Sponsored by the AIAA Engineering & Technology Management Group Session Chair: JoAnne Rocker

1. Engineering Technology Management Tracking the Constant of Change Risk Systems Engineering Economics History Management Legal Aspects Society Supply Chain Logistics Technical Information Multidiscipline Design Product Development The Delta Forum 2003Operating within a Risk Averse Aerospace Environment – Coping with the Unknown Sponsored by the AIAA Engineering & Technology Management Group Session Chair: JoAnne Rocker

2. Overview • Introduction – Carolyn Griner, ETM Director • Risk Acceptance and Society at Large • Tim Howard, Society & Aerospace Technology TC • Balancing Technology Risk and the Return on Investment • Paul Collopy, Economics TC • Legal Considerations Affecting Risk Acceptance • Scott Johnson, Legal Aspects TC • Risk Mitigation through Knowledge Management • Joanne Rocker, Technical Information TC • Risk Mitigation and System Integration • Peter Rutledge, Systems Engineering TC • Multidisciplinary Design Optimization as a Powerful Risk Mitigation Tool • Achille Messac, MultiDisciplinary Design TC • Integrating Risk Management • Richard Raiford, ManagementTC • Panel Discussion – All Speakers

3. Introduction • Our Group’s TCs examine the issues affecting the aerospace industry in the areas of Engineering and Technology Management • Our disciplines include: • Economics • History • Legal Aspects • Logistics • Management • Multidisciplinary Design Optimization • Product Development • Risk Management • Societal Aspects • Supply Chain Management • Systems Engineering • Technical Information

4. Introduction • Our purpose today is to examine a single issue affecting the aerospace industry, from the several perspectives of the various disciplines within the Group • This year’s theme addresses the change in how the aerospace industry accepts the risks inherent in our technologies, to develop, integrate, and deliver goods and services in a global marketplace • Our speakers come from across the industry to address topics in • Risk and Society • Intellectual Property • Investment • Knowledge Management • Systems Engineering • Mutlidisciplinary Design • Aerospace Management • Our panel at the end will draw together the separate perspectives in response to your questions

5. Topic 1 Risk Acceptance And Society at Large Tim Howard Society & Aerospace Technology TC

6. Historical Perspective of Risk Society’s Response to Risk Society, Risk and Aerospace Aerospace, Risk and Society Against the Gods; The Remarkable Story of Risk by Peter L. Bernstein Overview

7. Risk “The word ‘risk’ derives from the early Italian risicare, which means ‘to dare.’ (Bernstein)

8. A Historical Perspective of Risk • Before 1200s - Gambling, Arabic numbers & Fibonacci (1, 2, 3, 5, 8) • The Renaissance • 1500s – Cardano, gambling & probability • 1600s – Pascal & Fermat – Probability; Graunt & statistical sampling – London population tables • 1700s • Daniel Bernoulli: information quality & utility value • De Moivre – normal distribution & standard deviation (The Bell Curve) • Insurance & the coffee houses – Lloyd’s • 1875 – Galton & Regression to the Mean (sweetpeas) • 1900s –The Rationality Debate • Uncertainty & failure of invariance – same problem presented differently results in different choices

9. Society’s Response to Risk • Until 1960s, prevailing idea is that individuals are naturally risk averse • 1960s - Loss aversion more powerful motivation than risk aversion – we hate to lose, and will take the gamble to avoid a sure loss • Aerospace losses often more catastrophic, and more sensational than other technology or system losses • Risk tolerance increases in relation to our attitudes about the future • Issue presentation key to the acceptance or rejection of risk and hence loss • Need to identify society’s level of acceptable loss Version A: $30 to start; Choices are coin flip with heads = wins $9, tails = lose $9; no flip = keep the $30 Possible outcomes are $21, $30, $39 70% choose to flip coin Version B: $0 to start; Choices are coin flip with heads = wins $39, tails = wins $21; no flip = given $30 Possible outcomes are $21, $30, $39 43% choose to flip coin

10. Society’s Response to Risk • Society needs risk to grow; historical outlets are exploration and commerce • Exploration & development of old frontiers driven by commercial needs for new markets • The Phoenicians, Columbus, The British Empire • 10,000 years of maritime technologies enabled exploration and commerce • <500 years of risk management to improve probability of success • Insurance, economic forecasting, investment strategies

