One of the main benefits of Dependency Modelling is that the model is not only able to calculate the probability of simultaneous failures within a system or project, but also show the impact should those failures occur. The recent power outages in London demonstrate the importance of understanding the consequential impact of multiple failures.
You can read the full article from Reuters by clicking on the link below:
20th
June
Third
party service providers and suppliers pose a greater e-risk than hackers and
viruses. Speaking at the E-Risk
conference in London on 25th and 26th June, Chris Baker,
senior risk consultant at Dependency.Com, the risk management consultancy,
pointed out that e-business creates greater risks because it works differently
from the traditional way of business. “There
are companies which are doing a large proportion of their business over the
net which is managed by only a few staff.
But they are then extremely dependent on your infrastructure service
providers.
How
do they control this risk? Even
if there is a well-written service level agreement, how does this match up
with the service provider’s own agreements with their suppliers?
Business is not like it used to be; there is a long chain of dependency
on outside suppliers. This makes it harder to see when something is going wrong.
Often the first you know is when the website goes down and incoming
business suddenly dries up.”
Chris
Baker, who was chairing the conference, also pointed out that identifying
risks was not a problem, but balancing the demands of different risks with
their effects on brand, share price, reputation, legal standing and other
aspects of a company’s activity was more challenging.
“There is no magic answer, he says, but it is vital that you get the
balance right.”
The conference, which
took place at the Euro Plaza Hotel, London WCI from 25th – 26th
June, featured a panel of 15 speakers who presented a practical guide to
implementing an e-risk strategy. Those
attending were shown how to identify and manage the new risks resulting from
the introduction of e-commerce.
Dependency.Com
is a professional consultancy that provides strategic and operational advice,
specialising in operational risk, information security, business continuity
and strategic risk management.
Further
information:
Chris
Baker
Dependency.Com
Tel: +44
(0)1296 696362
Mobile: +44 (0)776 4242 174
Web: www.dependency.com
The following article was written by DMT user Shaun Wilkinson, General Manager, International Risk Management (New Zealand) Ltd. It was published in a bi-monthly publication in NZ, the 'Risk Management Gazette" and covers most of the apparent failures from a risk management point of view. The article also appeared in the National Business Review, (Friday 13th March J), which is the major weekly business paper in New Zealand.
Certainly no thinking manager or board member should fail to understand just how essential electricity is for every facet of everyday life nor should they be unaware of the importance of workable business continuity plans.
Users might also like to read a follow-up article "Exposures arising from Trading Terms" which follows this one:-
"There’s no such thing as bad luck, only bad management"
Shaun Wilkinson, General Manager, International Risk Management (New Zealand) Ltd
Within risk management circles this is a well known maxim which the catastrophic failure of the supply of electricity to the Central Business District of Auckland appears to confirm. Mercury Energy has failed to adequately manage its exposures to risk at a number of levels, including Board level, and as a result has not been able to maintain an adequate uninterrupted supply of power to its customers. The four major cables into the CBD failing within a month is not bad luck - it is bad risk management.
The lesson to be learned from the problems of Mercury Energy is that risk management has a vital role to play in the life of every organisation, as indeed does electricity Furthermore risk management cannot be applied like a coat of paint; it must be built into the structure of the organisation as well as into all of its products and services. Risk management must be an integral part of the corporate culture of the organisation.
Whilst the failure of the electricity supply to the Central Business District was the direct result of the progressive failure of the four main cables which supplied the CBD, there were a number of other contributing causes. The fact that the ageing cables had not been replaced, or supplemented, despite the need being recognised back in the 1980’s and Mercury’s apparent corporate emphasis of profit as its primary objective, rather than the maintenance of an adequate supply of power, exacerbated the situation. In addition, the apparent lack of a totally integrated business contingency plan able to be swung into action immediately the emergency occurred also added to the problem.
Mercury Energy failed to maintain an adequate supply of electricity to the Central business district of Auckland because it did not adequately manage its exposures to risk at both the tactical level and, more importantly, the strategic level. In order to survive any organisation has to take risks and Mercury Energy is no exception to this. However if the organisation is to be successful and survive in the long term those exposures to risk must be managed. This becomes even more important when a profit has to be made from its operations because risk taking is the sole source of profit for the organisation.
