Business Risk Management for Tetra Tech Case Study

Tetra Tech EC & Risk Assessment

Discuss the evaluation of the risk management and compliance process at Tetra Tech

The risk management and compliance process at Tetra Tech is -- if you want to use a buzzword more often associated with the digital revolution than with a waste management enterprise (like, frankly, Tetra Tech) -- "crowdsourced."

Certain aspects of Tetra Tech's process seem almost enthusiastically aware of the SOX provisions protecting corporate whistle-blowers (of the sort who might have ratted out Enron or the sleaziest subprime-mortgage-vendors of the Florida panhandle a bit sooner than actually occurred, and whom Sarbanes-Oxley seems positively to encourage) as outlined in Fletcher and Newell's study of Tetra Tech: they quote management as stating to the employees "You have an obligation to raise your hand and say if I do it the way you are making me do it, it is not going to be optimal. Everything is about continuous improvement." (Fletcher and Newell, page 9).

The fact that this is framed as an ethic of continuous improvement, not as a step towards allowing inmates to run an asylum, seems to indicate that the chief benefit of crowdsourcing is that it makes risk-management into a Wikipedia-style group-project where anyone can correct an error of fact. It seems mostly designed to force potentially out-of-touch senior management to actually pay attention to the day-to-day details of the activities their subalterns plan and perform. But in its emphasis on the planning stage as being more important than the execution, Tetra Tech's strategy is definitely to be commended.

1a. Review case Exhibit 2 and analyze the components of the process as they relate to effective risk management

The flowchart named "Exhibit 2: Schematic of Task Initiation Procedure" (or TIP, as the authors of the study call it) shows Tetra Tech's own home-made map for how they approach the management of risk -- which is potentially very large in the toxic waste cleanup industry in which Tetra Tech is apparently primus inter-pares. It was instituted when two projects in one of Tetra Tech's predecessor companies got into the remediation business, which involves removal of toxic sludge and things like that, under the government's Superfund to bankroll such cleanup projects under oversight of the EPA. They rapidly discovered, with a Superfund cleanup site in New Jersey in particular, that problems of environmental devastation are, if anything, under-assessed in terms of the potentially increased financial (not to mention health) risks to the company if the ramifications of the cleanup are not fully understood before the job is undertaken.

The chief thing to remember here is that, while many businesses have cried foul over environmental legislation like the Superfund even existing at all, anyone who has the most passing interest in Superfund legislation would surely have recalled the notorious "Love Canal" case before accepting a Superfund cleanup job in New Jersey which assessed the job as relatively quick, clean, and easy. Love Canal was, in the late 1970s and early 1980s, shorthand in the mass media for a toxic waste cleanup gone horribly wrong: precisely the sort of thing that Superfund legislation was put in place to take care of. Love Canal was a neighborhood of Niagara Falls, New York, who discovered that over twenty thousand tons of toxic waste had been buried underneath their streets and homes by the Hooker Chemical corporation. The crisis began with the discoveries of birth defects and anomalies (including increased incidence of miscarriage) and grew until by 1978 President Jimmy Carter was forced to declare the area a State of Emergency -- for reasons of health, marking it as the first occasion on which the federal government disbursed emergency funds for anything other than a natural disaster. Love Canal was, of course, a primary impetus for the enactment of CERCLA, the Comprehensive Environmental Response Compensation and Liability Act, which established the Superfund in the first place to pay for this kind of work to be done. Twenty years after President Carter declared Love Canal a state of emergency, medical doctors were still warning in 1998 that -- given the increased risk of cancers (including leukaemia) that had been documented from persons who had lived in Love Canal -- the site still represented a "public health time bomb" whose massive costs were going to grow yet more massive within short order.

In other words, one could point to the fact that the original Love Canal site is not yet cleaned up -- by 2010 only ten percent of displaced families were able to return to their former homes and elected to do so -- as proof that it is very easy to underestimate the scale of Superfund-style projects, especially when the project that necessitated the creation of the Superfund in the first place is still not completed today.

b. Why do employees feel that they own the risk management and compliance process at Tetra Tech?

