Risk Management as a cultural factor

1. Risk Management as a cultural factor SIDIR Conf. Risk Management in the Engineering Investment Process Warsaw, 29-30 November 2012 Jörg-Martin Hohberg (Switzerland) Dipl.-Ing. TU Berlin, MSc Imperial College London, Dr.sc.techn. ETH Zurich Structural Engineer IABSE ISRM SwissNCOLD IPMA PMI

2. Personal background: • Senior Engineer and former Quality Manager in underground and hydro-power construction, www.iub-ag.ch • EFCA Task Forces on Quality and H&S, expert for the EU Guide to the Mobile Site Directive (92/57/EEC)www.efca.be • Member of the FIDIC Risk & Liability Committeewww.fidic.org • SGS Lead Auditor in the Swiss construction cector (engineers, contractors, road authorities, rail infrastructure) www.sgs.com 2

3. The ‘construction game’ Source: IABSE 3

4. Contents • ‘Risk’ – recapitulation of definitions • Risk management process and maturity • Dimensions of ‘Culture’ • Implications for risks and conflict resolution • The COVEC case • Adversarial thinking in construction projects • Relational contracting, Partnering, Alliancing • PQM – Swiss approach to partnering • Conclusions 4

5. ‛Risk’ – recapitulation of definitions event * * incident / changing circumstances / something not happening (risk source) hazard controls • chance / • probability / frequency • (incident & exposure) scenario risk danger likelihood context (internal / external) consequences objective / value vulnerability resilience Stakeholders 5

6. Awareness as cultural element Source: Hilson amnesia (ignorance) epistemic uncertainty knowledge management aleatoric uncertainty • „Risk is an uncertainty that matters“ 3.context = environment in which to achive objectives 1.likelyhood = chance of something happening 2.consequence = outcome of an event (affecting objectives) 6

7. Opportunities as ‘upstream risk’ focus reduce exploit threats opportunities opportunities ? likelihood likelihood consequence consequence Source: Hilson 7

8. Risk management process (1/4) • external context: • environment • forced field • values & relations • internal context: • governance • policy • resources • decision making • values & relations • defined risk criteria: • analytic quality • risk levels • risk appetite stakeholder mgmt. Source: ISO 31000 8

9. Risk management process (2/4) • identification: • experience • checklists (lessons) • creativity techniques • analysis: • likelihood • consequences • scenarios • failure trees 9

10. Risk management process (3/4) • evaluation: • priorities • bearability • acceptance • treatment: • avoid • reduce (ALARP) • transfer • share / insure • accept 10

11. Risk management process (4/4) • monitoring: • implementation • of actions • effectiveness • negative side-effects • review: • non-occurrance • new objectives / risks • shifting priorities • alternative actions quality mgmt. 11

12. Risk management maturity • Prerequisits • no-blame culture, reflective and supportive • organisational framework (management system) • stable RM process with continuous learning • accountability of risk owners • empowerment of action owners (incl. escalation paths) • Perspectives (example) application to be equally delloped (level n) process experience definition culture 12

13. Risk maturity growth • everywhere • proactive • leadership • quantitative • improvement • partnering • formalized • systematic • budgeted • tool set • metrics • suppliers • piloting • experimental • little support • ineffective • inconsistent • qualitative • heroic • sporadic • unstructured • unreflected • reactive • no learning ‘natural’ ‘normalized’ ‘novice’ ‘naive’ 13

14. Values, attitude, and behaviour • The ‘lilly-pond’ model behaviour    possibility of change attitudes culture values ethics 14

15. ‘Culture’ • View of social anthropology [Geert Hofstede et al.] • pattern of thinking, feeling and acting (mindset, mental program) • the unwritten rules of the social game in any human collectivity • Four (later: six) dimensions of culture • social inequality & authority  “power distance” • indviduum vs. collectivism “individualism” • assertiveness vs. modesty  “masculinity” • tolerance to ambiguity  “uncertainty avoidance” • thinking in past or future  “long-term orientation” • expressiveness vs. discipline  “indulgence” 15

16. “Power distance” • Definition • “The extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally.” • Ranking of countries • China (80) > Poland (68) > U.K. (35) = Germany (35) >CHgerm (26) • e.g. German contractor being surprised by first-name culture • with resident engineer on Swiss construction sites • Correlations • high PD: ~ centralization, ~ hierarchy, ~ trust in authority • low PD: ~ equality, ~ dialogue, ~ autonomy, ~ saecularism 16

17. “Uncertainty avoidance” • Definition • “The extent to which the members of a culture feel threatened by umbiguous or unknown situations.” • Ranking of countries • Poland (93) > Germany (65) > CHgerm (56) > U.K. (35) > China (30) • e.g. uncertainty avoidance (and power distance) in school: • “there exists a single correct solution (that the teacher knows)” • “there may be other solutions (that the teacher might not know)” • Correlations • high UA: ~ anxiety, ~ control, ~ formality, ~ quality • low UA: ~ gambling, ~ ‘chaos’, ~ common sense, ~ innovation 17

