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Calculating the cost of inaction

Posted on 10th January 2019 at 16:34pm

Too often when deciding whether to make changes or not, we only see the cost of action and ignore the cost of inaction. This means we may often choose unwisely, writes Robert Pratten

How many of us have started the year with good intentions and maybe a New Year’s resolution to become healthier, to learn a language, to improve our work environment? Working in crisis response is a stressful job – surely changes that create time and peace of mind are worth implementing? So why does each year go by and we stick with the status quo?

The answer will often be that we compare where we are today with the future situation and are put off by the anticipated cost, effort or risk to make the changes necessary. But we’re falling into a mental trap that’s known as the Parmenides Fallacy – a term first coined by military strategist, Professor Philip Bobbitt.

What we should be doing is not comparing today with the future, but instead comparing possible futures. That is, what does the future look like if I do something about this problem and compare that to what does the future look like if I don’t? Analysing possible futures in this way correctly accounts for the cost of inaction.

Let’s take investment in crisis training. As the crisis response team or business resiliency team, we might not be able to prevent a major incident, but better training is proven to reduce the impact of the incident.

So this year when you look at the cost of running a rehearsal or investing in new simulation technology, think about two possible futures – one responding with the status quo level of expertise and one responding with enhanced expertise gained from more frequent, immersive exercises.

Research from the Ponemon Institute in 2016 showed that the median cost to organisations for a data centre outage was around US$650,000 (the max was around $2.4 million).

If, through improved training, you can improve your response by only a marginal 10 per cent, that’s an immediate $59,000 saving in the event of such a crisis.

You can use whatever maths you feel most comfortable with – $650,000 loss x nine per cent probability of incident x 200 per cent response improvement = $39,000 cost of inaction*. The principle remains the same: it is possible to calculate the cost of inaction.  

Rather than start the year with good intentions only to lapse back into business-as-usual, think about the cost of not making those improvements and it will provide the extra motivation to be better!

Robert Pratten is CEO and Founder crisis simulation software company Conducttr, one of CRJ's Key Network Partners 

*This is the equation used: future cost * probability of incurring cost * 1/(1+improvement)

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