Corporate Crisis Preparedness: Developing a Business Case

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Originally Posted September 2015

Whether it be a natural disaster; corporate scandal; cyber incursion; fire; or hazardous materials release, a corporate or community crisis can bring an entity to its knees financially. If not handled properly, a crisis of this nature can also bring irreparable damage to a respected brand. As with any program-based mitigation initiative within a corporation or municipality, decision-makers must be convinced there is an economic incentive to proceed. Crisis Management is being increasingly recognized as a key pillar within a prudent corporate Enterprise Risk Management program. Informed leaders understand the benefits and assurance of having a crisis management program in place, as it serves to ensure stability of the entity and protect corporate brand should a crisis occur.

There is increasing awareness and action at all levels of corporations, including their boards, to ensure that the economic loss due to a crisis or disaster is assessed and mitigated. A 2011 poll by the Society for Human Resources Management (SHRM), of 300 U.S. organizations validates that there is still much work to do regarding corporate crisis preparedness. It was found that 76% of the 300 organizations had a formal plan in place; however, only 33% of the organizations believed they were prepared to respond to a “great/very great extent”. Further, 42% felt prepared to only a “moderate level”.[i] It is offered that confidence in the crisis plan can only be built through a validation process including the corporate crisis team, exercising the plan in a formalized manner with business continuity stakeholders. This validation will also serve the crisis team well by identifying gaps that become the next steps for the planning process. The cost of this annual process is a small price to pay for the certainty of confident response in a time of crisis. Painfully for unprepared leadership teams, it is clear after crisis strikes that a programmatic approach would have prevented or minimized economic impact and loss of trust in brand: “the disconnection between a high level of preparation and a low level of readiness could be explained by a lack of comprehensive crisis management programs and systematic planning processes across all organizational units” (Wang, Hutchins, & Garavan, 2009).[ii]

The United Nations Secretary General, Ban Ki Moon, urged for a higher level of awareness, partnership and formalized education in the economic realities of loss around disasters. "Economic losses from disasters are out of control and can only be reduced in partnership with the private sector which is responsible for 70% to 85% of all investment worldwide in new buildings, industry and small to medium sized enterprises. The principles of disaster risk reduction must be taught at business schools and become part of the investor's mind-set," (New York speech May 2013).[iii]

Over the years, there have been regular anecdotal references to the cost-benefit ratio of being prepared for crisis. Quite frankly, these references usually had their genesis in the aftermath of a crisis that affected a corporation or community beyond their wildest expectations and were re-counted in retrospect by leaders who wished they had prepared fully and were able to effectively mitigate their black swan event.

Undoubtedly, there is a ratio of investment to return when allocating budget resources to crisis mitigation planning and programming. When discussing the Tsunami recovery effort, Eric Schwartz, the United Nations Deputy Special Envoy stated: “…every dollar spent on risk reduction saves between $5 and $10 in economic losses from disasters.[iv] Further, researchers from Loyola Marymount and Stanford Universities estimated that every “…$1 spent on preparedness is worth about $15 in terms of the future damage it mitigates.”[v]

It is certainly reasonable, and conservative, to estimate that for every dollar spent within a corporation to prepare for the capability to respond effectively that $5-15 may be saved. Beyond the mitigation of direct financial loss, the long-term indirect loss of brand confidence and community goodwill are serious considerations. Investors, customers and community have long memories when corporate giants like Exxon, BP and Toyota fail to meet their expectations for action and communication in times of crisis. Cleary, when a corporation or community fails to recognize risk and to put a commensurate plan in place to protect and respond, leaders are dealt with harshly. Leaders like the mayor of New Orleans, Ray Nagin; BP CEO, Tony Hayward; and Montreal Maine & Atlantic Railway Chairman, Ed Burkhardt are a few of the unfortunate individuals who never imagined that they would be cast as villains. It is clear that these leaders never truly understood or internalized the risk they faced, as they would have undoubtedly put together a team to plan to prevent the crisis and would have had response and communications strategies commensurate with the risk. Although these are incidents at the extreme end of the continuum, similar and relative consequences at both the leadership and corporate/community levels can result when an unexpected, high-impact, low-probability incident occurs. A relatively small investment in time and energy by the leadership team can serve to eliminate or minimize the impact on the corporation and ensure crisis leaders are prepared to take on an incident.

Beyond the direct economic benefits and protection of the brand and corporate leadership, I have noted that an opportunity develops through the planning and validation process. Stakeholders and community business continuity partners welcome the opportunity to work with the corporate planning team to ensure their crisis interdependencies are solidified as well. In the next blog I will explore this area in greater depth.

Some of the best crisis managers I have seen have come from the Fire Service (obviously I have a bias in this regard). I have noted that these great leaders have always been men and women who anticipate low probability “reasonable worst case scenario risk”, prepare and learn from past incidents as well as working diligently to create tangible crisis stakeholder relationships. The culture of becoming a learning organization, as it relates to crisis for the fire service, has its foundation in reality of the loss of fire fighters (100+ every year in North America), who die during operations. These losses weigh heavily on the minds of crisis decision makers. For those we have lost, we adopt the philosophy “Through Training we Remember TM.”

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[i] Society for Human Resources Management (SHRM). (2001). SHRM Poll: Disaster Preparedness Plans in Place at Majority of Organizations. [http://www.shrm.org/about/pressroom/pressreleases/pages/ disasterpreparednesspoll.aspx#sthash. IASCODkl.dpuf]

[ii] Wang, J., Hutchins, H. M., & Garavan, T. N. (2009). Exploring the Strategic Role of Human Resource Development in Organizational Crisis Management. Human Resource Development Review, 8(1), 22-53. http://dx.doi.org/10.1177/1534484308330018

[iii] Ki-Moon, B. (2013). STATEMENT: Secretary-General's remarks at the General Assembly's high-level meeting on Improving the Coordination of Efforts against Trafficking in Persons [http://www.un.org/sg/statements/index.asp?nid=6812]

[iv] Schwartz, E. (2006). A Needless Toll of Natural Disasters. Op-Ed, Boston Globe. [http://www.boston.com/]

[v] Healy, A & Malhotra, N. (2009). Myopic Voters and Natural Disaster Policy. American Political Science Review, 103(3).