Hall: Are You Prepared for the 'Worst Case Scenario'?

The continued news on the financial and employment losses of Hurricane Isaac is a poignant reminder of the threat natural disasters pose to business and economic growth. Last year alone, global economic losses from natural disasters totaled a remarkable $370 billion (U.S.), according to Swiss Re. Many businesses aren’t able to recover from the devastating losses that often accompany a natural disaster. In the U.S., for example, more than 40 percent of businesses never reopen after experiencing a natural disaster.

A forest burns during a backburn operation to fight the Wallow Firen in Nutrioso, Arizona.
A forest burns during a backburn operation to fight the Wallow Firen in Nutrioso, Arizona.

Every company needs to protect its business from the “worst case scenario” in order to grow because, as the last few years have shown us, the worst case can easily and quickly take us by surprise. (Read More:11 Nuclear Meltdowns and Disasters)

Having a well thought-through business continuity plan that addresses risks in areas such as physical property and the supply chain can help mitigate potential losses and keep a business in business. With a complete business continuity plan, a company becomes more resilient and can weather a disaster while its competitors are left wading through the damage trying to recover.

In 2011, the floods in Thailand severely impacted the hard drive industry. Water damage shut down operations for several major players in the market. Some hard drive companies – Toshiba, for example – found that as the floodwaters rose, their ability to meet customer demands plummeted. Unlike most situations where floodwaters recede after a few days, chest-high water was in some commercial buildings in Thailand for 45 days. The flooding also temporarily affected the hard drive maker’s business results and financial condition. In the immediate aftermath of the flooding, Toshiba slashed its full-year profit outlook blaming the impact of the natural catastrophe for contributing to its losses.

For Seagate, the flooding in Thailand created an opportunity that helped improve its business while competitors like Toshiba struggled to restore their manufacturing capabilities. Unlike its competitors, Seagate suffered relatively minimally, in part because some of its key production facilities were located on higher ground. As a result, Seagate regained its positionas market leader—one it hadn’t held for more than two years, according to market researcher iSuppli. Computerworld noted that Seagate’s fiscal year revenue increase of 36 percent over the prior year was attributed – at least in part – to the misfortunes of its competitors during the Thailand flooding.

Even though they fared well through this crisis, the company seems to be recognizing that it may not be as fortunate the next time disaster strikes. Seagate is now accelerating initiatives to make its supply chain “even more flexible, robust, resilient and responsive,” according to a recent blog post by Dennis Omanoff, the company’ s senior vice president of worldwide supply chain and procurement.

As this example demonstrates, being prepared for a crisis – whether it’s a devastating hurricane, crumbling infrastructure or political upheaval – is vital to the growth, operation and resiliency of your business. These are the types of situations that we at FM Global advise our clients to prepare for and to manage. Even a small amount of planning can have a huge impact. For example, FM Global clients who had facilities in the path of Hurricane Katrina and prepared adequately in advance of the storm reduced their average dollar loss by 85 percent. The steps taken were inexpensive too—US$7,400 in improvements per facility to avert an average of US$1.5 million in property damage per location. (Read More:The World's Worst Oil Disasters)

Business continuity planning is not glamorous, however. It is a complex and often tiring process that takes time and costs money. But it works. Seagate is a great example. By addressing its vulnerabilities – including its factory location in a flood zone, the location of its suppliers, its material requirements and internal resources – and planning for a “what if” scenario that went beyond obvious issues within the business, Seagate had a way to adapt to a new situation quickly and efficiently. (Read More: Natural Disasters Sink Lloyd’s of London’s Profits)

Executing cost-saving measures that present growth opportunities – such as shifting operations to cheaper production locations like Thailand with less robust building codes and risk management standards can have grave consequences for any company that isn’t prepared for the risk that may accompany these decisions. In-depth business continuity planning is vital to ensuring your business stays afloat and competitive. When developing a business continuity plan, ask yourself these questions:

  • Do your senior managers view continuity planning as a competitive advantage?
  • Have they made the necessary commitment to addressing supply chain risk, and does your company collaborate with its suppliers to assess and mitigate risk?
  • Have you designed risk mitigation into your product design and manufacturing processes?

The record number of major events in 2011, along with the natural disasters of this year – from the Italian earthquake and Colorado wildfires to Beijing flooding and Hurricane Isaac – is a clear indication that the worst case happens more often than we’d like to think. Hoping the worst won’t happen is not an effective business plan. The best way to weather the storm is to start planning today.

Jon Hall, Executive Vice President FM Global. As executive vice president, Hall is responsible for various divisions at FM Global, including claims, engineering and research, marketing and enterprise learning, underwriting and reinsurance, and Affiliated FM (a member of the FM Global Group).