Risk vs. Return: To Solve...Or Not?

I pick up sharp things when I see them. I’m talking about nails, screws and wire – not glass. Whether I’m on my bike riding around town or walking down the street, I always take the time to stop and pluck any sort of sharp thing up off the ground. Having had my share of flat tires, I know how disruptive they can be. So I gladly do my small part in trying to prevent them before they happen.

But does it actually make that much of a difference, other than allowing me the opportunity to feel sanctimonious in the moment? In a recent conversation, I heard (second hand) “Why would you attempt to solve a problem when it’s unlikely ever to happen again?” At first, I thought that sounded pretty dim, but that was because it was encroaching on my bias that it’s always worthwhile to investigate. But it’s a fair question – one I thought I should be able to answer without a reflexive dismissal.

Investigations aren’t free – there are costs associated with them, mostly in the form of opportunity cost (investigating instead of doing something else) and sometimes direct costs in the form of outside analysts, labs, etc. If it’s true that there are no “expenses” in business, only investments, then I should be able to calculate my expected return for investing in an RCA. 

In calculating ROI, we compare the impact of the problem to the cost of solving the problem. But it’s not like you actually earn money directly by investigating and solving problems. What you get for an investment of this type is a reduction in risk.

Take the sharp things I pick up, for instance. If it takes me on average 15 seconds to stop and pick up the object, that investment provides a reduction in risk to near zero (depending on where I ultimately deposit it) that the nail or screw will be involved in a future flat tire incident. But what was the baseline risk of a flat in the first place? If my investment buys down the risk effectively to zero, I need to know what the baseline level risk was so I can see how much my efforts (minuscule as they were) moved the needle. In order to estimate risk, I’ll use the simple risk formula of Probability multiplied by Consequence.

I’ll need a model to assess probability. And I’ll also need to make some assumptions because I’m not going to sit out on the street counting cars!

·     How many cars pass the spot where the nail was over an average month? 

Assumption = 1,000 cars/month, or 12,000/year

·     How many of them drive over the nail? 

Assumption = 30% of cars drive over the nail

·     What are the chances that when a tire makes contact with a nail in the road, the universe aligns so that it actually pierces the tire? 

Assumption = 10%

Probability = 12,000 * 30% * 10% = 360 cars out of 12,000, or 3% end up with a nail in the tire. My final assumption is that every nail in a tire ultimately results in a flat tire.

Assessing consequence could be a little trickier because of the variables, such as how long until the tire actually goes flat, who is the person, and what exactly were they about to do when the tire became un-drivable? But instead, let’s make the assessment much easier by just calculating the average amount of time it takes to change a tire and assigning a value to it. Some people could conceivably change a tire in 15 minutes... others might not be able to do it at all. I’ll choose 60 minutes for my estimate.

Assumption: Average time to change a tire = 60 minutes

Therefore, the baseline risk (expressed in minutes) = 3% x 60 minutes = 1.8 minutes.

Average Salary (City of Seattle) = $70,000. Wage per minute = $.13  (https://www.payscale.com/research/US/Location=Seattle-WA/Salary)

Amount saved per nail = 1.8 minutes x $0.13/minute = $0.25

Cost per nail picked up = 0.25 minutes x $0.13/minute = $0.03

Therefore, the ROI = ($0.25-$0.03)/$0.03 = 733%

So of course it makes sense for me to pick up the nail... especially if it was your car that was spared.

This is a scenario an economist might appreciate, however you would be forgiven for thinking it’s silly. But it certainly has broader implications. I would guess that many of you have small, repeat problems (think nails) that you experience routinely at work--problems that aren’t big enough to address, yet they steal hours of time on a weekly or monthly basis and add up over time to qualifying as a big problem. You can use this same method to assess whether or not investing in a root cause analysis makes sense, and if so, you can show the economics to justify not only your proposed solutions, but why it makes sense to tackle the problem to begin with.

When the problem is extremely costly and/or complicated, solutions may not be immediately apparent.   When we take the time to develop a complete understanding of the problem through investigation, we routinely find lasting solutions that sustain the gain going forward.