Many types of events have a statistical behavior, e.g.  floods, earthquakes, fire, making a sale, getting a job, being caught in a criminal activity, etc.  Most of these tend to be such that if you wait long enough the flood will occur, if you work at it long enough you will get a job, or engage in unethical activity long enough and you will get caught. 

The power elite in organizations are faced with a number of these decisions.  Let’s leave out the right and wrong about ethical issues for a moment and just consider the consequences to the organizations and to the decision makers.  Consider planning for disaster recovery.

Consider two organizations where everything else is exactly the same except one invests in disaster recovery planning and the other uses the same resources to invest in something else, perhaps more marketing or new product development.  Disaster recovery planning takes resources.  As long as the disaster does not occur then the company that is investing in more marketing or product development will do better in a competitive market place.  But should the disaster strike the company that has prepared will do better.  The prepared company will manage the sort term reaction better and continue operations while the other company may have to shut down for some period.  If the unprepared company has to shut down for too long then it will start loosing market share and may never regain it. 

Major stock brokerage firms invest in computer recovery well beyond the legal requirement.  At least one spends more than a million dollars a month to be able to switch their computing systems and their entire computer network for stock trading to backup facilities within two minutes of a failure.  They are not so concerned about the loss of revenue during an outage they are concerned about the loss of customers who will go elsewhere if they cannot trade.  They are likely to not return.

I know of two garden supply firms that were fierce competitors with about equal market shares.  There computing systems were both made inoperable by the same earthquake.  One had prepared for such a disaster and was up and running within 48 hours.  The other was not prepared.  It took them 60 days to resume operations.  By that time they had lost so much market share that they were forced out of business. 

On the other hand I know of a cell phone company that was growing rapidly.  They considered investing in disaster recovery for their switching centers.  To do this would have cost about $20,000,000 dollars.  It also costs about $20,000,000 to open a new market area.  They decided to continue their expansion program.  The possible protection of assets against the almost certain increase in market share could not be justified.  Perhaps when they are no longer able to expand so easily, investing in protecting assets may be the right decision. 

There is a simple statistical equation by which one can judge the optimal disaster recovery strategy.  Whether prepared or not prepared a disaster event will cost.  The purpose of mitigation is to reduce the cost of the disaster.  As long as we are not talking about serious injury or loss of life we can say that if the probability of the event times the event cost savings is greater than the cost of mitigation then one should mitigate.  Since most events will eventually occur we must specify some time period.  The likely time period to use is the expected life time of the organization or the time the organization will be at risk for the event to occur.  Such a calculation almost always tends to result in the conclusion that there is a maximum disaster event that is economically worth mitigating.  Thus, one mitigates for an earthquake up to a certain size after that mitigation cost become prohibitive as the probability of occurrence drops.  Of course, for certain types of events one does need to consider the cost in life and injury.  That makes the planning more difficult and sensitive but the fundamental concept still applies.

Thus, given adequate information about mitigation costs, disaster costs, mitigation costs, and a given period of time there is an optimal investment strategy for an organization.  Is this organizational optimal strategy the same as the personal gain optimal strategy of the decision makers? It may not be! To calculate the optimal disaster recovery expenditure one must specify over what time.  If one uses the time the decision maker will be with the company rather than the expected life time of the company the investment will be lower.

Suppose as a member of the power elite decision makers your income is based on profit for the year, then your income will be reduced if you decide to invest in disaster recovery.  If you plan to leave soon and you plan to use your earnings level and the profitability of the organization you are leaving to leverage a more lucrative position somewhere else, it is not in your best interests to invest in disaster recovery.

Now consider the group of decision makers across a large number of organizations who are faced with this decision.  There will be those who chose personal optimization and those who choose organizational optimization.  Now let us look at the long term historical pattern.  Everything else being equal or treated randomly the most successful will generally be those who played the odds and won.  That is they did not invest in disaster recovery and the disaster did not strike while they were at an organization.  The second most successful group will be those who optimized for the organization.  Those who do the worse will be those who gambled and lost.  They did not plan and the disaster struck while they were at the helm.

Note that those who gambled and won will always be at the top even if the odds were against them, i.e.  it was a bad bet.

I have used disaster recovery planning as an example.  It applies equally well to engaging in any number of unethical activities, such as ignoring environmental consequences, ignoring health and hazard issues, criminal activities and a whole host of other decision making issues.   

As long as optimal behavior for an individual decision maker is different from optimal decision for the organization there will be those who take advantage of the situation.  How many who do this will depend on the overall ethical nature of the culture and the believed odds of the gamble.

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(C) 2005-2014 Wayne M. Angel.  All rights reserved.