The word escalation has several meanings in the business world. Two have to do with finance, and one has to do with general business terminology.
Escalation in Finance
In finance, escalation means a provision that allows the increase of costs to be passed on in one way or another. This can be applied to various situations, with the context changing as applicable.
One example is a clause that can be found in some employment contracts. This is called an escalation clause. In an escalation clause, provisions are made so that the employee will receive a payment increase in accordance to inflation increases on a yearly basis. The details may vary depending on the specific nature of the employment contract. In this sense, however, the cost of inflation is being passed on to the employer. The escalation clause offers protection for the employee, covering circumstances that are beyond his control.
Escalation Rate
Another way by which escalation is used in finance is in the term escalation rate. This rate is defined as how fast the prices of goods and services may change. This figure is usually presented in percentage. In this sense, the escalation rate is very important when it comes to coming up with budgets. Whether you are talking about businesses or individuals, taking the escalation rate into consideration is important. It gives the budget creator a better estimate of what might happen in financial terms.
When incorporating the escalation rate to any budget, many things are taken into consideration. These considerations include labor costs and inflation (see the first example above), price of raw materials, and so on. It is important to bear in mind that the escalation rate is a projection and may not be a hundred percent accurate.
Escalation as a General Business Term
In business in general, escalation refers to sending a project to a higher level of the organization for resolution. For example, imagine that an organization’s computers are slow. Helpdesk finds the problem, but can’t figure out what’s causing it. So they escalate to the IT department, which looks into the problem. IT realizes the issue has to do with the company’s systems being hacked. While working to fix the problem, IT also escalates it to Operations, which deals with security breaches. The issue may then be escalated to the company’s executives if it proves serious enough.
