70 Million Reasons Why You Should Know Your Risk DIfferential
I hate dragging around an umbrella. There’s never a good place to put an umbrella. A wet umbrella’s just a mess. And, half the time I end up leaving it somewhere – under a seat, on a counter, in a corner, you name it. As a result, I tend to have one only when I’m fairly sure I’m going to need one.
The skies were clouding up quickly this morning, so I double-checked the weather forecast before heading out to an appointment. “10% chance of rain”, the app said. “I have a 90% chance of staying dry,” I thought. I like those odds, so headed out without the maligned umbrella.
It doesn’t take much to guess what happened. Yep, I was caught in a torrential downpour as I walked to the train. Fortunately, I dried out before my appointment, and life goes on.
The episode caused me to reflect on risk, cost and impact.
In deciding to leave without an umbrella, I knew that my impact coefficient was low. The probability of a negative event was low – only a one in ten chance of rain. And, the impact of a bad result was also pretty low – I knew full well that I’d dry out before my meeting even if I did get soaked. At the same time, the costs of carrying the umbrella were high (to me) – inconvenience, aggravation, replacement cost. My assumed risk low, so leaving without the umbrella was an appropriate (albeit incorrect) decision.
Prevention Cost – (Event Probability * Cost of Impact) = Risk Differential
Real Risks. Real Exposure.
Do you know the fraud Risk Differentials for your clients and prospects? Earlier this year, the US Attorney’s Office announced that a Nigerian national was being charged with defrauding more than $70 million USD from US and Canadian law firms. While you can read the specifics in the US Attorney’s press release, it essentially amounted to a variation on the old Nigerian email scam.
The direct Cost of Impact was high – $70 million high. The indirect Cost of Impact (damage to reputation, ancillary litigation with insurers, and opportunity costs) are difficult to quantify, but it’s safe to assume that they were also substantial.
The duped firms may have underestimated the Event Probability. Or, the Cost of Impact. Perhaps they misjudged the Prevention Costs. Or just maybe they failed to consider the Risk Differential at all. Wherever the fault lies, your business can ill afford to make these sorts of mistakes.
We’re here to help.
Plan. Think. Act.
Center Square can help you develop processes that lower your Risk Differential from new and existing clients. Contact us to find out how.