Mercury Energy is a monopoly supplying electricity to much of the Auckland isthmus and the CBD in particular. It is the only company that operates electricity lines in the CBD, so there is no competition which may have prevent the virtual closedown of the CBD. Mercury is essentially a public utility and as such has different responsibilities to the normal commercial organisation. As electricity is a necessity of modern every day living and business life Mercury Energy owes a higher duty of care and responsibility to its customers than a normal commercial organisation. Therefore the maintenance of a supply of electricity should have been Mercury Energy’s primary objective, not the making of a profit. Modern risk management is all about maximising the upside of the organisation’s activities whilst at the same time managing the downside so as to minimise loss. Few New Zealand organisations have yet recognised this change in emphasis.
For the risk management process to be optimally effective it should take place within the framework of the strategic context of the organisation so that all risk management decisions are taken in support of its mission and objectives. Establishing the context should be the first step taken in implementing risk management within an organisation (Australian / New Zealand Standard on Risk Management - AS/NZS 4630). In Mercury Energy’s case this does not appear to have happened and if the strategic context had not been properly established any risk management undertaken would have been undertaken in a vacuum and would not necessarily have supported the organisation’s objectives..
In addition, because of its faulty organisational structure, which meant that the interest of its stake holders were not fairly represented in its decision making processes, it is likely that Mercury Energy failed to determine the crucial elements which may support or impair its ability to manage the risks to which its operations were exposed. Prior to 1992 Auckland Electric Power Board, Mercury’s predecessor, was owned by the Auckland consumers who elected the members of the Board who were totally accountable to those consumers. Following the introduction of the Energy Companies Act in 1992, under which Mercury Energy was formed, the structure was altered and the Board is now dominated by individuals who do not appear to be directly accountable to the owners, who effectively have been disenfranchised.
Under the terms of the Act an energy company is required to be a commercial success. Furthermore nowhere in the Act is there any reference to the security of supply. Mercury Energy’s primary objective appears to have been to be a commercial success and it has been driven by the profit motive. As a consequence this has distorted its thinking on the management of the risks to which it was exposed. Perhaps having competition in supplying power to the CBD may have prevented this distortion.
This distortion was further exacerbated by the Auckland City Council’s drive to develop Auckland which has resulted in growth far outstripping the city’s infrastructure. Mercury has been using basically the same network for supplying power to the CBD as its predecessor had in the 1970’s. It would appear that neither the Council nor Mercury Energy had given full consideration to the probable effects on the infrastructure of the rapid expansion of the City, particularly the rising demand from the CBD for power as a result of the significant increase in both occupied office space and inner city apartments. Despite the rapid growth, the cables that were in use in the 1970’s to bring power to the CBD have not been upgraded or indeed supplemented even though some of the main cables are fast approaching the end of their useful life.
Before the failure the Central Business District of Auckland needed about 160MW of power each day, when running at a normal level. This means that it could survive if three of the cables were operating normally and it could probably get by with minor losses of power using only two cables. Much of Mercury Energy’s power distribution network in the CBD is at least 20 years old with two of the main cables being over 40 years old. It is showing its age and prudent maintenance practices should have resulted in these older cables being upgraded if not supplemented by additional capacity before Mercury Energy was formed in 1992.
Belatedly, in 1997, Mercury Energy commenced the construction of a tunnel between the Penrose sub-station and the Central Business District to carry cables which would have replaced or supplemented those that recently have failed. Now, in what appears to be an act of desperation rather than a part of its formal business continuity plan Mercury is planning to bring 120MW of electricity by overhead powerlines into the City to supplement the failed cables until the tunnel is ready sometime next year.
If the media reports are to be believed the predecessor of Mercury Energy was well aware of the possible risks of the cable failing as early as the eighties. However, it appears that over the years the analysis and evaluation of the risks involved did not produce a good enough case to the Board for additional cables to be brought into the CBD and it was not until 1995 that the Board decided to act. Even then work did not start until 1997. Since the introduction of the Resource Management Act major projects such as this have taken considerably longer to complete. Because of this Mercury Energy would have needed to have begun planning much earlier than it did if it was to have additional cables running into the CBD before the end of 1997.
Analysis and evaluation of risk are two critical steps in the risk management process. They, together with identification, provide the basis for the subsequent decisions on how the risks should be handled. Questions must therefore be raised as to quality of the assessment of the risks involved and the standard of the reports presented to the Board recommending whether or not action should be taken to replace or supplement the distribution network. The decision to reduce maintenance staff, particularly those skilled in locating and fixing faults in the gas filled cables, which are the only ones of their type in New Zealand, should also be questioned.
