How to Calculate the ROI of Avoiding a Crisis

An image to illustrate the concept of avoiding a crisis.
What’s that umbrella worth? Image by Gerd Altmann on Pixabay.

Awhile back we wrote about how to measure the value of avoiding a crisis: Establish benchmarks and baselines of what is normal, then compare the current crisis to others in the past or in your industry, etc. Read the whole piece: “Crisis Measurement for the Crisis You Avoided.” (You might also like to read: ”How To Avoid a Crisis by Measuring Your Community Relationships.”)

Since then I’ve spoken on that topic on a number of occasions. Almost always I’m asked the same question: “Avoiding a crisis takes a ton of work that is never appreciated. How do I account for that time in my measures of success?”

Good question. In any crisis avoided you’ve probably spent days and nights in a war room, plus hours on the phone with numerous reporters and in negotiations with lawyers, etc. All to achieve what appears to be “nothing.” No mentions means no discussions and no crisis. Congrats. But that’s a lot of resources that don’t show up in calculations of “normalcy.”

On the other hand, had you not spent those hours and the crisis had gone public, then your organization would have faced much steeper, but unknown costs. Legal fees, lost sales, impact on employees, goodwill, etc.

[Here are two dozen more articles on crisis measurement, including a crisis measurement checklist.]

The good news is that you can, in fact, actually calculate the ROI of all that time, effort, resources, and energy that you spent avoiding a crisis. It’s not simple, but eminently doable. Here’s how:

How to Calculate the ROI of Avoiding a Crisis

As when calculating any form of ROI, use this equation:

In a crisis avoided, the Gain from Investment is all the money and customers and talent that the company did not lose as a result of the crisis. The Cost of Investment is all of your time, executive time, legal time, and agency time spent on avoiding the crisis. To get the percentage of return you divide the results of the Gain-Cost calculation by that investment. Because I’m lazy I use this handy online ROI calculator.

The challenging piece of this is calculating the Gain from Investment: all the money, investors, stock value and customers that you didn't lose. Here are three steps to help you figure out what the gain from the investment (i.e., costs avoided) might be:

Step 1: Define the degree of crisis

It helps to first define the relative severity of the crisis you are facing. For example, years ago Southwest Airlines defined three categories of crises:

1. A media crisis

A media crisis is something the media might go nuts about, and might end up trending on Twitter, but other than being a 24-to-48-hour distraction, there is little long-term impact. A media crisis might result in some lost business and of course the cost of staff time to put out statements, respond on social media, etc. Media crises typically have significantly lower costs than other types of crises. But costs nonetheless that wouldn’t have had to be spent if the crisis never occurred.

2. A reputational crisis

A reputational crisis is one that might inflict long-term damage to the brand. For instance, issues with unhappy customers or employees, or a mismatch between what the brand stands for and something someone said or did. A reputational crisis might be what United Airlines suffered when musician Dave Carroll’s guitar was broken by United’s baggage handlers. After experiencing terrible customer service, he wrote a song that went viral and caused the loss of millions in market value.

3. A business crisis

A business crisis is something that can hurt the business itself, such as safety issues, financial issues, work stoppages, etc. So, for example, Wells Fargo faced a business crisis when its representatives were found to have created millions of fake accounts. That crisis resulted in multiple fines and investigations and millions of lost customers. Most of the perpetrators of the fraud were fired, as was the CEO. So the cost of the crisis could be calculated in cost of business disruption, of replacing staff, and of winning back customers. Plus the legal fees for all those investigations and lawsuits.

So consider your own organization. What types of crises are you likely to face? How would you characterize the severity of each? What will your costs of avoiding a crisis?

Step 2: Find a fitting benchmark

Now do your best to determine what a typical crisis could, would, or does cost your company. While you may not be able to show the precise value in your specific crisis, you can show the negative impact in others’. The trick is to find the right comparisons.

The severity of the impact of any crisis depends a great deal on the industry that you are in. For instance, banks, defense companies, airlines, insurance companies, utilities, and fossil fuel producers are all high risk businesses that have seen a relatively constant stream of bad news due to the nature of their businesses. To them a win might just be a month with only neutral coverage.

On the opposite end of the spectrum you have those trusted brands that seem to be able to stay out of everyone’s cross-hairs. Over the years they’ve rarely been the subject of negative press. When they do have a crisis it dissipates quite quickly. Think Southwest Airlines, PBS, Disney, M&Ms, and AAA.

Now ask yourself, on a scale of 1 being the most likely to see negative press and 10 being the least, where do you fit? Identify peer companies in your industry that have withstood and/or suffered from reputational crises and figure out what those cost them.

Step 3: Find the numbers

When organizations manage crises badly, they frequently suffer some quantifiable amount of damage, including a decline in stock price, calls for consumer boycotts or legislative action, higher recruitment costs, and lost deals. If you are lucky (or unlucky) enough to be in an industry where something like that has happened, you can use those lost financial figures as a component in determining what your own crisis might cost.

If hard numbers aren’t available for past crises that have hit comparable organizations in your industry, you need to sit down with finance, your legal team, strategic planning, and, if you have them, the risk management folks and come up with crisis costs for various potential crises specifically for your organization.

Once you’ve identified that “crisis cost” then you can calculate the value of all that time spent avoiding it. ∞

About Author

Katie Paine

I've been called The Queen Of Measurement, but I prefer Seshat, the Goddess.

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