Employees at Tetra Tech represent the crowd to which Tetra Tech is crowdsourcing its risk assessment process. For starters this is already how the pre-existing COSO model (which pre-dates the SOX provisions by about a decade) instructed companies to view the risk assessment process: COSO depicts corporate hierarchy as a pyramid, in which activities listed at the base of the pyramid (the fat bottom on which it sits, so to speak) are activities that involve the organization as a whole, and COSO insists that risk management be one of these activities. This is presumably because as common sense and the COSO model will both tell you, allowing those members of an organization with actual hands-on knowledge of their individual bailiwick within the organization are more likely to be able to identify potential problems (having a presumably seasoned understanding of what problems are likely or able to occur within that individual bailiwick). It also assists with any case where the potential problem is going to be identified even more easily by what Jim Leonard says to Fletcher and Newell about the "naive questioner" on the staff -- "a TIP reviewer who prided herself on knowing nothing about these projects. And who asked 'off-the-wall' questions" (p. 7). This was how it became evident in the case mentioned before, which involved the toxic spill in the ocean and the truck on the old pier becoming too heavy to drive back safely. But from the way Jim Leonard narrates it, it sounds like an admission of an embarrassing failure on the part of management involved in planning that aspect of the enterprise. The mere fact that it took a "naive" questioner to ask this simply means there was not a working engineer on the staff, who would have been only too eager to point out this potential structural flaw in the plan, since most engineers enjoy sitting around and offering scathing criticism (or helpful improvements) to other engineers' plans. To some degree, though, this is why the TIP procedure seems to work: the element of competitiveness that enables Tetra Tech EC to win the Superfund contracts in the first place is based on accuracy, and the ethic of that same competitiveness (in which workers are encouraged to "correct" each other's work, in a sense) are what the tactic which I have described as the "crowdsourcing" of risk assessment is designed to encourage. That is the economic model, although I would also adduce from game theory the notion of a "nomic," or a game in which changing the rules itself becomes one of the rules. In other words, increased assessment of risk -- because everyone is asked to take part in the job -- is nothing more than an advance awareness of future problems. It is best to allow those who have a sense of the likelihood or probability of given practical real-world problems to be the ones who assess likelihood for the purposes of an organization's necessary -- and, thanks to Sarbanes-Oxley, federally mandatory -- risk assessment.

The interesting thing about this climate at Tetra Tech EC in which all employees are encouraged to be vocal with negative or contradictory opinions is that it seems to have emerged independently of the SOX's protection provisions for whistleblowers (outlined in Sarbanes-Oxley section 1107, introducing criminal penalties for any corporate retaliation against whistleblowers) creates a climate in which employees feel free to speak their mind to management, presumably each from a specific area of specialization in which one risk or another might be more readily apparent to them. The authors of this study point to an incident at Tetra Tech, when a toxic spill in the ocean was going to be cleaned up by sending an empty truck to the end of the pier, when somebody pointed out that it seemed to be a rather rickety pier, and a truck full of toxic sludge weighs considerably more than a truck as-yet-unfilled with toxic sludge, and therefore driving the truck full of toxic sludge back on the rickety pier was an idea that seemed infallibly destined to result in spilling all your toxic sludge back into the ocean, with a dead truck driver on top of it. This was assessed as a risk, and dealt for accordingly -- by deciding to use a long hose to pump up the toxic sludge. One can imagine that in many climates, the risk assessment process would have been hampered when capable engineers felt silenced by that fact that management's focus on pitching the lowest bid possible (cost wise) had supplanted management's ability to recognize simple facts which would be the first question of a competent engineer with experience in the field.

It says a lot about the shortsightedness of management strategies in the first place that looking at the mechanical facts of the situation was not until very recently a factor in assessing its risk. This suggests management was out of touch with the physical realities of the risks assessed: like one of those tragic stories from Vietnam or World War One where the grunts on the ground knew exactly how bad things could get, but the military brass was incapable of understanding it (not having experienced it in any meaningful or hands-on fashion).

c. How has this process been included into the firm's culture?