Contingency planning is the safety net of risk management. It is not possible to avoid a loss or minimise the exposure to risk after the loss has occurred. This can only be done before it happens. Risk management is a planning tool and is only effective if used as such. Any public utility providing an essential service such as electricity must have a well tested business continuity plan that is able to cope with any catastrophe and maintain a continuity of supply. The evidence of the past month appears to demonstrate that Mercury Energy’s contingency plans are woefully inadequate.
Whilst repairs were commenced promptly, despite there being few engineers skilled in the repair of these types of cables in Australasia, the power company’s communication with its users and owners and its plans for coping with the emergency have staggered from crisis to crisis since the early days of the catastrophe. Whilst internally Mercury Energy may have been dealing well with the catastrophe it gave the impression of fumbling around in the dark like many of its Central Business District customers.
It is generally accepted that losses are caused; they don’t just happen. This being so the causes of any loss should be determined and steps taken to avoid or control any future occurrences. One technique that may be used to ascertain all of the causes of an event involves asking the question "why did the event occur?" and using the answer as the basis for the next question and to repeat the process at least five times. If this technique is applied to the loss of power in the CBD, which was caused by the failure of the cables, the result could look something like:
There are a number of lessons to be learned from this analysis the most important of which is that failures likes this are the result of a combination of causes amongst which will invariably be the breakdown of some type of management system or procedure.
In short, Mercury Energy, as the sole supplier of electricity to the Central Business District of Auckland, does not appear to have managed its exposures to risk at all well. The Board does not appear to have been fully exercising its governance role in respect to the management of risk; a role that is essential for the organisation to effectively manage the risk to which it is exposed. Risk management was impaired because it was not being implemented in an integrated way in Mercury Energy. It was only being applied at a tactical level rather than at both the tactical and strategic levels. Even then, rather than a strong emphasis on avoiding downside risks, an essential prerequisite of its obligations to serve its customers, there was the normal non public utility emphasis on profit. This distorted and impeded the implementation of risk management within the organisation leaving it very exposed to the kind of event that occurred in the first two months of 1998. Unlike many of its customers, Mercury Energy’s business continuity plan has not adequately catered for this catastrophe. Finally, we are now all aware, or should be, just how dependent we are on electricity in all aspects of our daily life and work, as well as on having workable business continuity plans.
International Risk Management (New Zealand) Limited is part of IRMG which is one of the leading independent provider of risk management services in the world.
| If you wish to contact the author or IRMG Email: Shaun Wilkinson at shaunwlw@irmnz.co.nz For the UK and Europe philip.holland@irmg.com For the US and Canada etc glen.giles@irmg.com For Australia and Asia doug.wilkinson@irmg.com |
New Zealand Power Crisis - Legal Issues
By Michael Wigley
| The
recent power supply problems in New Zealand, (see
earlier article by Shaun Wilkinson - New Zealand
Power Crisis - above ),
highlights issues of suppliers' liability, and
not just for Mercury Energy. The following article was written by Michael Wigley a barrister and solicitor in New Zealand. The article looks at the possible exposures that can arise from the ways in which Trading Terms can be applied. Although written from a New Zealand perspective, there are valuable lessons here for us all. |
Michael B Wigley is a Wellington solicitor who has prepared many supply contracts and is often involved in related litigation. His work also specialises in technology and intellectual property.
Mercury Energy's exposure in the power crisis highlights the importance of having suppliers' trading terms incorporated into the relationship with commercial customers. A supplier could be held liable, even if it is not negligent.
Mercury's well-drafted terms effectively exclude liability in many cases for 'big ticket' exposure, eg lost profit and extra business expenses. This was done through a clause excluding liability for consequential loss, and confirmation that Mercury does not guarantee continuous service. However, clever drafting goes nowhere if the terms are not part of the contract between supplier and customer. The liability limitation becomes unenforceable and the supplier is exposed.
Contracts are made up of the terms agreed between the parties. Suppliers cannot unilaterally impose printed standard form terms on their customers. To be effective, reasonable notice of the terms must be given. The net effect must be acceptance by the customer.
Mercury's terms of trade were mailed to commercial customers with their usual invoice and stated that the customer need not write back to confirm, ie Mercury expected automatic acceptance. The decision to mail (rather than insisting on signed acceptance) is understandable as it would be too difficult to get everyone to sign. Therefore, a compro-mise is required (which brings associated risks). A major (maybe the major) reason for trading terms is to minimise exposure in an across-the-board service failure. Mercury has to prove in each case that it sent the terms in this way and that the commercial customer has effectively accepted them, ie has received sufficient notice of the terms. Each case will differ, eg if only a junior accounts clerk dealt with the invoice and the attached terms of trade, does that bind the customer? The law and its application is uncertain in this area and in the areas described below.
