic tree structure called an event tree. Its objective is to find out whether the initial occurrence may well grow into a serious disaster or if the event is adequately contained by security systems along with the procedures applied in the design of the system. An event tree analysis can result in various diverse probable outcomes from one initial occurrence, and offers a means of obtaining a probability for every one outcome. Leighton Holdings can use event trees to inspect possible hazards so as to find ways of mitigating risks. An event tree can be constructed using various ways. However, the event tree analysis normally uses Boolean logic gates, i.e. a gate which has no more than two options, for example, success/failure, or yes/no. The event tree usually starts on the left with the initial occurrence and advances to the right, branching gradually. Every one branching point is referred to as a node (Andrews & Dunnett, 2000). Cost Benefit Analysis Cost benefit analysis is a cost-effectiveness risk assessment method. The analysis entails putting a figure on each and every one cost and benefit. The costs and benefits are then discounted to establish the net benefits (or costs) of a project intervention in present values. The net benefits/costs are after that used to quantitatively arrange alternative and competing project proposals. For a single project, if the net benefit is exceeds zero, it is sensible to pursue it. Furthermore, cost benefit analysis may well be used to check the usefulness of a proposal after implementation (Gowdy, 2007). Reflective Comparison of the Methods Used PESTLE analysis is a specific and both internal and external factor focus tool. The method is preferred because it can be used along with SWOT analysis to enlarge its external aspects (Opportunities and Threats) and to better comprehend the external environment to the organisation (Mechler, 2005). The use of FN-diagrams is mainly quantitative. The use of ‘fatalities’ that are already in mathematical form, help in the quantification of risks from main potential hazards. These amounts can be used in other methods such as event tree and fault tree analysis (Park & Vining, 2000). HazOp analysis is a high-quality risk assessment tool since it covers expert knowledge and takes into account past events. The method too incorporates up to date technological improvements given that it is able to lodge the use of software to sense system failures. Fault tree analysis is prepared during the initial stage of a project design and then develops fully in sync with design progression. The method allows for straightforward translation to probability measures. It clearly indicates every different association needed to cause the top event. The fault tree analysis method presents a structure for systematic qualitative and quantitative assessment of the top event (Crispin, 2003). Fishbone analysis is valuable when classifying the identified or probable causes of a risk. The graphic illustration of causes and effects helps team members to consider risks in a logical way. Fishbone analysis helps to find out the core causes of a risk by means of a well thought-out approach (Zhu & Sun, 2010). It supports group participation and makes use of group knowledge and boosts knowledge of the system by helping every person to gain an in depth understanding of the factors at work along with their relationships. Fishbone analysis indicates areas that need to be further analysed through data collection and analysis. Reliability block diagram is a straightforward method of envisaging the dependability on the compound systems. The method assesses the impact and sensitivity of component failure on the whole system safety. The method is cost effective, especially in hefty system trouble-shooting. It too identifies possible design problems (Zhu & Sun, 2010). Event tree analysis examines each and every one probable result of an initial event. The analysis provides a probabilistic risk assessment tool of the risk connected to each one probable outcome. It can be b used to model the whole system and the analysis extended to cover subsystems, parts, assemblies, software, procedures, the setting, as well as human failures. Event tree analysis can be carried out at different concept levels, such as abstract design, top-level design, as well as comprehensive component design. The analysis is quite straightforward to study and understand (Andrews & Dunnett, 2000). Cost benefit analysis is a helpful tool for risk assessment whose power lies in the precise and thorough accounting of the gains along with the losses that can be efficiently. This makes decision making clearer. It provides decision makers with a reliable foundation for evaluating project proposals and is well-versed with the use of economic resources. It as well provides a universal benchmark with a monetary measure against which to assess projects (Gowdy, 2007). Fixed Budget Allocation The aspiration of Leighton Holdings is to realize the most advantageous risk/return arrangement. This can be realised through risk budgeting. One of the ways of dealing with risk is accommodating the risk. In this case the expected return on a project is considered. Different projects have different risks; therefore, the company ought to consider the most favourable set of investments that will get the most out of the expected return for a specified level of the whole portfolio risk.  The overall portfolio risk offers the risk budget, and the company should aim to deal out this budget across different projects in the best possible way (Chow & Kritzman, 2001). Just the once the risk budget has been instituted, the company should watch the portfolio works to guarantee that risk positions do not deviate from those fixed in the risk budget by amounts exceeding the predetermined amounts. An important element of risk budgeting and monitoring is a collection of approximations of the impacts of future events that possibly will distress the value of the portfolio investment.  To deal with this, in a number of cases, actual past variances in values are employed to approximate probable future developments.  However, for projects covering a longer period, a wider scope of probable future occurrences is considered based on the models of the method of generating returns.  A standard move uses the approximate risks along with correlations, assuming the nature of probable probability distributions.  Usually a factor model is used to pay attention on the leading sources of concurrent risks (Scherer, 2007). Another method that is used is the "stress test". An example of stress test is where the company takes as true that upcoming events may mix the most horrible past occurrences at once despite the fact that they in reality happened at different times (Chow & Kritzman, 2001). Conclusion Project risk assessment is crucial for project evaluation and organisational decision making. There are a lot of methods used to assess risks and each method is intended to address specific concerns that are hazardous regarding any project undertaking (Acharya, 2010). Leighton Holdings can therefore use almost all of the methods discussed given its portfolio diversification to assess risks. References Acharya, V., Pedersen, L., Philippon, T., and Richardson, M. 2010. Measuring Systemic Risk. DP Stern Business School, NYU. Andrews, J. D. and Dunnett, S. J. 2000. Event Tree Analysis Using Binary Decision Diagrams. IEEE Trans. Reliability, 49(2): 230–238 Benson, C. and Twigg J. 2004. Measuring Mitigation: Methodologies for Assessing Natural Hazard Risks and the Net Benefits of Mitigation - A Scoping Study. Provention Consortium: Geneva. Chow, G., and Kritzman, M. 2001. Risk Budgets. Journal of Portfolio Management, 27: 56-60. Crispin, P. 2003. Applying Utility Theory to Project Risk Management. Project Management Journal. ECLAC, 2003. Handbook for Estimating the Socio-economic and Environmental Effects of Disasters. ECLAC, Mexico City. Gowdy, J. 2007. Toward an experimental foundation for benefit-cost analysis. Ecological Economics 63: 649-655. Leighton Holdings, 2014, Profile, Retrieved 8 March 2014, Mechler, R. 2005. Cost-Benefit Analysis of Natural Disaster Risk Management in Developing and Emerging Countries. Manual. Working paper, GTZ, Eschborn. Park, S.H. and Vining, G.G. 2000. Statistical Process Monitoring and Optimization, Marcel Dekker, New York. Scherer, B. 2007. Portfolio Construction and Risk Budgeting, 3rd edn. Risk Books, London. Zhu, S., Li, D., and Sun, X. 2010. Portfolio selection with marginal risk control. The Journal of Computational Finance 14(1), 3–28. Read More