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Why You Need to Understand the Cost of Crisis

November 11, 2021

What does it cost to replace a manufacturing plant? How about a flagship store? Fight a lawsuit? How much does it cost to restore your reputation? 

These are often the questions we ask when asked why protecting your organization’s reputation is a worthwhile investment. We’re asked to put a price on crisis. We are asked to compare the cost of crisis preparedness to the potential losses of a crisis 

And here is the answer to the question — restoration is a heck of a lot more expensive than protection. Just like installing a smoke detector in your home is a lot less expensive than rebuilding your home, preparing for a crisis is pennies on the dollar compared to what you will need to restore your reputation.  

Whether it’s disruption to your business that affects the bottom line, the cost of lawsuits or fines, or damage to your reputation, eroding your position in the market, crises have a cost. According to lawyer Michael Volkov “a company’s reputation and its culture as its most significant intangible asset, pricing it as roughly 30 to even 40 percent of the stock’s value.  If you put this in concrete terms, 40 percent of the company’s current capitalization reflects its reputation and its culture.” And although businesses are understandably reluctant to share the specifics of their losses, you can see the effects every day by scanning the business section of any newspaper or website.

So the question we often ask ourselves is, ‘Why is it so hard to get companies to invest in preparation?’

It appears that the adage that ‘prevention is better than cure’ only applies when there’s no money at stake. In my experience, there are three main reasons.

Firstly, there’s the difficulty of proving a negative. If you prevent a crisis from happening, and doing damage, how can you prove that your investment was worth it? It’s easy to cite instances when something occurred, but, as Sherlock Holmes reminds us, sometimes the significant thing is when the dog doesn’t bark. And, ironically,  the more successful your program is in preventing things from occurring, the greater the likelihood that people think the root problems have gone away and demand that the budget be cut.

The second issue is that there is a misconception that it is cheaper and easier to deal with a crisis than prevent one. The cost of even the most detailed and comprehensive preparedness program will be dwarfed by the cost of lost orders, regulatory fines and legal settlements, not to mention the cost of responding to the crisis. 

Not willing to take my word for it? The folks at Pew cite $6 of damage prevention for every dollar invested in disaster mitigation. That might not be the number for everyone – for some it will be even higher. 

So while it’s certainly easier to pay up afterward, it’s definitely not cheaper. We know.

Finally, there is the intangible damage that will take an even longer time to repair with untold costs – trust with your customers; commitment from your employees and confidence from your board. The hit to your reputation affects all aspects of your business. Looking to go public? Reputation matters. Looking to merge and get regulator approval? Reputation matters. 

So I know being prepared, preventing a crisis and protecting your reputation matters. You know it matters so how to make the case within your company?

Like with many other things, we can help.

The first thing we’ve seen that’s effective is to equate preparedness programs with insurance. Every business will have insurance and an acceptable ratio between the cost of insurance and the value of the insured assets. Again, this is probably pennies on the dollar. So when you equate the equivalent cost of the preparedness program to what you’re protecting, the costs are minuscule: it’s hundredths of pennies on the dollar. You can argue that a preparedness program is the cheapest form of insurance you’ll get!

In addition to the financial benefits, you can also show the reputational benefits. Living your values directly impacts your reputation and place in the market, so it’s good for your bottom line. But it also means that there’s a well of goodwill available for when things do go wrong. That goodwill buys you valuable time and space in the first few vital moments of a crisis which can be the difference between an effective response and a downward spiral.

Again, preparedness is about more than simply teaching people what to do when things go wrong.

The final benefit of preparation is that this will often help you identify preventable risks that can be addressed and reduced. For example, running people through a series of simulations of what could happen not only means that they’re better able to respond to that event, but they might also identify ways to prevent those situations from occurring in the first place. These mitigation or preventative measures will reduce your overall risk environment. That’s particularly important for strategic or preventable risks, that is, risks that have occurred either because of a decision that you made or something that you failed to do. 

And to again return to the cost of preparedness compared to the value of the business or the potential lost revenue, even a robust preparedness program that costs tens of thousands of dollars is pocket change. 

Now, the more cynical reader might see this as a pitch for business from a company specializing in this kind of work. And it’s true: running exercises, preparing teams, and ensuring that organizations are ready for a crisis is a primary focus of Kith’s work. 

However, our income from preparation is significantly lower than the invoice that follows a 3 a.m. call to assist a team that’s already in trouble. So, if there were a financial angle here, we’d be encouraging people not to prepare! 

Being called in as firefighters is financially much more lucrative. (And honestly, more stimulating.) However, we base our success on the number of phone calls we don’t get: not hearing the dog bark is a measure of success!

So if you’re ever faced with the question ‘How much will it cost us to prepare for this kind of event?’, I hope you now feel better able to give a credible, robust answer.

But the best approach is sometimes to turn the question around and ask, ‘What will it cost if we don’t prepare?’

That’s going to bring things into sharp relief for whoever allocates the budget – and attention – of your organization. And, when you compare the cost of preparation with the potential cost of inaction, your preparedness program will seem like a bargain.



Photo by Evergreens and Dandelions on Unsplash

Filed under: Blog

Stephanie Craig

Stephanie Craig has built her reputation as a crisis expert by guiding some of the world’s most prominent people and organizations through their most trying moments. Before Kith, Stephanie founded the Apeiron Strategy Group where she counted former First Lady Rosalynn Carter and the mayor of the nation’s 10th largest city as clients.