Look on the right.

You see that man?  That’s Tony Hayward, CEO of BP.

Does he look happy?   No, he’s not happy.

Does he look comfortable?  I don’t think so.

He’s being grilled by the US Congress.

One of the reasons?  He – or his company – or perhaps his whole industry – doesn’t seem to understand a simple equation which most project managers know by heart.

RF = P * I

Risk Factor is the product of Probability and Impact.

In any uncertain situation, you should be able to determine how much effort is required to spend in responding to a risk (a threat in this case) by understanding the Risk Factor (some call it Risk Score).

In this case, the probability may be very, very low.  But the impact is so astronomically high, that the product – the Risk Factor demands a huge risk treatment or response.

The impact in this case is a combination of very tangible things, like a $20B escrow fund, some mildly tangible things, like the health of one of the world’s most delicate ecosystems and the livelihood of hundreds of thousands of people, and the intangibles, such as the reputation of a multinational corporation which has just spent oodles (our own very technical financial word) of dollars to make their image a very green and friendly one.  How’s that working out for you, BP?

So – in that equation, I think we can all agree that no matter how low “P” is, “I” is very, very, high.  So the Risk Factor is going to be worth considering.

And yet.

And yet…

Just before the explosion of the Deepwater Horizon rig, BP sent home a crew from Schlumberger who was going to do a cement bond log.  What is that, you ask?  It’s a “representation of the integrity of the cement job, especially whether the cement is adhering solidly to the outside of the casing. The log is typically obtained from one of a variety of sonic-type tools. The newer versions, called cement evaluation logs, along with their processing software, can give detailed, 360-degree representations of the integrity of the cement job.” Seems like a good thing to do – and good assurance that your bond will hold.  Right?  The cost of this would have been $128,000.  This is only one of five decisions being raised at what can only be called the grilling of Tony Hayward.  The questions, coming from Republicans and Democrats, from oil states, and states that grow corn, all seem to be going after the companies acknowledgment of the Risk Factor equation above.

There is one point in the dialogue where Hayward seems to recognize the equation – however fleetingly:

“It gets to that point, though, that you have to question every assumption, especially when your entire company and its solvency are on the line.”

…and that equation leaves out the 11 dead, the ecological damage and the fact that the Gulf provides a livelihood for so many people as well as food for the world.

So what’s our point?

Keep the equation handy.  Keep it in mind.

Don’t be so fast to save $128,000 when on the other side of the equation there is a tangible $20B, and an even greater list of intangible damages to consider.  Your numbers may be lower (hopefully on both sides of the equation) but you will face this same choice.  Think of that picture above.  Do you want to have to wear that expression?

You can track the actual questioning here.