The Investment-Risk Curve

Quality Tools > Tools of the Trade > The Investment-Risk Curve

 

A common problem that occurs in business is that the Finance Director or one of the ‘bean-counters’ sets budgets (and cuts them) with what seems like relatively little regard for the impact on the business. The quality department can be a particular victim of this effect when those who hold the purse-strings do not fully appreciate the importance of what must be done.

 

What is often not realised is that when you spend less but try to deliver the same thing, then you do not just spend less – you are also taking risks. This can be illustrated with a plot of investments against risk, as in the diagram below.

 

 

Whilst this can seldom be drawn accurately, the shape of the curve can be estimated (and may be different for different situations). Typically, a high investment will significantly reduce risk, whilst reducing investment will increase risk, often in an S-curve shape.

 

When your budget is low or cut, rather than complain, simply draw this graph, adding on it a line to represent the investment, then add a horizontal line to show a maximum risk. When the lines cross below the curve, this is an unacceptable situation.

 

 

There are two dimensions on which a solution can be found: getting back to the risk curve can be achieved by accepting a higher risk or spending more money, as in the diagram below:

 

 

The question, then, when the company does not want to spend money on what you know to be important quality assurance or improvement, is whether they want to accept the additional risk that you can show them by using this diagram.

 

Next time: Customer sacrifice gaps

 

This article first appeared in Quality World, the journal of the Chartered Quality Institute