Futura Risk Management Conference and User Meeting
10-11 May 2007, Ingeniørenes Hus, Oslo, Norway

Thursday 10 May 2007 Erling Hjallen, leader of the Futura team in Norway, welcomed nearly 40 attendees from the Scandinavia and the UK to the Ingeniørenes Hus in downtown Oslo.

Keynote Address by Petter Eiken

Executive Vice President, Skanska International

Petter Eiken began by saying that his talk was based on 25 years of making mistakes and learning from them. He introduced Skanska, which is now the second largest construction contractor in the world. He described the serious problems that the business encountered in the late 1990′s, and what has been done since then to improve performance and business practices in every area of the business. Skanska’s business is now based upon ‘Four Zeros’ no ‘loser’ projects, no breaches in business ethics, no accidents, and no environmental breaches.

A key part of Skanska business planning is the Operational Risk Assessment Process (ORA), a fairly simple but practical approach which is applied to all projects. The amount of work involved depends on project size, geographical location, contracting arrangements and so on, but the outcome is always a listing of the top five risks, assessed by probability and potential impact. A comprehensive risk scan is undertaken, covering resource availability, technical risk, client and contractual risk, cost escalation risk, project financing, environmental risks and external social/stakeholder issues. A traffic light diagram is used to summarise the results (green, amber, red). Use of the ORA process has resulted in greatly improved financial performance since it was introduced in 2003.

Another key area inside Skanska has been safety performance, and although improvement is still necessary, he said that the number of fatalities had reduced significantly down by more than 80% since 1992. Skanska has learned a great deal from customer safety requirements, especially from the oil industry. He quoted one incident where an uncontrolled blast forced the shutdown of a site for a week he said that a 2000-strong workforce doing nothing for that amount of time certainly focused the mind!

As for environmental risk, Skanska is moving from ‘avoiding environmental accidents’ to ‘doing operations in an environmentally-friendly way’. Ethical business practice is also a key target. Skanska has left a number of regions and country markets since it has proved impossible to work there in a corruption-free way. He noted that incidents of bad practice during the 1990s were still affecting the business today.

Remedying defects has been a considerable problem in the past, especially in the house building sector. ‘Zero defects’ is to become the fifth Skanska ‘Zero’ from 2008.

Petter then discussed the management culture change that underlies the progress that has been made ‘a great boss is passionate about people’. The new management style at Skanska is all about setting clear expectations, communication, teamwork, coaching rather than directing, listening and meeting with subordinates.

Use of Futura from Start to Finish Experience

RGA Project Per Øystein Funderud (RGA) and Geir Frones (Futura)

Per Funderud gave an interesting talk about a large water supply project in southern Norway in which the Lichtenberg Method has been used for assessing and managing the risk. The initial cost was around 450 million NOK ( 55 million). The project comprises about 20 km of 800 mm diameter pipelines, 10 km of 300-500 mm diameter pipelines, three pumping stations and two large hydrostatic pressure tanks. It involves three different communities.

The first Lichtenberg Method analysis indicated that the original completion date was very optimistic. The pipeline route was the major uncertainty, and this was actually correct – a year later, the Board decided to change the route.

Although the schedule became six months longer as a result, about 1.9 million was saved by this change.

The first cost analysis showed that the original budget had a 60% chance of being exceeded. The plans were therefore revised, and as a result the Project is now being delivered about 12% (about 7 million) below the initial budget. To sum up – these uncertainty analyses have really helped to steer the project towards a successful
conclusion.

Per Funderud also said that regular use of the Method helped to ensure that all the project participants were aligned and moving in the same direction.

Using Futura in the Oil & Gas industry a Personal Perspective

Peter Adlington (Futura)

Peter Adlington has been using the Method on a wide range of oil and gas projects for about 15 years. He explained where the Method is used and why it fits so well, before going on to illustrate some of the very significant ‘overall influences’ which currently make cost and schedule prediction so difficult. He illustrated this with examples taken from projects in Canada and the Russian Federation. He said that the situation was worst for very large projects, where many factors come into play. Among these are the very high level of technical and system-wide complexity; pressure to achieve ‘first oil’ as early as possible due to the huge level of investment; hostile, remote environments with limited infrastructure; the likelihood of political interference; considerable interest from environmental groups and other NGOs; stringent lender requirements; complex partnering and contracting approaches; and the international nature of the work (exchange rates, multi-national workforces, etc). He noted that very large projects often appear to overwhelm the abilities of even the best qualified organisations.

