Home > News > 1999 > October 1999 > RAMP Risk Analysis and Management for Projects
RAMP Risk Analysis and Management for Projects
For further information, please contact Susanna Morran at the Cheltenham office.
Overview
In July 1998, the Institution of Civil Engineers and the Faculty and Institute of Actuaries launched RAMP, a new system for identifying, evaluating and managing risks. All projects carry some level of risk, but the way in which it has been dealt with in the past has often left a lot to be desired - consider the new British Library, Piper Alpha, the Titanic to name just three. It is this failure of projects, characterised by delay, cost over-run, loss of life or other adverse consequence, that prompted the joint working party on project management started in 1994.
It is interesting to note that RAMP was the result of collaboration between the professional bodies of civil engineers and actuaries. However, the reasoning is simple - both professions are concerned with the analysis of risk. For civil engineers, this risk is mainly structural, for actuaries more financial: both groups have skills that can be applied to the area of project management.
One of the main reasons for creating the RAMP process has been the shortcomings in existing approaches to risk management. The main problems have been insufficient follow-through from initial risk reviews and inappropriate allowance for risks, such as merely loading "difficult" risks into a higher discount rate.
RAMP can be applied to many types of projects from building a patio to constructing a motorway. Also, it need not be confined to construction-type schemes - "softer" projects such as an office move could benefit from the application of RAMP methodology.
There are four distinct stages to the RAMP process:
- process launch;
- risk review;
- risk management;
- process close-down;
and I cover each in turn below.
Launching the RAMP Process
The first stage here is to confirm the perspective from which the RAMP process is being carried out and the criteria by which success will be measured. For instance, a town council planning a sports complex for the purpose of creating jobs will have different aims from a private company building the same complex in order to make a profit.
The process launch is also the time to appoint a risk process manager, together with a team if necessary, to co-ordinate the RAMP process. The manager will usually be someone who is not performing other roles in the investment project
It is also the time at which the scope and budget of the process are confirmed and the timing of future risk reviews is determined.
Risk Reviews
There are several stages to a risk review. First, risks need to be identified. Clearly, this is an important phase. The initial investigation should take the form of a "brainstorming" session, without the use of any checklists, in order to give as wide a range of ideas as possible. Only after this should these ideas be refined and added to with the use of checklists, site visits and reviews of key documents (if appropriate).
Next, the risks need to be evaluated. There are two parts to this evaluation. First, expected values of the risks need to be calculated (based on the financial consequence of the risk and the likelihood of that risk occurring). However, attention should also be given to those risks that have a low probability but serious, even catastrophic consequences.
Risk Management
The first stage in managing risks is to try and mitigate as many as possible. There are a variety of ways in which this can be done:
- reduction/elimination. In many cases, this could be done at little or no cost. For example, in a construction project, it could mean modifying the design of the structure slightly;
- transfer. Risks should be borne by the party best able to manage them. This could be an insurance company (through purchase of a policy), the market (through securitisation of the risk) or another party (for instance, by contracting out some of the work);
- avoidance. For example, if the risk is that a small contractor would go bankrupt, use a larger contractor. In the extreme, this could mean abandoning the project altogether;
- absorption/pooling. This could take the form of entering a project as part of a consortium.
Once any mitigation measures are taken, the impact of any residual risks should be considered. On the basis that the project is still worthwhile with these residual risks, it is important to develop an appropriate plan to keep the risks under review. This will involve not only monitoring the emergence of any risks but also being aware of potential new risks and changes in the underlying assumptions in the investment model.
A crucial part of the risk review is the risk review report. This is a critical assessment of the review, from which lessons for future reviews can be drawn.
Process Close-down
At the end of the project, an appraisal is made of the investment and of the usefulness of RAMP, so that lessons can be learned for future projects.
More Work for Actuaries?
Let's hope so! Risk management is an area that is ideally suited to actuarial consultancy, requiring statistical know-how, communication skills and lateral thinking. Also, with the support of the Faculty and Institute of Actuaries, there is real scope for more work for actuaries in this field.
For further information, please contact Susanna Morran at the Cheltenham office.
Barnett Waddingham, October 1999.