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Wednesday, 14 January 2009 01:44

Facing Risk

Written by  Karel Gevers
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All managers especially project managers are faced with risk at one time or another as the future cannot be  predicted accurately managers have to take a position when facing risk.  I looked at some real life situations from the past and found that the examples set by these persons is very similar to the responsibilities that project managers are faced with.

Predicting the Future  

When managing projects we are constantly faced with risks of some kind or another.  The publications often hail successful events, the multitude of unsuccessful events and the causes thereof often go unpublished.  Hence the uncertainty of our past as history is written by the victors.  Hence, if as much as 10% of the past is based on victory, we lack 90% of the information that caused failure.  It can therefore be said that we have to plan projects to be delivered in an uncertain future based on information obtained from an uncertain past. As a result of its proven uncertainty, mankind has for ages been concerned with predicting the future. 

A good example goes back a few millennia to the time of the Egyptian Pharaoh’s and the River Nile. Beyond the cataracts of Nubia, three tributaries join together to form the main rivier known as the Nile which from there continues its nearly two thousand kilometre journey to the Mediterranean sea. The impact of the three tributaries, namely the White Nile, the Blue Nile and the Atbara (or Black Nile).  When the Atbara dominated the flow the colour of the water was green-brown and resulted in early floods and most likely the drowning of the crops, with the result that the likelihood was very strong that the Pharaoh has to use his grain reserves to feed the people of Egypt. 

Dominance of the waters from the White Nile would result in clear water and bring mild and late floods and minimal production, but sufficient for the people to sustain themselves.   However, when the flooding from the Blue Nile was predominant the water would be dark and cause sufficient and timeous saturation of the soil to ensure rich harvests and therefore sufficient harvest for future storage or to feed an army to conquer new territory. The pharaoh’s priests had to inform then annually at springtime of the conditions of the Nile.  According to the information provided by the priests, the years’ projects were planned - on pain of death if the priest was wrong.  Here the colour of the Nile was used to plan more effectively, in advance to determine which projects would be most sustainable. 

Managing Risk

One of the past’s most impressive exploration leaders, hailed by critics as “having shown the flame of leadership as few in the history of exploration have done”, was Ernest Shackleton.  Having travelled 700 miles from base camp in an attempt to be the first man to reach the South Pole under extremely hazardous conditions, facing hard physical labour, hunger and frostbite in conditions of sometimes below -50°C in blizzards of 100 miles per hour while traversing unseen crevasses and sastrugi between 15 November 1908 and 9 January 1909, Shackleton had to abandon his project of reaching the South Pole. 

After having travelled the said 700 miles he was 366 miles further south than any human being had ever been and only 97 miles short of his destination – the South Pole.  In fact he was convinced that the ice plain extending before them at that stage is where the South Pole was situated; a tempting moment to challenge fate.  Nevertheless Shackleton paved the way for future explorers. 

The hazardous conditions faced by these explorers becomes clear when one considers the fact that Scot – the firs man to reach the South Pole did not make it back alive even though he had all the information Shackleton had gathered on his expedition – did Scot maybe not make the right decision when the time came?  We will never really.  What we do know is that Shackleton opened up Antarctica for future explorers and became famous for always bringing his entire expedition teams back – alive! Clearly the sunk costs and more so all the effort that had gone into the project at the time he took the decision to revise the scope of the project (only to get within 100 miles from the South Pole) required very rational thinking, especially sacrificing the glory of being the first human to actually reach the South Pole.    

Nevertheless, logic and reason prevailed and he took the best decision in the circumstances, not necessarily the most desirable decision for himself.  

Approaching Risk  

Risk is often misinterpreted as a result of the conventional approach, an alternative view or approach can often afford the project manager a new perspective and lead to the identification of opportunities that are generally accepted as avoidable risks. A typical example was the performance of the £ (UK Pound Sterling) when they decided to join the Western European monetary system (ERM – Exchange Rate Mechanism).  Joining the ERM would link the weaker British economy to the strongest economic power in Western Europe namely the newly reunited Germany which had the power to decide what the best monetary policy for Western Europe was economically.   

George Soros thought that such a dependence on Germany would eventually be to the detriment of the British.  At the time the view at the New York stock exchange on financial markets was;”Discern the logic and you could become rich”.  Soros had a different approach;” Discern the chaos and you can become rich.  A small difference in perspective, but a total different point of view. The British economy was down and they needed to devalue the pound sterling to increase exports.  Germany was not interested in devaluation as they feared a recurring recession.   

On 13 September 1992 the Italians devalued the lire by 7%.  This was within the range set by ERM rules and a lot of investors reaped profits from their bets that central banks in Europe would honour their commitments to keep their currencies within the ranges set by the ERM and at the time it seemed poor judgment to invest on an ERM realignment that would reach beyond limitations of ERM rules. The British maintained that they would not devalue the pound.  The Italians had also stated that they would not devalue the lire and they had done so. 

The question arose; how much trust can be put in the promises of governments?  Soros became more convinced that the British would have to pull the pound sterling from the ERM as they would not be able to maintain the pound sterling value at DM 2.95 (German Marks) as set by the ERM at the time.   On 10 September Soros had already started his move in the market by betting one and a half times the total capital of his Quantum Fund against the fall of the pound sterling.  Amongst the transactions he did was to borrow 5 billion pounds and to exchange them at a rate of 2.79 German Marks per pound.  He now held strong Marks against a weak pound loan.  In total Soros hedged US$ 10 billion against the pound sterling.   

On 15 September 1992 the pound falls to 2.80 marks to the pound.  The Bank of England bought about 3 billion pound sterling.  This has no positive impact on the pound and by late Tuesday the Pound sterling is down to 2.778 marks.  The British Treasury meets with the Bundesbank to convince the Germans to reduce their interest rates in order to reduce pressure on the pound.  German officials refuse.   

In a further attempt to avoid devaluation the British increase interest rates by 2% to attract investment, still the value of the pound sterling hardly moves.  In total the British government spent £15 billion (pound sterling) of its £44 billion in foreign currency reserves in their effort to shore up the pound sterling – to no avail.  For a second time the same day interest rates are increased, now to 15%.  Still the pound remained below the ERM floor level.  As a last ditch attempt the American and Japanese made an attempt to rescue the pound sterling – with no effect. 

At 4pm the pound sterling is suspended from the ERM. Confident that he had covered all risks and possibilities most of this occurred while Soros was asleep at home in New York, making a profit of close to US$ 2 billion while resting.   Soros has the belief that if you are confident of you position you don’t do it half heartedly, you go for it all the way.  No other investor, investment banker or international banker profited even by half as much as Soros did from the downfall of the pound sterling. One may ask why Soros was so sure of his investment to in vest to the extent he did. 

The reason is quite simple – he also made sure of the downside of his investment and of what not to do.  According to Soros he stood to lose a maximum of 4% of the total amount invested if his bet did not pay off! The importance of the examples mentioned above is that someone in a managerial position has to be sufficiently informed of existing situations in order to take the right decisions – this requires taking all possible aspects into consideration and having the leadership capability to take the decision and face the risk together with the consequences. 

Author: Karel Gevers, TenStepSA 
Read 8607 times Last modified on Sunday, 04 April 2010 20:36
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