Magazine article Risk Management

Business Continuity Planning: Overcoming Disaster before It Happens

Magazine article Risk Management

Business Continuity Planning: Overcoming Disaster before It Happens

Article excerpt

When a disaster occurs, businesses can struggle to continue operations and return things to normal. That is why having a business continuity plan in place even before catastrophe strikes is so important. For most executives and operations managers, business continuity means finding any available options to reduce the interruption s impact on the organization and maintain services or sales to customers. But as many companies learned after recent catastrophes like Hurricane Katrina or 9/11, such measures often fall short of providing total financial recovery from the catastrophic impact of a large-scale physical disaster.

Disasters can result not only in wide-ranging damage to a company's physical facilities, but also in compromised infrastructure, transportation and supply chains. They frequently damage communication systems, hamper emergency response units and strain civil support services. They impede the supply of parts and materials and complicate the job of rebuilding and recovery. In their wake, the paper trail documenting what was lost or destroyed--and what is required for the organization to recover its losses through insurance--often gets lost in the shuffle, making recovery even more difficult. As a result, it is critical that an organization take steps to track and preserve the information needed to prepare an insurance claim, And one of the most important steps is to ensure that risk management is involved in business continuity planning from the start.

Imagine a financial services company with dozens of locations that was severely damaged by multiple hurricanes in the same season. Subject to wind deductibles, the company fully expected that insurance would cover the cost of rebuilding. Documentation unexpectedly became an enormous problem during the claim process, however. As temporary and permanent repairs were made to the damaged locations, the associated costs were reported through the accounting system on a regional basis. This was consistent with the business continuity plan and normal operating costs, but was not in accordance with the insurance policy requirements that costs be reported by the individual damaged locations.

Permanent and temporary repairs and additional operating costs were all reported regionally. When presented with these claims, the insurer balked and requested the information by location, which was no longer available. No one had anticipated how the business continuity plan and the insurance policy documentation requirements may have differed.

In this circumstance, the documentation issue could have been easily avoided had the business continuity team and the risk management team been in better communication before and after the event. The company had many locations at risk from tropical storms and hurricanes, so the scenario could have been anticipated prior to the loss. After the incident, the company's risk management team drafted specific documentation and procedural guidance for the business continuity planning team to help ensure that similar problems did not occur on future losses.

Assessing the Risks

Identifying and assessing the risk of business interruption and gauging how to plan for recovery will depend on a complete understanding of how the company operates. Companies should examine the potential areas of risk, the probability of an event's occurrence, its potential level of disruption, the likely impact to employees and the financial impact of disrupted operations.

First, a company must identify what the risks are, not only of catastrophic events such as fires, storms or earthquakes, but also of other risks such as operational disruptions or contingent impacts to significant vendors or customers in the supply chain. Past losses and claims are helpful indicators, but the largest losses affecting an organization often stem from events that management has not envisioned.

For instance, a Louisiana food manufacturer relied heavily on local water to make its products. …

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