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Cost-Benefit Analysis of Risk Treatments

Cost-Benefit Analysis of Risk Treatments

Jul, 01, 2014
by Rod Farrar

Well hello. In this session  I want to talk about the cost-benefit analysis for risk treatments. When we have a risk and it is determined that it exceeds our risk appetite and therefore we need to do something about it, well we then need to look at treatments. If we look at just cost, as the only determining factor of whether we go forward then we will have a problem. I will give you an example, let’s say we have a risk that has a consequence figure of $100,000 and we determine that to reduce that risk will cost us $60,000 and it will only reduce it to $50,000 in terms of the residual. In that case we are spending $60,000 in order to maybe save $50,000. A lot of people in my courses say there is no way I would do that because I am not going to spend $60,000 to save $50,000 it makes no sense. But those people are looking at the risk in only one dimension i.e. cost. What is not known at that point, when those decisions are made, is what is the safety consequence? What is the environmental consequence? What are the reputational consequences? What are the compliance consequences?

We can only make an informed decision about risk treatments if we understand the full extent of the consequences. Risk management and risk treatment is not always about cost, it may be that in spending that $60,000, you have brought the cost consequence down to $50,000 but you have bought your safety consequence down from severe to minor. To me that makes a lot of sense because I am probably going to bring my risk down to within my risk appetite. So why do we just focus on the cost? Because we all have bean counters that want to make sure that if that risk occurs we are spending as little as possible.

This is why I advocate that every risk, the consequence of every risk is considered against every one of our critical success factors. If you do not do that and you don’t record that in your risk register, then your cost-benefit analysis for your risks can not be effective. Because in all probability you are going to make a decision on cost effectiveness based purely on cost and many companies have done that in the past and not considered the other elements and ended up in a lot of trouble. So identify the consequences against every one of our critical success factors and measure the consequence against all of those and then make your decision about cost-benefit analysis for your treatments, it is not just about cost. That’s all I’ve got for this session, so as always, let’s be careful out there.

Written by Rod Farrar

Rod is an accomplished risk consultant with extensive experience in the delivery of professional consultancy services to government, corporate and not-for-profit sectors. Rod takes every opportunity available to ensure his risk management knowledge remains at the ‘cutting edge’ of the discipline. Rod’s Risk Management expertise is highly sought after as is the insight he provides in his risk management training and workshop facilitation. Rod was recognised by the Risk Management Institution of Australia as the 2016 Risk Consultant of the Year and one of the first five Certified Chief Risk Officers in Australasia.