The courts recognise that few
customers actually read detailed terms of trade. To have
effective terms, suppliers are often required to
highlight the tough terms, eg a limitation of liability.
Burying an onerous term in the fine print may not be
enough.
In Mercury's September 1997 brochure (mailed to
customers), the key points of the detailed trading terms
were summarised and appeared in full. The summary failed
to note the limitation of liability and that there was no
guarantee of continuous service. Those terms must be key,
if not the key points.The absence of these important
terms in the key points summary exposes Mercury to claims
as the terms may not be binding.
The next problem for suppliers is the Consumer Guarantees Act 1993. This imposes heavy responsibilities and liabilities on suppliers, while giving protection to household customers. Suppliers cannot contract out of the Act when dealing with household customers. This simplifies claims made by domestic customers against Mercury. The Act is structured so certain sales of goods and services to commercial customers are also covered. This applies unless both supplier and customer enter an 'agreement in writing' to contract out. The relatively new Act takes a broad brush approach. There are areas of uncertainty, and few court decisions are able to clarify liabilities. However, many issues can be argued with prospects of success, eg while there is an argument that the Act does not apply to electricity and other utility services, it is likely that a court would decide it does. This would lead to widespread potential exposure for Mercury, unless the parties have contracted out with an 'agreement in writing'. Mercury's standard terms of trade include a Consumer Guarantees Act 1993 exclusion, but if the terms are not part of the agreement, then there is no agreement to contract out. An additional problem occurs with mailing - do written trading terms constitute an 'agreement in writing'? The question of whether both parties are required to sign acceptance remains unresolved.
If the terms are not part of the agreement (or are not effective for some other reason), then what happens? The court must determine the terms of the agreement. It may decide that Mercury has a contractual obligation to supply (with an allowance for brief shutdowns to undertake maintenance, etc). Should this happen, Mercury could be liable in contract for failing to meet its commitment to supply - even if it hasn't been negligent. Demonstrating negligence by Mercury makes it easier to succeed (including under the Consumer Guarantees Act 1993) but there is a chance that Mercury is liable even if there is no negligence. If the terms are incorporated in the agreement, there is still argument that liability is not excluded for all losses (and that the stated exclusion from guaranteed service does not allow a lengthy shutdown). The courts are still developing the law in this area.
The first message for suppliers is
that they should review their terms of trade and the way
in which they are incorporated into contracts. This
should happen regularly to ccommodate the continuous
legal developments which can affect this complex area.
The supplier should consider carefully what the key issues and risk factors are. Some issues initially appear important but in reality, are not, eg pricing. Generally, provisions such as liability of limitation for consequential loss are much more important. Pricing problems can usually be settled in a practical way, as they develop, and without the risk being too large. Liability limitation cannot be patched up without changing terms.
In other instances, pricing is critical, but the priorities and focus of terms depends on the suppliers' specific goods and services. Other factors ideally include the suppliers' risks, needs, warranties, credit exposure, etc. Unfortunately, many printed terms appear to be 'off the rack' and do not bear a strong relationship with the particular product. Tailoring the terms involves more preparation and analysis (and additional legal expense). Mercury's potentially massive exposure demonstrates the dangers if issues are not covered.
Ideally, there should be a teamwork approach between the suppliers and lawyers. Neither can do the job in isolation. Some clauses require special wording and clearly need input from lawyers familiar with the issues. Integration of Trading Terms with Risk Management The terms should be integrated with the overall risk approach (legal or otherwise) as they do not stand in isolation. Mercury demonstrates that not only is there legal risk, but also the risk of public reputation being shattered. While terms cannot contain an exclusion of liability for household customers, there could be protection in the definition of the service being provided, eg Mercury stated that their supply was not continuous. This will possibly reduce Consumer Guarantees Act exposure.
Another issue concerns the Fair Trading Act 1986. It dictates liability for damages if there is misleading or deceptive conduct, eg if salespeople misrepresent features of a product. Although steps can be taken to minimise exposure, suppliers generally cannot contract out of Fair Trading Act exposure. This highlights the need for salespeople to be familiar with this legislation.
