Likelihood versus consequence management...

It often seems that as a species (and indeed as a society) that we spend most of our efforts on managing risks after they occur, rather than preventing them from happening. .  The difference between the two approaches can be described as consequence management versus likelihood management, and is illustrated in the figure below.

Likelihood Management versus Hazard Management

This principle seems to apply whether we're talking positive or negative risk management.  For an example of consequence management of positive risks, we've probably all come across the salesperson or manager who likes to take credit when things are going well and will often put more effort into promoting this fact than they did into achieving that success. In theory, we'd all be much better off putting our efforts into increasing the likelihood of a positive business outcome, but there can be rewards for people who do little or nothing, at least until after success becomes assured. People often don't even really know the cause of their success but they do know that by trumpeting it loudly, they increase their chances of a bonus or promotion. This certainly isn't true of everyone by any means but it's a common enough trait across our collective humankind.

When to Use Consequence Management
The tendency towards managing consequences after a risk has manifested isn't necessarily a bad thing and indeed, sometimes it's entirely appropriate. If your job involves emergency management or disaster relief then ‘consequence management’ is absolutely the right area to be focused on. Natural disasters such as earthquakes are typical of risks where consequence management is more important than likelihood management. I'm not suggesting by any means, that we do away with likelihood management, but rather that we understand the role that these two elements have in any risk management strategy. With bushfire management for example, it's important to reduce likelihood by managing fuel loads, fire bans, bushfire alerts, reducing housing pressures in bushland etc, but ultimately bushfires will occur no matter what we do. Indeed the ecosystem needs them to occur in order to stay in balance. Hence, the focus has to be on resources, training and leadership to reduce the consequence of inevitable fires. For most of us however, an ounce of prevention is worth a ton of cure and this is the area of ‘likelihood management’.

The Symbiosis of Likelihood and Consequence Management
A good illustration of the relationship between likelihood and consequence management is the link between security (likelihood management) and emergency response (consequence management).  Post 9/11 when we were looking at protecting a major hydrocarbon facility from terrorist attack, we quickly came to the conclusion that we were well into consequence management territory. Security could do a lot of useful things to reduce the risk of an attack but ultimately we couldn't stop a determined adversary. At least, not without a ridiculous amount of resources and some military assistance - certainly way beyond our ability to provide cost effectively. We decided instead, to focus most or our resources on consequence management including the following steps:

• Upgrade the muster system to get people more quickly to blast resistant emergency shelters
• Establish reciprocal arrangements with other hydrocarbon facilities to swap cargoes so that our customers would receive continuity of supply
• Upgrade our terrorism insurance policies

Getting the Balance Right
By way of an example with mixed results, let’s take a look at allopathic (modern western) medicine. We've achieved great advances with trauma medicine and diseases such as typhoid, malaria and bacterial infection. The track record with illness and disease however is somewhat variable and recent years seem to have seen an increasingly heavy reliance on consequence management. As you can see from an earlier blog entry, cancer and heart disease (both highly preventable) are two of the leading killers in the United States and, I think we can safely say, most of the developed world. Take diabetes as another example of an incredibly preventable disease, which still has an enormous reliance on drug related consequence management therapies.

Different Strategies for the Same Risk
Even where we have that have achieved great success in likelihood management, that success is often confined to the developed world. In remote parts of Africa, such as the location where I sit while writing this paragraph, 'preventable' diseases are still killing people on a daily basis. According to the World Health Organization's 2010 World Malaria Report, malaria alone still kills 781,000 people every year with 99% of those in sub-Saharan Africa.

In developed nations, malaria risk management is all about likelihood management. In Africa it's primarily on the right hand side of the bow-tie - very much into the realm of consequence management. According to WHO, there are 225 million cases of malaria each year, most of which are treated successfully with medications after the event (ie. consequence management).  By contrast, malaria was also once rife in America and Europe.   It was so pervasive in Rome that it is even suspected of contributing to the decline of the Roman Empire. Even the word 'malaria' originates from Medieval Italian "mala aria" or "bad air" due due to its association with marshland. Simple steps such as adding screens to windows, avoiding mosquitos, draining open bodies of water and selective spraying of mosquito habitat have all but eliminated malaria from most of the world. This is 'likelihood management' working at it's best.

By contrast, likelihood management isn't working extraordinarily well with malaria in sub-Saharan Africa. To be fair, it is achieving some success and the main reasons why malaria is still rampant have more to do with much broader cultural, political and economic issues - all of which are way beyond the scope of this short article. It does go to show however, that consequence management can still work reasonably when likelihood management hasn't been enough.

Which One Is More Important?
Neither is more important than the other. Likelihood management can stake a legitimate claim to supremacy - after all, prevention is better than cure. It's a tenuous claim however and the reason is self-evident when you think about it. 'Likelihood Management' is really only about tilting the odds in our favor  Almost by definition, there are no guarantees of any given outcome. It's at this point then, that Consequence Management can pipe up and say "you'll always need me, therefore I am more important!". When we look at it more closely however, Consequence Management is always going to have a certain stigma. No matter how good we are at it, there will always be an element of 'we got here by luck' (in the case of positive outcomes) or a sense of failure and loss (in the case of negative outcomes).

It's interesting then to look at what drives our decisions in terms of which strategy to pursue and when. I suspect, it depends a lot on our own predilections, experience and capabilities. If the only tool in our toolbox is a hammer, after a while everything starts to look like a nail - or at least something which will respond to a spot of 'percussive maintenance'. The other critical element which steers our decision making however, is incentives. Think very carefully about how you incentivize your employees. Incentives drive behavior, and I've met executives who openly admit that the main risk they manage is their 'personal career risk' (ie. bonuses and promotions).

Equally, at the industry level, you'll find incentives-driven behavior. When we look at an industry such as the healthcare industry, it's easy to see an increasing focus on insurance, vertical integration and development of drugs that can be patented coming from the allopathic sector.  There aren't many patents that you can take out on a healthy diet, exercise or prevention of disease - and as a result, not as much research or marketing resources going into such things. Pharmaceutical companies focus on consequence management such as patentable drugs, because that is where they make their profit. Once you have a disease, they know that we'll pay almost anything for the cure. In the world of likelihood management, there is less money to be made but there are still plenty of profitable businesses among nutritionists, vitamin companies and gym owners.

In summary however, we can say that even in the most obvious of cases - the pursuit of good health - it's one thing to know that we should all eat healthy diets and exercise, but that simply isn't the way humans are programmed. Likelihood and consequence management both have their place in the real world - the trick is to know which one you're doing and why you chose that approach at any given time.