Whether it be a natural disaster; corporate scandal; cyber incursion; fire; or hazardous materials release, a corporate or community crisis can bring an organization to its knees financially. If not handled properly, a long duration, high complexity crisis can also bring irreparable damage to a respected organizational brand. As with any program-based mitigation initiative within a corporation or municipality, decision-makers must be convinced there is an economic incentive to invest. 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. It may be argued that the primary elements which lead to a thorough resiliency strategy include preparedness for emergency management, business continuity and security incidents with overarching common capabilities like crisis communication planning.
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, understood and mitigated. A 2011 poll by the Society for Human Resources Management (SHRM), of 300 U.S. organizations validates the assertion 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”. 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).
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).
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 invested proactively, prepared fully and were able to effectively mitigate their “black swan” incident.
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. 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.”
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 (Hurricane Katrina); BP CEO, Tony Hayward (Gulf Oil Spill); and Montreal Maine & Atlantic Railway Chairman, Ed Burkhardt (Lac Megantic Rail Incident, 47 lives lost) 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 level of 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.
Economic impact and failure of leadership are two separate issues that need to be addressed; however, there are times when leaders are not empowered to make the investments needed to prepare for the low probability, high impact incidents. The criteria of CSA/NFPA 1600 assist leaders to break down the elements of governance, budget, risk assessment, program implementation, sustainability and validation. Other studies which directly link proactive investment in a sustained risk management program versus the cost of not being prepared include
1) National Institute of Building Sciences (NIBS): “Natural Hazard Mitigation Saves” (2017)
This study assessed the benefits of hazard mitigation strategies in the United States. It found that, on average, society saves $6 for every $1 spent on mitigation. The study considered a range of natural hazards, including earthquakes, floods, hurricanes, and tornadoes.
2) World Bank: “Natural Hazards, Un-Natural Disasters: The Economics of Effective Prevention” (2010)
The World Bank’s report emphasizes the economic case for investing in disaster risk reduction. It suggests that investing $1 in prevention can save up to $7 in future disaster-related costs. The study discusses various types of disasters, including floods, earthquakes, and tropical cyclones.
3) United Nations Office for Disaster Risk Reduction (UNDRR): “Economic Losses, Poverty, and Disasters 1998–2017” (2018)
UNDRR’s report analyzes the relationship between economic losses, poverty, and disasters. It emphasizes that the economic impact of disasters disproportionately affects low and middle-income countries. The report underscores the importance of risk reduction measures in breaking the cycle of poverty exacerbated by disasters.
These studies collectively demonstrate that investing in disaster preparedness, risk reduction, and resilient infrastructure is not only a proactive strategy for protecting lives and property but also a sound economic decision. The upfront costs of preparation are consistently shown to be a fraction of the economic losses and recovery costs associated with unmitigated disasters.
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. At Emergency Solutions International we have successfully applied the 80+ criteria outlined in CSA/NFPA 1600 with “Risk-based Parties of Interest” to create a “Report Card” outlining a prioritized mitigation strategy to bring the “Program” to a level commensurate with risk. https://esintl.ca/plan-review-and-development/ Further, there is an opportunity for industry to support adjacent communities or First Nations partners to get to a higher level of preparedness and interoperability together as part of their community stewardship efforts.
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”
Thank you for your feedback on past posts. We recognize that the benefit of a post, session or exercise comes from the wisdom of the group and their contributions. Please assist us with your own comments and knowledge, if there is an idea within this post or another area that you would like us to examine and discuss in greater depth, please do not hesitate to let us know.
About the author: