An Ounce of Prevention: Does Risk Management Really Work?

An ounce of prevention is worth a pound of cure! I wonder what risk analytics software they ran to come up with that ratio? For thousands of years human experience has evolved to the point where we have become genetically programmed to know this. Yet we consistently ignore it! Dan Gardner‘s book “Risk: The Science and Politics of Fear” addresses this paradox extensively. Why, if we know what the money spent preventing risk will produce exponential returns, do we so often choose to ignore risk management and take our chances?

I think that the biggest reason is that we may intuitively know the ounce of prevention adage, but we need to be able to quantify the cost versus the savings. Of course, it is good business practice to have a sound business case before committing resources, but the problem with risk is it is very hard to quantify. It is perhaps even harder to quantify the savings realized from risk management. How many motor vehicle claims did your company prevent last year as a result of your fleet risk management program? If your claims were below average, was it due to your RM efforts or was it a good year? Were there fewer extreme weather incidents, or did the driver training program improve driver skills? Only review of trends over several years based on comprehensive records will narrow in on the answer.

We have done a lot of research to find studies quantifying the cost/benefits of risk management. There are many out there that we have found ranging from $1 spent managing risk can save up to $13 in loss related expenses. Intuitively and maybe even intellectually we know that risk management works.

The challenge is that organizations with limited resources have trouble investing in something that can’t be easily measured. It is difficult to justify an investment with little quantifiable evidence that it will pay off. Sometimes your gut needs to win out over your head when making the decision of whether or not to implement risk management.

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7 Responses to “An Ounce of Prevention: Does Risk Management Really Work?”

Kelly Strickland on July 17th, 2009

I think the problem lies in a lack of understanding about the insurance industry. People have trouble understanding how they can control their insurance costs by controlling claims.
Anonymous on July 20th, 2009

I think it’s because there are so many other issues to deal with before risk management that it gets put low on the priority list. If more businesses thought about risk management in the early stages it could prevent future catastrophic losses. Running a business in a time with such a shakey economy I think issues like this are paramount.
Jana Harding on July 21st, 2009

Thanks for such a timely post. In these rocky times I think it the importance of risk management is magnified. It is a reminder of what companies probably should have been doing for the past number of years.

Does it work? It is difficult to say, but there may be a few ways of speculating.

One way of knowing is looking at companies that implemented risk management plans and where they stand now after the financial crisis. Of course, this is not all-telling if they implemented various non-financial aspects of risk management.

Alternatively, one could observe companies’ incidents, claims, and costs before and after risk management implementation.

When (and if) there are clear cut risk management success stories, other companies will be a lot more open to the idea of spending the money on prevention.
Ronald Hicks, CIC, CRIS on July 24th, 2009

It is about what money I am spending today, vs the ROI tommorrow. Perfect example. 2 identical contractor firms with decent truck fleets. One has embraced the cost of GPS and tracking systems. The other has stated, it is not in the budget. The firm with the tracking system has seen a 38% ROI in year one in reduced labor and fuel costs. They have implimented an “incentive” based program tied to a monthly contest for a small gift card for coffee for the employee with the lowest idle time. HUGE savings. Imagine the savings if fuel was back to $3+ a gallon. It’s time to think about long term balance sheets and not just the quarterly or annual.
Craig Rowe on July 27th, 2009

Thank you to all for your comments.

Ronald – I appreciate that you brought in that very illustrative example. This blog entry really links it to our more recent post more than I originally thought! John Downey’s comment on ‘Will Organizations Start Listening to Their Risk Managers’ mimics your sentiments. He speaks to the fact that risk management isn’t addresses as it should because there is no instant gratification associated with the proactive measures.

http://blog.clearrisk.com/will-organizations-start-listening-to-their-risk-managers/#more-270