He went on to share some keys for getting the best outcomes from an Uncertainty Analysis (proper preparation, active client sponsorship, quality of the analysis group) and some of his worst experiences, especially having to work with very large groups.

He concluded that even with massive oil and gas projects, there is a place for a top-down approach which captures and highlights the key uncertainties. This does not replace the huge amount of detailed cost and planning work that has to be carried out, but it often gives a clearer picture of the overall situation. Given the current state of the market, previous cost and schedule data can be very unreliable guides, so there is an even greater need to carry out uncertainty analyses the Method is excellent for this since much of the current levels of uncertainty is due to
‘overall influences’.

Preview of the 2007 Futura Nova Maintenance Release

Pekka Pajuoja and Peter Adlington, Futura

The 2007 maintenance release will be available in early June 2007. A number of minor improvements have been made throughout the program, as well as the addition of two error-prevention checks in the schedule modelling module. There are two challenges relating to operating systems which will addressed in a major software release later in the year. These relate to the use of Futura Nova without Administrator rights in the latest versions of Windows XP Service Release 2, and the need to make the software fully compatible with Windows Vista and Office 2007.

Visit to the Nobel Peace Centre and Conference Dinner

At the end of Thursday afternoon’s proceedings, the Conference delegates were given a guided tour of the nearby Nobel Peace Centre, before enjoying an evening meal in the delightful surroundings of the Christiania Restaurant, a stone’s throw from the Norwegian Parliament. See pictures at the end of this article.

Friday 11 May 2007

The second day of the Conference was more interactive in nature, but it began with a brief talk by Halvor Stormoen about the increasing requirements for companies to identify and manage risk.

He noted that Senior Management can use the Method for the practical elimination of unpleasant surprises (e.g., overruns or delays); risk-assessed corporate budgeting and planning; greater certainty that key issues are being identified and actioned; support for corporate contingency and risk management; and for cancelling
loss-making projects in due time.

For Sales and Marketing, the approach can be used for sales budgeting and planning; consideration of opportunities as well as risks in competitive situations; and for bid preparation and development. Finally, for Project Managers, the approach can be used for project start-ups; development of realistic plans and budgets; reduction of cost or project duration during project implementation; and for creative problem solving and team building.

Halvor noted that in the move to more decentralised organisations, the approach can also be used to communicate between different parts of the organisation. There is also a trend towards analysing companies and public sector organisations rather than simply concentrating on projects. He has successfully applied the Method to company valuations. In general, use of the Method can be a key way for managements to demonstrate that they truly are addressing and managing risk.

This mirrors the Basel II requirements for the banking sector, where their clients now have to assessed for credit risk.

Friday Workshop Sessions

Workshop 1 about ‘How to become a good Facilitator’ was led by Thomas Lillskogen of Futura. Thomas gave a comprehensive presentation about how he prepares for and facilitates Uncertainty Analysis workshops using the Method, with particular reference to schedule analyses. He noted that a good workshop introduction is particularly essential for newcomers to the Method, and that it is very important that people fully understand the concept of ‘overall influences’ on the Base Case result when building the quantitative models.

Workshop 2 was led by Patric Östring from Saab Aero Systems on ‘How to keep the Method alive’. Saab uses the Method and Futura Nova software internally, but the organisation has struggled to keep its use going since 2000, both in terms of the demand for analyses and the loss of facilitator competence after a number of trained individuals had moved on. Workshop participants discussed the reasons for this, using the why?…why?… approach to identify the root causes. Solutions were then discussed using how?…how?…

Talks by Steen Lichtenberg

Before lunch, Steen Lichtenberg and Anker Schrøder spoke about their ongoing work for the Danish Roads Directorate, where they have facilitated 72 cost analyses over a period of four years. (Their work was described in more detail at the 2005 conference in Cambridge.)

Projects which have had more than one analysis were plotted on a graphic which showed the variance in mean cost over time. Although the sample was currently fairly small (around 12 projects), they were satisfied to see that the majority of the results lay within +/- one standard deviation of the original prognosis. Major changes to project scopes were not included in these results.