18. “Power Distance” & “Masculinity” Source: Hofstede 18

19. “Uncertainty avoidance” & “Individualism” Source: Hofstede 19

20. The COVEC case 20

21. Dispositions and disappointments • Position of the Polish Client • time pressure (EURO 2012), high political visibility • award by lowest price (“race to the bottom”) • design & build (risk transfer? reward?) • focus on enforcing results (trust?) • ‘hard line’ against any claims danger • Position of the Chinese Contractor • strategical low tender to enter the European market • boykott by Polish subcontractors • attempt to capitalize on African road building experience • underrated legal constraints (inspections, unions, ecology) • frustrated hope for negotiation (i.e. to build relationship) 21

22. Implications for risks and conflict resolution • Power distance • centralization of control and decision making, lack of discussion • Collectivism • “yes/no” avoided for harmony, trust takes time and is personal • Masculinity • ego-boosting behaviour, conflicts resolved by show of force • Uncertainty avoidance • distrust in opponents, desire for preciseness & quality • Long-term orientation • perseverance at the cost of short-term sacrifices, pragmatic • Indulgence • atmosphere of negotiations (sociability), lesser focus on moral 22

23. Clash of cultures (Poland  China) • Power distance: • largesmall 80 68 • Individualism: • individualistcollectivist 60 20 • Masculinity: • masculinefeminine 64 66 • Uncertainty avoidance: • strongweak 93 30 • Long-term orientation: • long-termshort-term 38 87 • Indulgence: • indulgentrestrained 21 29 23

24. Adversarial thinking in construction projects • Group think and the ‘moral circle’ • “we and they” – closing ranks by creating a common enemy • applying different moral standards to the out-group • lack of critical reflection of the in-group • Antagonistic factors in construction projects • asymmetry in information (hidden risks, hidden quality flaws) • moral hazard of opportunistic behaviour (‘principal / agent’) • transactional character (no bearing on future business) • adverse selection by lowest price (‘lemon problem’)  claims • blame culture, uncapped joint and several liability 24

25. Formulation of project constraints • ‘Political pricing’ • systematic underestimation of project costs, exaggerated benefits • late start of execution after procrustinating project approval • putting high pressure on keeping the opening date • The ‘nano-percent chance’ of positive surprise example: project duration guaranteed mostly hardly ever Source: De Marco 25

26. Procurement principles • Abnormally low tenders (ALT) acc. to EU policy • ALTs are detrimental to the national economy • clients must have an idea of the effort required for a good job • national legislation must allow to exclude ALTs • Quality-based selection (QBS) • selection according to experience and capacity of the firm • award according to experience of the project team • analysis of risks (threats & opportunities) incl. project interfaces • realistic break-down of project and construction schedule • QA concept for identified critical tasks (also H&S, environment) • double-envelope procedure, cost/benefit ratio, or points for price 26

27. Effect of procurement strategy • Shift in risk allocation ? ? ? Source: ECI 27

28. Relational contracts • General idea • teaming of the project coalition, alignment of objectives • open sharing of information, learning from each other • risks allocated according to capability of treatment • adaptability to change (‘dynamic contract’) • Partnering vs. alliancing 28

29. Literatur on partnering etc. 29

30. Swiss approach to partnering • PQM = project-specific quality management • focus on vital success factors and lethal risks • cooperation in projects across organizational boundaries • common understanding of the quality process in construction 30

31. Dynamic contract feature • Risk analysis as dialogue 31

32. Implementation problems in Switzerland 32 Source: Swiss Highway Authorities

33. Conclusions (1) • Procurement strategy & contract management • fit type of procurement to the project and Client‘s involvement • use QBS and avoid the ‘lemon problem’ • take your time to clarify ambiguities before signing the contract • establish procedures for variations and alterations • provide a clause on amicable dispute settlement • Risk analysis and risk allocation • sollicit the Contractor‘s experience for a joint risk analysis • allocate risk according to ownership and action capability • find a fair andbalanced bonus/malus rule (allow opportunities!) • commensurate liability with project contribution and remuneration 33

34. Conclusions (2) • Teaming building • clearly define the spheres of responsability and respect them • focus on common project interests and build trust • plan periodic feedback & improvement workshops • honour rituals and celebrate milestones • Dispute resolution • formally approve plans, construction programs and minutes • discuss frankly Contractor‘s objections and suggestions • keep track of change orders, settle claims timely • don‘t pile up ‘amunition’ and dig trenches for litigation • prepare to do future business together 34

35. Preparedness Bye 35

36. Questions? Dr. J.-Martin Hohberg (usic) +41 31 357 11 85 martin.hohberg@iub-ag.ch 36