In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. In other words, you can’t both eat your cake and sell it. If you eat it, the opportunity cost of your decision is the sales value of the cake you won’t earn. We frequently generate opportunity costs in how we use our time. You can’t simultaneously go to see the Rolling Stones in concert and attend a Garden Party with the Queen. The opportunity cost of doing the former is the latter and visa versa.

To a more complex extent, opportunity costs also exist in business. If a company sets a budget for spending on, say, Process Safety, it generally doesn’t exceed that budget and once it’s spent, any Process Safety amenity not purchased but considered becomes the opportunity cost. So far so straightforward. Often companies get this about right, expending a ‘Goldilocks’ amount - spend too little and PS incidents increase, leading to damage, injury, production downtime and possibly death; spend too much and the benefits are diminished to the extent that the money could have been more productively spent elsewhere.

But what it they get this judgement wrong? What if they decide to reduce the spending on Process Safety, perhaps because they haven’t had an incident for a long time (which may ironically be due to the fact that they were spending the right amount on Process Safety)? Or chosen not to pay for a specific safety measure on the grounds of perceived cost benefit impact? Wouldn’t this become the opposite of an opportunity cost - a short term economy which engendered an increased likelihood of major impact?

Perhaps we would call this a Pyrrhic Saving. You may remember Pyrrhus, a Greek leader around 300BC, who was engaged in conflict with the Romans in Italy. He was victorious in a couple of battles, but, as the Romans could draw on greater and more accessible resources, he famously declared "If we are victorious in one more battle with the Romans, we shall be utterly ruined". From this the phrase Pyrrhic Victory emerged - one that inflicts such a devastating toll on the victor that it is tantamount to defeat. In this vein, a Pyrrhic Saving would be one where spending is withheld results in increased frequency of incidents, in the worst case major ones.

Sadly, in our industry, there are too many examples of companies which made a Pyrrhic Saving:

  • Texas City. Pyrrhic Saving - $0.1m (Installation of LAHH trip on Distillation Column). Cost of Disaster - 15 fatalities / 180 injuries / $3,000m
  • Deepwater Horizon. Pyrrhic Saving - $1m (Investigation and probable replacement of safety barrier whose failure was evidenced by rubber in well fluid). Cost of Disaster - 11 fatalities / 15 injuries / $50,000m
  • Piper Alpha. Pyrrhic Saving - $0.1m (Dismantling of ceiling between Condensate pump and its PSV). Cost of Disaster - 167 fatalities / 35 injuries / $3,000m
  • Bhopal. Pyrrhic Saving - $0.05m (Operation of Vent Scrubber System, which had been turned off at the time of the incident to save money). Cost of Disaster - >3000 fatalities / >30000 injuries / $1,000m

In fact, it is, on average, 10000+ times more expensive to recover from an accident than to have authorised the expenditure which could have prevented it. As Trevor Kletz was won’t to say “If you think Safety is Expensive, Try the Cost of an Accident”

Pyrrhus