Role of engineering in enterprise risk management

Conclusion

Events resulting in loss of property, people, and the environment can be financially staggering. Consider for example a possible event involving chemical leakage to a nearby creek causing severe contamination of the environment. The community is then outraged by the apparent neglect of the plant operators and the government is forced to close down the plant’s operations. The problem is caused by a check valve failure because it has not been maintained and checked by its maintenance engineer. Imagine the financial losses to the company without production for days or months of closure, not to mention its reputation impact to the owners of the business. Can it ever recover even when the government reverses its sanctions? Risk engineering can not only be a problem solver but a preventive measure as well.

Emergency preparedness/crisis management/disaster planning

It can be said then that risk management is an offshoot of risk engineering. The process of analyzing and treating risks is in itself an engineering process, be it from a technical or financial standpoint. When you look at the process logic, the risk management process is a problem solving process the way an engineering process evolves. While one may say that risk is not yet a problem as it is still an uncertainty, most of these probable events will be triggered by problematic conditions. The 9/11 event was a first time. That was not anticipated. And so it was a risk before it happened. Today, would it not be a risk anymore? Would it then be merely a terrorism problem where solutions are now underway hence it is just a case of a risk evolving as a problem? Whether an event has occurred or not, the uncertainty of a recurrence remains and the application of risk management remains relevant.

Many emergency preparedness, crisis management and disaster planning programs are born out of a reactive response to something disastrous that has occurred. Ideally, disaster planning or other similar forms of emergency preparedness program should cover the “unthinkable” events of the future. A typical planning workshop starts with a question – “what if?” Scenarios are then simulated as to determine the sequence of the events until the emergency, disaster, or crisis situation has been built up in paper. Planning participants are then asked to input the control mechanisms that are in place and how these operate to mitigate the impact of the event. Improvements are then formulated to increase the state of protection, security and safety of people and property.

Notwithstanding the protection, responses are deliberated to prepare the management for the likelihood of the event happening. In some developed programs, such simulations are replicated in IT-enabled systems that enhance outcomes, calculations and sequence simulations at any given control points, many with applied engineering principles such as:

a) Design and installation of security, early warning and detection systems

b) Flood Control Systems/Satellite Based Typhoon Signal Forecasting System

c) Design and application of Earthquake/Seismic Shock absorbers to reduce the impact of seismic waves on the building structures.

Other engineering controls play important roles in raising the emergency preparedness of companies and the communities susceptible to calamities and any forms of disaster. They form the front line of defense against risks. A well-engineered control mechanism will effectively avert the disaster waiting to happen.

Product safety

A hammer jack injures an operator because a safety pin failed to operate. A medication drug causes massive kidney malfunction in several patients. A dish in a restaurant poisons its customers during the day. A worker dies of a falling object from a lifting crane that has defective slings. A building is completely burned because of sub-standard cable wires. All these are attributed to defective products and unsafe product designs and specifications.

There had been attempts, particularly in underdeveloped countries, to shortcut quality processes and testing procedures resulting to substandard products, primarily to save on production costs. On the other hand, progressive companies in more developed economies invest a lot on product research and development to create quality yet rationally inexpensive products. They become successful largely because of engineering ingenuity and excellence. They have been able to re-engineer their methods and processes to achieve highly safe technology and product manufacturing processes. Insurers accepting product liability risks put a good premium on product safety.

These are just some of the engineering applications of risk management. When one thinks about it, risk engineering forms a critical component of risk treatment. Its universality finds usefulness even in service lines of business such as banks which rely heavily on computers’ hard and soft ware. The systems engineering that goes into the design of the on-line banking system is proof of the critical role of engineers. Failure or breach of security spells risk to the management and the depositors.

I say, lack of engineering in risk management is lack of management overall.

(Daniel Z. Barlicos is a Senior Manager for Risk Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of Daniel Z. Barlicos and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]).