Introducing the world’s first dynamic, practical tool for proactively measuring and managing risk during capital project execution.
“If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.” – Gary Cohn, Vice Chairman, IBM
Capital project organizations are complex, and we haven’t had an effective, proactive way to measure and mitigate all the risks. This is a bold statement, but the evidence to support it is everywhere you look. Generally, we know the vast majority of capital projects are late and over-budget, a fact that some observers attribute to “delusional optimism.” Specifically, we hear about staggering oversights at some of the world’s most powerful capital project organizations, as when a Fluor CEO admitted to investors that labor costs had inexplicably doubled between projects, or when a leaked report revealed that Exxon and its partners had overspent by $138 Billion over 20 years — with some projects going six times over budget.
The FEL and PDRI are excellent definition indices, but it’s clear they don’t account for the full gamut of risk associated with a capital project. Concord® has created a tool that does this, and more. Our index not only provides an agile tool for identifying and measuring static risks, it also provides capital project leaders with a practical, future-focused tool to proactively measure risk during execution. Our tool is called Predictability Thinking® Index; it’s an innovative, new risk management methodology, and that’s why we trademarked it.
Why We Measure Risk, and How Our Tools Fail Us
We seek to measure risk because doing so helps us make better decisions. If we can quantify a risk and understand its probable impact, we can choose whether to accept the risk or take steps to mitigate it. Risk measurement indices are important because they provide an external assessment that helps temper our “delusional optimism.”
The problem is that traditional indices are one-time analyses that look largely to the past, assessing risks when little or nothing can be done to mitigate them. They are, in many respects, a retrospective technical audit with a pass/fail outcome. This doesn’t actually help us manage risk. What we really want and need is a working tool that helps project leaders assess and proactively address risk on a regular basis through the project lifecycle. We need a dynamic risk dashboard that empowers project teams with meaningful information about new and evolving risks during the project execution, when they can actually do something about it. This is what the Predictability Thinking® Index provides.
The tool is too multifaceted to explain in a short blog article, but let’s take a look at a few of the ways it differs from existing risk measurement and mitigation tools. Then we’ll consider what we really want and need from our risk measurement tools.
1 | Accounts for Risks Related to Organizational Maturity
Expertise and experience matter a great deal when it comes to capital project execution, but existing indices don’t sufficiently account for risks related to organizational maturity. A company that has been in business 10 months has a different risk profile than a competitor that has been in business for 10 years. Likewise, an organization that has delivered on-time and on-budget for three consecutive years has a different risk profile than one that has been late and over-budget during the same period. These are just a few of the ways in which organizational maturity has a direct impact on project outcomes, yet we fail to account for this in our assessment of risk. The Predictability Thinking Index does this.
2 | Accounts for Toolset and Functional Capacity Risks
Let’s say you’re a company that has invested in modern digital tools, you’ve trained your team, and you now have the capacity to manage 100% of your engineering scope using cutting-edge technology. Your systems allow you to provide full visibility to key stakeholders, to be highly responsive, and to deliver unparalleled engineering quality. This toolset and your organizational capacity have a direct impact on your risk profile, significantly distinguishing you from a competitor who struggles with disintegrated engineering tools and systems that do not favor transparency and scalability. Unfortunately, traditional indices don’t account for this; the Predictability Thinking Index does.
3 | Accounts for Dynamic and Emergent Risks
Nobody had a global pandemic in their risk register before COVID-19 hit in March 2020, and our fixed indices had no place to account for the cataclysmic impact the virus would have in the months and years that followed. Risks change, and we need dynamic tools that can capture new disruptors and support capital project teams in managing related risks quickly and effectively. The Predictability Thinking® Index can expand to include categories of risk that were not in the framework at project inception. It is a dynamic risk measurement index purpose-built for capital projects, the first of its kind.
Risk Measurement Is For Investors, Too
Here at Concord®, we believe that predictability is a major factor in the market value of capital project organizations. Our index can support Owner organizations in improving predictability, which can contribute to better ROI for shareholders. Owners and investors who care about predictability can adopt or recommend the use of the Predictability Thinking® index to ensure that leaders and decision-makers understand and consistently manage risk.
If you’re ready to take the next step in measuring and managing risk, contact us today.