Pitfalls of Return on Investment Analysis for Resiliency

iStock_000014311039XSmallThe business response thus far is largely a continuation of existing practices based on a historical picture of past risks, and often fails to adequately consider changing climate and weather conditions. Thus, the most common strategy for addressing climate-related risks leaves most companies without the resilience they need to weather future physical impacts of climate change.”  –  Weathering the Storm:  Building Business Resilience to Climate Change, Center for Climate and Energy Solutions, July 2013.

In an age where we are increasingly asked to do more with less, for a well-conceived idea to become a reality, it must go through a rigorous process of justification first.  Financial analysts perform an ROI analysis; public opinion leaders must decide whether the idea is palatable to their constituents; business analysts must decide where the idea ranks on the list of priorities, and so on.  The old justification process, while it has served us well in the past, fails to take into consideration changing variables that didn’t exist previously such as climate change; aging infrastructure; and increasing dependence on a just-in-time economy, vulnerable supply chains, and digital communications.  In response to these factors, the process needs to be modernized to respond to the changing needs of our businesses and their communities.

When an organization decides to become more resilient, to what are they becoming more resilient?  Vulnerabilities that have slipped them up in the past?  While lessons learned from the past are important to address in the short-term, another equally pressing problem is the unexpected changes and vulnerabilities that an organization has not yet experienced but is likely to in the long-term.  When an organization makes a commitment to become more resilient, they mean to become more resilient to climate change and other “new normal” realities.  In strengthening their resilience, business leaders take a real close look at “known unknowns” (e.g., climate change, the next pandemic) and “unknown unknowns” (e.g., remember how shocked and unprepared we were for 9/11) that are at once capable of catastrophic impacts and unanticipated.  By exploring these potential vulnerabilities in a business’s long-term future, a resilient business can move forward intentionally aiming to pre-position itself and make wise decisions to manage risk and leap ahead by managing and even profiting from volatility.

Deciding how to become more resilient can prove a challenge to organizations who rely on a traditional ROI analysis before proceeding.  Funding for resiliency is not easily justified, as it is not pegged to deliver quick paybacks, and traditional ROI tools would show low priority on resiliency due to their need for verifiable data.  But not having verifiable data is not excuse not to act.  Companies such as 3M, IKEA, and Intel have addressed this executive pushback by lowering the ROI hurdle for investments in such areas.

When organizations make necessary adjustments to their ROI models to evaluate resiliency programs, the return on their investments can be staggering although over a longer payback window.  Resiliency programs realize their value through “avoided losses,” so unless the company has access to real values for risk mitigation, opportunity, community enhancement, environmental benefit, safe work practices, workforce retention, risk avoidance, and social engagement, there is no input data available for the ROI model.  This has not stopped an increasing number of companies who are going forward with resiliency projects anyway.  Ford and GM have invested in the car-sharing business is a disrupt-before-being-disrupted strategy.  Adidas and Nike have invested in a process to dye clothes without using water.  Kimberly-Clark has invested in paper towel and toilet paper roles without cardboard tubes.  And Walmart has committed to increase its use of onsite renewable energy 600% by 2020 “to help keep its stores up and running no matter how bad the weather is or who else might be shut down.”

Companies have long made significant investments without a supporting ROI calculation in areas such as marketing, R&D, and when entering new regions.  What’s new is this mindset being applied to initiatives that address resiliency.

Why Collaborate with Gradient Planning?

Gradient Planning is uniquely qualified to address these challenges.  Our seasoned risk engineers provide a proven approach to crisis management planning, incident management planning, emergency response procedures, business continuity planning, emergency exercises, and vulnerability assessments.  These services are known to increase an organization’s resiliency.  For more information, go to www.gradientplanning.com.