11. Society, Risk and Aerospace • The first century of flight made us the new risk outlet for societal growth • Air travel, cargo movement, satellite systems and information transport fundamental to the success of the new global economy • We enable exploration and development • Shackleton, Byrd, & the 19th century frontier • Space is the new frontier for human exploration & commercial development • 100 years of aerospace technologies available to support the need to grow • New fields use risk management to improve probability of success (National defense, air traffic control, space launch) • We develop new technologies and new applications of existing technologies to provide social growth

12. Aerospace, Risk and Society • Our industry was founded by risk takers; now we operate in a risk-averse mode • Societal growth stunted, or turned inwards; not the natural process • We need to place our mean to the right of where we are, and start regressing – we need to take more risks • Rejuvenate our industry • Rekindle interest in our profession • Reclaim technology leadership role society needs us to play • IT can only give us a virtual frontier; we have already delivered the real thing • We need to embrace our role as the new enabler of societal growth • It’s time for a fresh deck of cards…

13. Risk … if we dare

14. Topic 2 Risk and the Return on Investment Paul D. Collopy Economics Technical Committee

15. Two Messages • Managers: Embrace Risk • Eliminate unnecessary downside risk • Know what you are signing up for • Use strategies like hedging to improve risk+return • Analysts: Don’t lose sight of the Fundamentals • E[NPV] is the basic metric (return) • Adjust for risk aversion when  > 4% Equity • otherwise never trade E[NPV] for 

16. Risk Mitigation Everybody loves but • Great idea, if there is no cost • in product performance • in development time • Risk free development  Sunset Industry • Performance > SoA = Technical Risk

17. Risk 400 500 600 400 500 600 Combat Range Combat Range What is Risk? Low Risk Program Risk = Uncertainty

18. Tech Development Entry into Service Concept Studies Dem / Val Production E & MD 0 5 10 15 20 Years Military Aerospace Development Careful Risk Mitigation ensures the system will achieve obsolescence and military irrelevance upon entry into service

19. Venture Star

20. Caveats • Choose your Battles • Hope for Success / Plan for Failure • Do not Bet the Company

21. Diseconomy of Scale Development Cost or Schedule 0 1 Average Probability of Failure Choose your Battles • Risks Interact: • ~ 5 Technical Risks can be managed at once • Use Spiral Development for more ambitious programs

22. Hope for Success / Plan for Failure • Quote expected performance • Plan backup designs • Low risk • Prepare to take a performance hit • There is always next time

23. Typical Business Value of Money 20% 16% Neutral Attitude to Risk 12% Value / Equity 8% $        0 . 16 u $  0 . 16 1  e 4%     0% 0% 4% 8% 12% 16% 20% % of Equity Betting the Company Risks < 4% equity: value = avg. return For Risk = 20% eq. business is strongly risk averse

24. 20% 16% 12% Value / Equity 8% 4% 0% 0% 4% 8% 12% 16% 20% % of Equity Using the Value of Money Curve + 8% Arbitrary Base Point p Upside = 3% 1 - p - 8% Downside =5% Value of deal = 3%p + 5%(1-p) Upside Downside

25. Summary • Risk has upside and downside • Risk-free designs condemn the industry to mediocrity • Good risks need to be managed not mitigated

26. Topic 3 Legal Considerations Affecting Risk Acceptance R. Scott Johnson Legal Aspects of Aerospace TC McKee, Voorhees & Sease, LLP

27. What is risk? • Potential for liability

28. Negligence • Duty • Breach of Duty • Injury • Causation

29. Negligence • Duty • Generally: Exercise Reasonable Care • Breach of Duty • Injury • Causation

30. Negligence • Duty • Specifics: Statutes, Rules, and Regulations • Breach of Duty • Injury • Causation

31. Specifics: Statutes, Rules, and Regulations • Federal Aviation Act of 1958 • 49 U.S.C. • Provides regulatory authority for: • Department of Transportation • Aviation Economic Regulations or AERs 14 C.F.R. § 200-400 • Federal Aviation Administration • Federal Aviation Regulations or FARs 14 C.F.R. § 1 - 199 • National Transportation Safety Board • 49 C.F.R. § 830, 31, and 45

