Tuesday, November 15, 2011

ALARP as a risk benchmarking target?

ALARP (As Low As Reasonably Practicable) is a fundamental concept in risk management. In essence, it represents the concept that we should mitigate threats (negative risks) down to the level where the expenditure of resources is balanced against the benefit.   As the saying goes, a picture paints a thousand words so this concept is probably best illustrated in Figure 1 below.

FIgure 1: ALARP - the point where risk and resources achieve optimal balance
Understanding the concept and measuring it in practice are however two entirely different things.  There are a number of challenges that can conspire against us in this mission, the main two being:

  • You need a consistent performance scorecard with at least 2 years of historical data. Unless there is some barometer that can give a quantitative or semi-quantitative level of risk, there is no way to objectively measure risk levels 
  • Much of what we spend on risk management is 'hidden' from view. It's relatively easy to quantify the cost of insurance, hedging, risk management training budgets etc but that is just the tip of the iceberg. A simple example of this would be an organization that relocates its office for security or safety reasons. It's easy enough to say that the organization spent $x on relocating and an extra $y/mth in rent but few organizations actually track this difference, much less allocate it to risk management.

If we want to understand when we are in the ALARP region (and it's more accurate to think of it as a 'region' rather than a point value), then the first step is to do the analysis that is required in order to build a performance scorecard. More on that later but here are some SIMPLE questions to consider:

  • Scope - What is the scope of our scorecard? The whole organization? Or do we want to separate out each division, each geographic location or each separate facility? Maybe just the safety and health program, or perhaps Health, Safety, Environment and Security?
  • Indicators - What are the specific indicators that we care about?  Are we more interested in lag or lead indicators? Do we have enough information already and if not, what would we need to track?
  • Measures - How do we measure success? At what point do we read the optimal resource/risk balance? Is there a specific number? If not, can we use client (internal or external) surveys to provide a semi-quantitative measure as a proxy for risk?
  • Performance - What long term performance are we seeking? How will our ALARP strategies and measures contribute to organizational performance?
  • Longitudinal data - What period of time do we want to consider? Will we measure monthly, quarterly, annually? What is the lifespan of our performance benchmarking tool? If we align it to our risk management framework, it will need to be revised when the framework is revised. Will we need to modify historical data to keep our long term trend information meaningful?
  • Excellence - How will we achieve excellence? How will we know when our benchmarking is excellent? Is it when the CEO or Board signs it off? Will we consider it excellent when it's working to plan? Or when external independent auditors sign it off? Equally, what do we need to do to achieve true excellence? How will we track hidden risk management costs? Eg: Will we create cost codes to track the hidden risk treatment costs such as the extra cost of rent as in the example above?

As you can probably see, SIMPLE doesn't mean simple, but lets start with the concept of ALARP as being important to our risk performance benchmarking. If we're really serious we also need to think about how to measure the AHARP concept (As High As Reasonably Practicable) for positive risks (aka. opportunity realization). More on AHLARP at this link but that's an idea for another day.

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