The de-facto crowdsourcing (to its larger community of employees) of Tetra Tech's risk assessment strategy has been included into Tetra Tech's "culture" insofar as the climate of speaking one's mind is encouraged. Because of the mean-minded militaristic emphasis on hierarchy and discipline -- the so-called "chain of command" -- in so many management strategies, most of which exist purely to glorify the managerial class of apparatchiks at the expense of the proletariat and intelligentsia alike. It sounds like Tetra Tech is learning to follow the model of information technology companies which have learned how to get engineers and designers to voice their concerns, precisely because their engineers are the only people who can assess the size of any given project. It seems like you need to allow them a sort of veto power over management for precisely this reason, but psychologically speaking it places management in a better position to spin this as a process of crowdsourcing the assessment of risks rather than giving intellectual labor any kind of veto power over the decisions of management. I feel like these things are obvious to anyone who has considered seriously the rise of Microsoft but maybe this sort of thing trickles down more slowly in the waste management industry.

d. Is there evidence of an ethical tone at the management level of the company? If so please describe.

As far as the authors of the study are concerned, they are impressed by management's emphasizing (at the moment of employment) to employees that "you would be in more trouble with us if you didn't stop and plan and made the target than if you did stop and plan and didn't make the target" (Fletcher and Newell, p. 5) One executive is quoting as telling a long story which ends with the helpful note: "We didn't fire the person who raised the flag" (p. 5) -- he might have added "or blew the whistle," since this is a distinct attempt to demonstrate ethical tone by making operations more transparent (at least to those within the company).

If planning is taken to be synonymous with ethical behavior in the toxic-sludge-hauling business -- which I daresay it is, because toxic sludge is not so toxic if handled according to the correct procedures, but those procedures require government legislation above and beyond what would be called for if Tetra Tech was merely selling widgets -- then I think the study intends to paint management at Tetra Tech as attempting to implement a sort of ethical honor code in which employees are made to feel remiss for not speaking their minds.

What could be seen as creating a climate of internecine squabbling and endless gridlock is here instead seen as a happily communitarian ideal, in which employees are actively encouraged to point out flaws in everything they see. This is presumably why, when the policy was first implemented, it was viewed by employees as being "nasty," "contentious," "unpleasant," and "no-value-added" (p. 7).

"No-value-added" seems (among other things) to be a critique of the conscious re-branding effort involved in calling the newfound risk-assessment protocols a "TIP," which is clearly meant to involve the idea of added value (a pourboire such as one would leave for a waitress) and also increased knowledge (as a racetrack tout would offer you a "hot tip" by way of his superior knowledge of the strength of the horses and the condition of the racetrack on that particular day). The employee who suggested this particular "TIP" had "no-value-added" was thus suggesting that the obnoxious aspects of the procedure (from the standpoint of an employee) were not offset by any increase of added economic or informational value.

2. Elaborate on risk assessment in the Task Initiation Procedure (TIP)and oversight processes. Link your analysis to Don Roger's feeling about Tetra Tech's risk appetite.

Of course Don Rogers thinks that Tetra Tech finds no risk too big to swallow, provided that their TIP oversight processes -- and the attendant change to contract terms, for what is essentially a waste-contracting firm (subject to increased EPA oversight, although the level of oversight has changed over time).

I suspect the unique reason why Tetra Tech is able to swallow even the most sizable risks lies in the contractual necessity for renegotiating the contract upon discovery of new problems -- which is merely one feature of their procedural overhaul in the wake of two disastrously risky projects gone wrong -- moreso than due to the Task Inititation Procedure itself, as defined by the flowchart in Exhibit 2.

In terms of Tetra Tech's compliance with the terms of Sarbanes-Oxley Section 404, they seem to be within the terms of the SEC's interpretive guide to SOX compliance for management (published in June of 2007). The SEC requires management to assess any company top-down for risk, especially for risks such as fraud, controls to guard against fraud, and to scale all assessments granting due importance to factors like the size and complexity of the company itself.

Tetra Tech seems to have a remarkably open climate of conversation at the corporate level, by design, as part of their TIP procedures. But as far as the goals of Sarbanes-Oxley are concerned, it's hardly like the TIP procedures described could prevent (say) accounting fraud. The TIP procedures seem best understood as a hedge against hubris on the part of a corporate managerial structure with an appetite for (supposedly creative and Schumpeterian) destruction.

3. What has Tetra Tech done to overcome the difficulties associated with Enterprise Risk Management (ERM) implementation?