32. Specifics: Statutes, Rules, and Regulations • State products liability laws • “liability of a manufacturer or seller of a chattel which is defective and/or unreasonably dangerous and causes” injury. • William R. Prosser, Handbood of the Law of Torts 641 (4th ed. 1971) • Three theories of recovery: • Warranty (contract remedy) • Strict liability (tort remedy) • Negligence (tort remedy) Vary by State

33. Negligence • Duty • Breach of Duty • Injury • Causation liability

34. The Bad • Create broad range of compliance duties • Create investigation bodies • NTSB determines “probable cause” for all aircraft accidents in the U.S. • Create Enforcement Procedures • Civil and criminal penalties

35. The Bad • Other Sources of Liability • Contract provisions • Other Federal and State Statutes and Regulations • Environmental • Intellectual Property • Employment • Corporate • International Treaties

36. The Good Statutes can be good?

37. The Good • General Aviation Revitalization Act of 1994 (42 U.S.C. § 40101) • 18 year statute of repose • prohibits any legal action for any aircraft, engine or part at issue • Applies to all general aviation aircraft

38. The Good • General Aviation Revitalization Act of 1994 (42 U.S.C. § 40101) - Exceptions • Manufacturer “knowingly misrepresented or concealed or withheld” from the FAA information relating to: • The type certification • components • airworthiness

39. The Good • General Aviation Revitalization Act of 1994 (42 U.S.C. § 40101) - Exceptions • claimant was a passenger for purposes of receiving emergency or medical care

40. The Good • General Aviation Revitalization Act of 1994 (42 U.S.C. § 40101) - Exceptions • suit is brought under the manufacturer’s written warranties

41. The Good • State statute of limitations • International Treaties • Warsaw Convention • Other liability limiters • Sales contract provisions • shift liability away • limit liability • Insurance agreements • cover yourself

42. The Beautiful • Risk Management Programs • By whom? • Government Initiated • NTSB or FAA • Insurance Company • In-house x

43. The Beautiful • Risk Management Programs • Evaluate loss potential • Use established risk management techniques • Put a plan in action

44. The Beautiful • Risk Management Programs • Evaluate loss potential • Total potential loss X % Chance loss will occur • Account for “all” losses (Economic & Social) • Use established risk management techniques • Put a plan in action

45. The Beautiful • Risk Management Programs • Evaluate loss potential • Use established risk management techniques • Eliminate (Don’t Do It) • Reduce (Rapid Response) • Transfer (Insurance) • Retain (Savings Plan) • Put a plan in action

46. The Beautiful • Risk Management Programs • Evaluate loss potential • Use established risk management techniques • Put a plan in action • Identify the risks • Maintain database of accidents, lawsuits, liability situations • Create contingencies and risk reducing methods • Example: British Airways BASIS program

47. Thank you! R. Scott Johnson McKee, Voorhees & Sease, PLC 801 Grand Avenue, Suite 3200 Des Moines, Iowa 50309 johnson@ipmvs.com

48. Topic 4 Risk Mitigation through Knowledge Management JoAnne Rocker NASA Scientific and Technical Information Program Chair, AIAA Technical Information Committee

49. Risk Systems Engineering Engineering Technology Economics Technical Information Multidiscipline Design Product Development Management Tracking the Constant of Change History Management Legal Aspects Society Supply Chain Logistics • Discussion Topics • Risk mitigation • Knowledge management • Communities of practice • Lessons Learned • Portals • Technology and cultural change • Conclusion

50. Risk Systems Engineering Engineering Technology Economics Technical Information Multidiscipline Design Product Development Management Tracking the Constant of Change History Management Legal Aspects Society Supply Chain Logistics Risk Mitigation • Risk Management (RM) is an organized, systematic decision-making process that efficiently identifies, analyzes, plans (for the handling of risks), tracks, controls, communicates, and documents risk • Purpose: increase the likelihood of achieving program/project goals • Risk mitigation depends upon risk analysis • Many useful sources of information should be compiled to provide input for risk analysis, for example: • Test data • Expert opinions • Hazard Analyses, Failure Modes and Effects Analyses • Lessons learned data and historical information from other programs/projects • Software verification and validation • Risk data generated in other steps in the process Risk mitigation is a process involving information analysis from a variety of data sources Risk Management Procedures and Guidelines, NPG 8000.4