Calculating the Cost of a Mistake 1

Here’s a question I get a lot from clients and executives at companies I visit in my firm’s talent risk management and knowledge transfer work:

“Steve, we know we have a talent risk, but how do I make the business case for addressing that risk over the TEN other things competing right now for our organization’s time and resources? How can I show the cost to our business if that talent risk is left unmitigated?”

I recently addressed this for an executive at a multinational energy company. The executive had attended her company’s monthly Enterprise Risk Assessment meeting and had brought up the talent-related risks that she had red-flagged as an increasing concern. In her case, the concern was a lack of a comprehensive succession plan for critical and unique technical experts and the potential impact on business continuity if one of them was no longer available to work.

After some discussion with the Enterprise Risk Assessment team to clarify these talent-related risks, her homework for the next month’s meeting was to show the cost associated if those risks were allowed to continue unchecked. She reached out to me for help.

What she was really asking was, “What’s the Cost of a Mistake here?” Understanding the Cost of Mistake made by insufficiently prepared talent is vital work for anyone who wants to truly manage talent risk and protect one’s business.


Calculating Unmitigated Talent Risk Thru the Cost of a Mistake

I laid out the steps for this executive:

  1. Interview the managers of your critical Subject Matter Experts (expert) and talk about the importance of being able to calculate the “Cost of a Mistake” as part of assessing the risks to the business (in the way a project manager would identify the critical path on his/her project.
  2. Have the managers identify a “knowledge silo” (an area of expertise for a unique expert where he/she is the go-to person).
  3. Once the silo is named, ask:
    1. “What could go wrong if someone else (like a trainee) did the work in that silo instead of the expert?
    2. “What would that kind of a mistake cost the business? (money, time, quality, safety, customer satisfaction)”
    3. “How many times in a day/week/month/year might that happen?”
  4. Look for potential mistakes that are at least $100k and could happen at least 10 times per year. For most corporations or large organizations, I bet you won’t have any trouble finding “million dollar risks” this way.

In my experience in this field over the past 20 years, I’ve found that “million dollar mistakes” are not just at risk of occurring, but often have occurred (often more than once) in a company’s recent past. One client said, “We have contingency budget for that.” What he could just as easily have said is “We don’t mind spending our profits on mistakes!”

These risks also tend to be labeled as an “HR problem” and swept to the side, while focus is given to more familiar risk factors affecting a company’s bottom line that executives are more comfortable addressing (e.g. legal risks, supply chain issues, capacity planning). With this Cost of Mistake approach, the executive was able to collect the necessary data and at the company’s next Enterprise Risk Management meeting make a clear case for mitigating the business’s critical talent risks.

SUMMARY: As you identify and mitigate risks that can disrupt or derail your business, taking a systematic approach to talent risk management (TRM) is vital. Factoring the Cost of a Mistake enables your TRM to be based on facts and data, not gut feeling or the tendency to avoid people-related risks in favor of other “hard” business risks that seem easier to pin down or solve. With the Costs of Mistake data in hand, you can make a clear business case for mitigating your top talent risks, and your organization can responsibly set priorities and allocate resources to take action.