A fast-track process has been developed which enables each analysis to be carried out in just one day. The uncertainties are assessed via overall influences on the estimated base cost, which is not assessed in detail. Instead, a base cost accuracy range is included in the model. Two results for each project are given to senior management one without the major exclusions, and second one with them included.

After lunch, Steen shared his thoughts about the future use of the Method. He was concerned that alternative approaches which were too simplistic/primitive could come to dominate the risk assessment ‘market’ at the expense of the Method. He was very keen to see a more proactive approach to marketing the Method at conferences and similar events.

Ten Minute Case Studies

Case Study 1 – Banverket
Ove Bucht from Svenska Banverket gave a short presentation about use of the Method at the his organisation, which runs the railway infrastructure in Sweden. With an investment budget of 11.7 billion Euros to be spent between 2004 and 2015, there is considerable risk to understand and manage. In the past, Banverket has been publicly criticised for producing unreliable cost estimates, and use of the Method is aimed to address this problem.

In a wide-ranging assessment of use of the Method over the last two years, Ove Bucht highlighted some interesting points:

a light version is used to review cost estimates for all projects in the Future Plan. There have been positive reactions from participants; it is seen as a valuable opportunity to discuss and to synchronise the overall picture of the project, to discuss the overall conditions, etc.

However, costs have generally gone up approximately 20% from 2004, partly due to market factors benefits have included the generation of a unified picture of a project and a good overview of the costs. It gives a common understanding of the effects of overall influences and their effect on cost, and a good picture of where the greatest uncertainties lie. It is also a good basis for discussion and creation of action plans concerns have been expressed about the reliability of an estimate where workshop participants have limited or no knowledge of costs. There is a concern that risks are being ‘double-counted’ once overall influences have been added. It has been found that the Method tends to increase the forecasted costs, and there have also been difficulties in getting good estimates of minimum and maximum values the facilitator must therefore give a good introduction to the Method as well as having a good knowledge of the type of business involved. The selection of participants is also very important, of course. Ove Bucht went on to say that computer-based supporting software is a necessity outstanding issues include the use 1/99 versus 10/90 for the minimum and maximum values in the triple estimates; the potential use of a checklist for overall conditions; use of the Method in project economic forecasts; use of the Method for schedule risk analysis and the potential effect of costs; and the pros and cons of using internal vs external facilitators

Case Study 2

Mats Persson from Futura (Sweden) gave some warnings about the misuse of the Method. He said that the Method enables the user to see and understand a situation as a whole, and that it is a mistake to extract particular details from the model and to view them as ‘accurate’. This is because the overall results are valid, not individual line items, activities or sub-sections inside the model. He has seen detailed parts of a Futura model extracted, transferred to a spreadsheet and then misused no account was taken of the Base Case assumptions, nor of the wider overall influences which related to them.

Case Study 3 – Insurance Risk Assessment Study

Peter Adlington gave a short presentation about the use of the Method for an Insurance Risk Assessment Study for a geothermal power plant in Iceland. The three day event involved a site visit and briefing for Workshop participants on the first day, followed by a two day workshop in which the qualitative analysis stage of the Method was used, followed by an Excel-based assessment of the 35 key risks arising from the Scenario Analysis. The assessment involved discussing mitigating strategies, the maximum level of financial exposure, the insurability of each risk, and then what the lead insurance category might be if a risk is potentially insurable.

Hot Tips, Predictions vs Outcomes, and ‘Ask the Experts’

Towards the end of the Conference, participants spent 30 minutes sharing their ‘hot tips’ about the use of the Method and the Futura Nova software tool. This was followed by some sharing about how the actual outcomes of analyses had matched the original prognoses.

The final plenary session was ‘Ask the Experts’. Two topics were discussed. The first concerned the presentation of different analysis results for a project over time, and the second was a question to Steen Lichtenberg regarding the correct modelling of overall influences in schedule models (the so-called ‘shadow effect’ of time being added in series from the different overall influences).

The combination of an enjoyable Conference and a satisfying Friday lunch at the Ingeniørenes Hus brought smiles to everyone’s faces.

Some pictures:

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