McLaren Formula 1 team: risk analysis

Risk averse

Every business owner, investor or risk manager would like to be able to predict the possible risks their businesses face and the probable outcomes of their strategic decisions – and then be able to select the best direction to take.

by Richard Willsher, World Business
Last Updated: 23 Jul 2013

Sadly, SmithBayes corporate software product (smithbayes.com) cannot do this but it can lead its users a number of steps down the right track.

In essence the product is a decision-making platform for handling a broad range of risk and reward metrics available for a product, a business, a portfolio of brands or other business activity facing an uncertain future. It applies a series of tests and calculations to the project and provides a variety of possible outcomes.

SmithBayes’ CEO Simon Williams explains the basis for the tool: “Businesses have to live with an unrelenting pace of change and there is a need for strategic decision-making to be ever faster. They may be risking a great deal in terms of money, revenues or brand impact so getting things a little bit right or a little bit wrong could have a huge impact. Take telecoms or pharmaceuticals or aerospace, industries that make big bets on future market conditions. For a telco it's: which bit of the convergence do you want to bet on? If you’re in aerospace and developing a new jet engine, how do you respond to the technologies that you’re going to have to incorporate in your engines over the next 5-10 years? How are you going to respond to government regulation, noise and pollution issues, for example?

"We found that the tools people were using to look at these things were based upon quite linear and very definite plans. It’s all about building a plan and then executing it. We thought that, given the pace of change and the flux of developments, you could never have a certain plan. It seemed to us to be much more important to focus on being able to react to change, being agile.”

SmithBayes took ideas from the financial markets, which are pretty good at managing uncertainty in pricing securities portfolios and trading patterns, and then cross-fertilised these with a model developed by Formula 1 team McLaren to manage strategy during a race, taking into account race data as the race was happening, second by second. The result is a tool that is able to recalibrate data as events occur and which can be applied to business situations.

"Our view," says Williams, "was that this was exactly what was needed in the corporate space. Rather than have a decision or planning cycle that may be a year long, companies are looking for a way to come up with a plan and then very quickly recalibrate that as things happen around them. If you’re a FMCG (Fast Moving Consumer Goods) company your corporate planning cycle may be much slower than the rate at which changes in market conditions are happening. So if you can reduce that decision cycle down to a quarter or a month you will be fleeter of foot as compared to your competitors."

Risk managers and strategy planners are familiar with decision trees but in comparison SmithBayes’ offer is more akin to decision forest. The sheer scale and comprehensiveness that the product embraces is impressive. And it’s pretty too. The output is a set of clever graphics that enable users to see at a glance the risks, their scale, their probability and their impact in a variety of visual forms, all linked to a timeline and to a profit-and-loss projection. At first sight, you can’t imagine how any business, any project, any entrepreneur can do without this bit of kit. I thought I’d better ask some experts what they thought of the concept – could there be a tool that was that good?

"In classic risk management training," says Phil Keown head of technology and risk management at business advisors Grant Thornton, “people refer to impact and probability and that is what all risk management is about. You are trying to assess the impact of something happening and the likelihood of it happening. The issue really is, how do you know that you’ve dealt with everything? How do you know that this is a better way than the intuition and experience of people who’ve worked in the business or sector for 20 years?” he wonders. “It would be very difficult to automate that. That said, if someone is using tools that can do a better job, and results are shown in the marketplace, in due course that’s where the proof lives…"

Andrew Keeling, head of group risk management at London-listed international brewing business SABMiller, is sceptical. Although he has not had experience of the SmithBayes’ offering, he’s aware of other software tools available in the market that offer to reduce or manage risk. “These tools work very well where you have a lot of quantified data and know the variables – in processes, chemical processes for example, where you know all the variables. In Formula 1, for example, where you can measure the exact temperature of the track or know which tyres are best suited to which condition. You need to be able to get your scenario analysis right up-front. The problem that you run into with more strategic and enterprise risk management is that a lot of the risks, especially the new, emergent risks, are very intangible to start with. SARS, avian flu, global warming – there is lots of qualitative opinion but there is very little quantified data."

SmithBayes’ CEO Williams says he is not offering a magic bullet. What the software does, he says, is help business planners frame uncertainty, think through scenarios of probability and rejig them in a dynamic way as new ideas, new data, new factors come into play. And that, says one of his clients, is a vast improvement on some methods that are currently used in business planning. These often involve a mass of spreadsheets produced by different parts of the business which may be idiosyncratic and are not easily tweaked with new information nor necessarily compatible.

The client, a major international telecom firm whose identity I am sworn to secrecy not to reveal, is a relatively new user of the product but is already reaping benefit from it. “In the past, using human intuition, people working without such tools made some pretty smart choices. But it is an advantage to us that we can increase the number of people who can share their intuition from product development, finance, technology and other areas – they can have a common ground on which to discuss new projects. It gives them a wider language. All of the stakeholders can pool their intuitions.

Also they can sensitivity-test. They can say, "if my intuition about this is wrong – which it well might be – then how badly could it change the outcome?” It speeds up and makes more efficient that human ability to enter decision-making by adding a certain common language. It can’t invent things you wouldn’t have thought about but the consequences of a particular decision or path can be seen relatively quickly."

What I find so surprising is that this product hasn't come to market before. If it enables all known information to be factored in and then adjusted in real time, a vast number of probable outcomes mapped and priced, how come every business isn't using it or at least something of the sort to reduce its risk and increase its probability of success? But at the same time I am forced to ask the difficult question, "What about a Katrina? What about a tsunami? What about a 9/11? The completely unexpected, unpredictable and catastrophic event that can affect possible outcomes to a massive degree?"

It is no surprise that SmithBayes cannot model the events and risks that are beyond our imagination. And that, of course is the limitation of this tool. It is only as good as the data that it is given to work with. Williams says that clients can set probabilities for different possible events: "For example, we know there is going to be a general election in the next four years. We don’t know when or what the outcome is going to be nor what the effect of the outcome will be but we can examine a variety of possible outcomes." But that is far as we go.

Makers of software, along with consultants, tend to talk a good game, especially to journalists. Vigorous and well-rehearsed marketing comes with the territory. I'm not sure I buy all of the hype around the McLaren/Formula 1 origins of the SmithBayes product, which has been rehearsed in much of press coverage so far. Businesses are not F1 Grand Prix events. But as release version 2.0 of its strategy management tool is released there is a risk that I understate the complexity and power of what SmithBayes has produced. Risk managers and strategy planners might want to give this product a test-drive because of the impressive level of complexity and the sophistication that underpins its very graphic and accessible results.

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