Enterprise Risk Management (or ERM) is largely a tactic or series of tactics whereby a company can understand its risks by assessing them in terms of statistic probability of occurrence, potential magnitude of consequences as a result of occurrence, and additionally by identifying potential strategic responses to hypothesized risks, and offering a yardstick whereby progress in achievement of objectives can be measured against potential risk.

From Tetra Tech's perspective, they were able to proactively determine risk for the customer and accordingly include that in their marketing plan. "We like to say we plan our work and work our plan" is reported as being the "mantra" at Tetra Tech's corporate headquarters (Fletcher and Newell, p. 4). This presumably tells the client that while Tetra Tech may cost more, they provide a better way of buffering the client from continuing to hemorrhage money on a protracted spree of unanticipated additional costs. But it mostly seems that Tetra Tech's internal system of TIP procedures is greater at the portion of ERM which deals with assessing the magnitude of consequences associated with risks.

In part this is necessary because Tetra Tech deals in the clean-up of dangerous or risky products: if members of the general public start giving birth to flipper-babies the way they did in Love Canal, then that is a much more serious potential consequence for the offending polluter than merely having to pay for a few extra trucks because there's more toxic ooze than anticipated. As noted before, if Tetra Tech's business involved widgets rather than poisonous chemicals, it would probably not be subject to such onerous regulation (nor might it seem so urgent to aim for full compliance with the more burdensome and ambiguously-worded provisions of Sarbanes-Oxley).

The story of Tetra Tech is, however, mercifully free of easy libertarian sneering at the burdensome nature of SOX 404, probably because a business like Tetra Tech that started out (and faced no market barrier to entry while starting) solely because of the government's willingness to legislatively mandate (and financially guarantee) the total clean-up of hazardous toxic waste is not so unwise as to bite, ideologically speaking, the invisible, if Keynesian, hand that feeds it.

In their study of Tetra Tech, Fletcher and Newell tell a revealing anecdote in which Tetra Tech loses a bid because of their predictive accuracy:

The lower priced contractor won the bid. However, the competitor subsequently found that the material could indeed not be pumped, as Tt EC had predicted. The lower priced contractor could not accomplish the work as intended and, as a result, got in deep trouble on the project. The client turned to Tt EC to complete the project. This example illustrates how the Tt EC approach to risk management created a higher barrier for Tt EC in winning bids, but nevertheless led to a situation where contracting companies learned to trust Tt EC precisely because of its risk management approach. (page 4)

In other words, the chief hurdle to implementation of ERM -- which is, as ever, greed and corner-cutting on the part of an efficiency-obsessed managerial class -- needs to be stated outright here as a goal to be rejected. In the antebellum American South, famously Senator John C. Calhoun once declared, of his own outspokenness, that he "would rather be right than President." By introducing Tetra Tech by means of anecdotes such as the above-quoted one, management effectively declare up front that they would rather their employees be right than be obsessed with profitability and efficiency. Or else -- to put it in a more positive light perhaps -- we might say that the Tetra Tech approach allows for greater efficiency in terms of the informational intelligence of the overall organizational structure, with the realization that the potential delays inherent in this strategy are simply part of the planning stage. Tetra Tech insists on remaining in the planning stage when other companies (it surmises) have engineers chomping at the bit and saying "Let's start working" before considering all potential consequences. This seems to be a professional inclination of engineers -- they'd rather be working on something until they encounter a hitch, or they would rather take a hands-on and ad hoc approach to solving the problem -- or so the Tetra Tech model would suggest.

In terms of how Tetra Tech complies with the COSO internal control framework definition for how risk assessment must operate, they pose an interesting case. COSO says that "establishment of objectives" is a precondition of any accurate risk assessment: Tetra Tech seems actually to go one step further than that by defining risk assessment itself as one of the primary organizational effects. From the standpoint of classical game theory, this qualifies Tetra Tech's internal game strategy -- as I noted earlier -- as being the relatively rare (but intriguingly libertarianly-tinged) variety of game known as a "nomic" which permits players to change the rules (not unlike the fanciful croquet-match in Alice's Wonderland). Whether COSO's notion that risk assessment is a necessity in terms of planning for future risk is correct or not, Tetra Tech uses what might otherwise be seen as meddlesome federal regulation, and turns it to their own advantage by forcing clients into taking their instant-renegotiation provisions.