A further example of related risk arises from the possibility that supplier A may be liable to its customer if supplier B (who supplies to A) defaults. For example, say Trans Power failed to deliver power to Mercury. Without protection in Mercury's terms with its own customers, it could end up being liable to those customers. If there was an exclusion of liability in the contract between Mercury and Trans Power, it may not have recourse. Therefore, it is important to look at back-to-back considerations. The Consumer Guarantees Act 1993 creates particular problems. It may be impossible for supplier A to contract out of liabilities to household customers, but there is no recourse against defaulting suppliers because of a liability limitation. This sometimes occurs, even though the Act includes manufacturer's liability.
The terms should be clearly signed by a sufficiently authorised person on behalf of the customer, with clauses such as limitation of liability clearly highlighted. This will also help eliminate any argument under the Consumer Guarantees Act 1993 that contracting out can only occur when the customer has actually signed. While this is achievable in some situations, in many it is too hard. Marketers detest the idea of selling a great product with the customer being told upfront that there is a substantial exclusion of liability. However, if risk allocation is not done in this way, the lack of liability limitation may lead to increased prices. Suppliers need to balance sales and risk. My experience is that most suppliers feel they cannot take the upfront approach (it is too hard for sales). If they don't, they should not use the key points summary approach.
Many suppliers can get new customers to sign up terms, eg as part of a credit application. The big problem is changing terms with existing customers. The mailout has dangers, although doing it as part of an invoice run (as Mercury did) helps with proof. Having a 'sign and return' slip is not a good approach unless the supplier is looking for nearly 100% acceptance. If the customer does not sign, the lack of signature implies lack of agreement. Mercury were right not to require a response.
Suppliers often add the terms to the back of invoices and other documents, eg delivery notes. An invoice is usually mailed to customers after the sale contract is concluded. The terms making up the contract are those in existence at the time of concluding the sale. As the invoice usually comes after the contract, its contents generally cannot form part of the contract itself. However, having the terms written on the back of an invoice (with very clear reference on the front) still helps. The courts have sometimes decided that terms on invoices are incorporated in a contract by way of consistent trading. In effect, the terms may be accepted through the course of dealing. Although a helpful approach, suppliers should not rely heavily on this. However, in practice, many customers will not take the incorporation issue against a supplier. They and their lawyers may not be aware of the point and simply accept that the terms apply. Therefore, it is best to have the terms there anyway.
An alternative is to have the terms clearly displayed at places such as sales outlets. This is not a particularly strong approach. There are arguments both ways which depend on the specific circumstances.
Another option is to have sales representatives deliver terms to the customer as part of a normal sales visit.
The Internet is becoming an increasingly relevant method for accepting terms of trade. Terms can be accepted by so called 'click-wrap'. The user accepts the terms by clicking the 'accept' icon. Issues similar to those for paper terms arise, eg can the supplier prove that someone of sufficient seniority has accepted? Are the people accepting the terms who they say they are? The supplier may not be able to show that the company has actually accepted. Also, onerous terms need to be clearly highlighted. This does not happen often and sometimes the terms themselves are not brought up on the screen (unless the user specifically selects that option). Where the risk is high, suppliers may need to look for a higher degree of reassurance, eg the use of confirmatory public/private key techniques. Electronic contracts and trading terms have their own set of issues, including whether they are enforceable. Although unresolved, it is likely that the courts will enforce most of them - provided they are set up correctly. Suppliers should look at establishing trails to act as evidence, eg by automatic archiving. High risk arrangements may require initial paper-written agreements that enable ongoing electronic transactions. One uncertainty is whether an electronic contract can constitute an 'agreement in writing', ie whether parties can contract out of the Consumer Guarantees Act 1993 electronically.
Shrinkwrap terms are common with software sold in shrink-wrapped packaging. They can contain a licence (the equivalent of trading terms) and a message saying that by opening the wrapping, the user accepts all terms of the licence contained within. As with invoices, what is inside the package is not usually seen until after the contract is concluded, and therefore cannot form part of the terms (in theory). However, overseas courts have accepted the enforceability of such terms. It is possible that the same trend will be followed in New Zealand. This could develop into a useful technique, not only for software, but also for other types of products.
The supplier should look at customers who could generate large dollar exposure, eg those with critical services dependent on the supplier's product. They could be given special treatment by requiring individual signing of contracts and perhaps a more tailored approach.
| Author and
Publishers contact information:- Publication name; Brookers
Risk Management Gazette - Issue 11 Author's Contact Details; Michael Wigley
- Barrister & Solicitor Phone: 64-4-472 3023 Fax: 64-4-471 1833 Email: mwigley@wigley.co.nz |
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Date last edited: 01/12/2005 11:52