Cost-Benefit Analysis and Best Practices

Time and money are finite. After you complete your risk assessment, you will have a long list of risks—far more than you can possibly address or defend against. You now need a way of ranking these risks to decide which you need to mitigate through technical means, which you will insure against, and which you will simply accept. Traditionally, the decision of which risks to address and which to accept was done using a cost-benefit analysis, a process of assigning cost to each possible loss, determining the cost of defending against it, determining the probability that the loss will occur, and then determining if the cost of defending against the risk outweighs the benefit. (See Cost-Benefit Examples sidebar for some examples.)

Risk assessment and cost-benefit analyses generate a lot of numbers, making the process seem quite scientific and mathematical. In practice, however, putting together these numbers can be a time-consuming and expensive process, and the result is numbers that are frequently soft or inaccurate. That’s why the approach of defining best practices has become increasingly popular, as we’ll discuss in a later section.

The Cost of Loss

Determining the cost of loss can be very difficult. A simple cost calculation considers the cost of repairing or replacing a particular item. A more sophisticated cost calculation can consider the cost of out-of-service equipment, the cost of added training, the cost of additional procedures ...

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