Lessons in risk from Pakistan and BP

By ManMohan S. Sodhi

Recently a seven-year American Londoner asked me why there is war in Pakistan. I wanted to say, “You mean Afghanistan,” but the country was correct: the radio had mentioned multiple drone attacks in Pakistan. I mumbled something about goodies and baddies, but later I reflected on the question and compared the situation to oil giant BP and the explosion of the deep-sea drilling rig off the coast of Louisiana. There are some lessons here and possible implications for how we teach operations research.

Lesson 1: Where problems begin is not where they end up. What started with the 9/11 terrorist attacks on U.S. soil resulted in war in Iraq, then in Afghanistan and now Pakistan, whose porous borders attract Taliban fighters, thus attracting drone attacks. This has partly encouraged the creation of a Pakistani Taliban, and now the president of Pakistan has publicly worried about Pakistan surviving as a country due to extremism and the floods that have ravaged the country recently. And Pakistan’s survival problems create grave worries for India.

BP’s problems began off the Louisiana coast but quickly ended up in Washington, D.C., where the company coughed up $20 billion with many more billions to follow. U.S. politicians have repeatedly referred to the company as “British” Petroleum, which is no longer the company’s legal name, raising hackles in the United Kingdom. Interestingly, BP’s U.S. assets were part of Standard Oil that became Amoco, which was acquired by BP only 12 years ago (1998). The Texas City refinery, the site of a 2005 explosion, was a troubled Amoco plant, and BP must rue the day it dropped the Amoco name.

Lesson 2: Outsourcing does not relinquish responsibility. Outsourcing has many advantages, but it has disadvantages as well. The Economist has outlined a growing reliance in the United States on mercenaries for action in Afghanistan, Pakistan and Yemen, for reasons of expediency. But outsourcing does not take away responsibility when something bad happens. If mercenaries carry out random civilian killings, public condemnation (and consequent loss of public support) falls completely on the outsourcer.

Likewise, for BP, Halliburton had worked on the cement seal at the bottom of the well and Transoceania owned and ran the rig and maintained the “blowout preventer” that did not prevent the blowout. But in public opinion and in terms of monetary consequences thus far, it has been 100 percent BP’s fault.

This asymmetry creates moral hazard for the business partners or contractors: They can take more risk knowing they would not have to pay the consequences if things go bad.

Lesson 3: What does not kill you can leave you weaker. One could argue that respect for United States as the free world’s leader or “awe” for the U.S. military could be hurt as a result of the conflict in Iraq, Afghanistan and Pakistan. More than 5,700 U.S. personnel lives have been lost in Iraq and Afghanistan (2003-2010, Casualties.org) along with nearly 1,300 allied troops including those from Britain. While the toll in terms of lost human lives is not comparable, BP will be left a smaller company worldwide and much diminished in the U.S. market.

Lesson 4: Hubris engenders risk. The post-9/11 wars, whether of “choice” or “necessity,” did not play out as well as the pre-war narratives would suggest. Wags have commented that the “The Tigris flows through Baghdad. The Hubris runs through Washington, D.C.” Maybe this was why expert military opinion, such as Gen. Powell’s and possibly Gen. McChrystal’s, has sometimes been put aside by decision-makers. Like a stuck vinyl record, op-ed articles advocating war on Iran are already appearing in the same U.S. newspapers that had op-ed articles advocating war on Iraq for exactly the same reasons: “weapons of mass destruction.”

BP understands risk quite well as a company, and it does not buy insurance in any country unless required by law because self-insurance makes sense from a cost viewpoint. But it can also engender a feeling of being able to ride through any problem. Going deeper into the sea than any one else is a sign of confidence, but it could also be hubris. The company filed a report in February 2009 with the U.S. Department of Interior that it was “unlikely that an accidental surface or subsurface oil spill would occur” at the rig where the explosion occurred. This could explain the absence of any pre-planned response, highlighting the company’s misplaced confidence in its own design and in its partners, Halliburton and Transoceania.

Implications for O.R. Education

Reflecting on the examples above, two things strike me when I think about how we teach O.R. First, when I was a supply-chain consultant, I took great pains in separating out short-term issues from long-term ones because in operations research modeling, we can separate out models for short-, medium- and long-term planning. However, such separation is a fallacy when it comes to managing risk; things that are expedient in the short-term (like the use of outsourcing) can create long-term problems. I am not sure how we incorporate this in O.R. teaching’ maybe we need to think about systems thinking and “soft-OR.”

Second, risk is created because multiple parties have different objectives. Instead of focusing on single-objective models as we do in O.R., we should teach mostly multi-objective models so we are always aware that even within the same organizations different groups have different objectives, as do our business partners and allies.

Signing Off

This is my last QED column. I wrote my first “Cyberspace” column, which appeared in the August 1996 issue of OR/MS Today, while visiting London. I have written nearly 150 articles for OR/MS Today since then – the Cyberspace and QED columns, the IOL editor-in-chief column, software reviews and other articles. It’s fitting that I “pen off” from London, too. Cheers!

ManMohan S. Sodhi (m.sodhi@city.ac.uk) heads the operations and supply chain management group at Cass Business School, City University London.