ASBDC - Flirting with Disaster?

By Sheree R. Curry

Flash floods, mudslides, hurricanes, tsunamis, blackouts or even an executive’s death. Are you prepared if disaster were to strike your business? More than 1 in 4 businesses will experience a significant crisis in a given year, according to a January 2005 survey conducted by Continuity Insights magazine and KPMG Risk Advisory Services. Of those businesses that experience a disaster and have no emergency plan, 43 percent never reopen, according to The Hartford’s Guide to Emergency Preparedness Planning, published by The Hartford Financial Services Group, an investment and insurance company. Of those that do reopen, only 29 percent are still operating two years after opening. Despite your best-laid plans, sometimes it’s the people you do business with who may cause the demise of your business.

A Fantastic Sam’s hair salon hit by Hurricane Ivan in fall 2004 is a perfect example of a business that didn’t directly suffer extensively but was still affected immensely. The Pensacola, Florida-based salon never reopened, despite only minor damages from the storm—it was the inability of its mall landlord to remain operational that silenced this tenant’s hair clippers and blow dryers. “We didn’t incur major structural damage. [But] after two and a half weeks, I still wasn’t up and operational because the shopping center didn’t have power and didn’t have water,” says Mary Blanco, president of F&S Pensacola, which operates a chain of salons—including the disaster-stricken Fantasic Sam’s—around the northwestern edge of Florida. After potential sales was down $65,000 to $70,000 across her salons, Blanco opted not to renew her mall lease that had come due days after the hurricane. In the end, the shopping center was closed nearly two months before it reopened—without Fantastic Sam’s as a tenant. “It is very important for smaller companies to have a crisis management plan because the smaller you are or the newer you are, the more you have to lose if you have a crisis,” says Larry Smith, president of the Institute of Crisis Management in Louisville, Kentucky. “The little company has fewer resources and less money in the bank and less experience to cope with these things. They need to be prepared.”

Seattle-based FusionWare Corp. was not prepared despite the warning it had when CFO David Stefanoff announced he had lymphoma in 2003. “He was healthy enough to go with me to Australia in February 2004, and in August he was dead,” says CEO Alan M. Davis, 61. Stefanoff worked from home weeks before his death, trying to raise $5 million in VC funding for the $2.5 million middleware integration software firm. “Losing a key member of the management team can have a major impact, and you could lose the company over the inability to recover fast enough,” says Davis. The company was a tad closer to obtaining the funds it needed in July than it is today. Although it has since hired another CFO, Davis says, “our financials for venture capital are not in the same condition as they would be if [Stefanoff] were here. He really understood the process of raising more money and which analysts to involve.” Davis suggests that companies groom a successor or keep names of potential hires for its key management positions at hand, adding that it need not be a death that sets you back. “Maybe a key employee just says, ‘I’m done. I’m moving to Pittsburgh.’ In a small company, a key person walking out the door can be as devastating as someone dying.”

Many Forms of a Crisis

A crisis need not be a major incident. Simply having your computer systems knocked down for a period of time can cause serious issues. Businesses that suffer computer outages of eight days can lose between 2 percent and 3 percent of gross sales, according to The Hartford’s Guide to Emergency Preparedness Planning. Tom Wilson, catastrophe director at the Orlando, Florida, branch of Matson, Driscoll & Damico, an Atlanta and Chicagobased accounting firm specializing in loss, says backing up data is critical to any disaster recovery plan. “Capture data early and often,” he says. “Rotate the backup media frequently enough to ensure the most current data is completely captured. You should also maintain an archive of your historical data.” As president and founder of commercial insurance producer Multiple Risk Managers in Anchorage, Alaska, Frank Thomas-Mears was so concerned about his customer information database that he used to carry copies of nearly 80 gigabytes of data on 38 pounds of tape with him at all times—even on vacation. “I stored all the tapes in a suitcase next to the door of my office, taking it with me whenever I left,” says Thomas-Mears, 50. In May 2003, he switched to LiveVault, an off-site, online backup and recovery service—at an investment of nearly $10,000 per year. “This is a good deal for backups given the time tape drives fail, tapes fail, and calculating the cost of human effort to perform and monitor the backups and the cost of network engineers to keep things fixed and tweaked,” says Thomas-Mears of this $250,000 firm. Plus, the system is able to recover data up to the minute of the data-loss event, rather than through the day of the last tape backup.

Plan on It

So now that you know the importance of preparing for a possible disaster, what’s your plan? If you don’t have a disaster contingency plan in place, you’re not alone. According to a study by Continuity Insights magazine and KPMG LLP, 42 percent of businesses with fewer than 500 employees had no plan in place. “A crisis communications plan is invaluable,” says Denyse Dabrowski, vice president of The Marcus Group, an advertising, PR and crisis-management firm in Seacaucus, New Jersey. “When I say ‘plan,’ I do not mean a 30-page book your company puts together about its crisis response, because that’s out of date before it hits the shelf. I’m talking about the ‘plan’ as far as who is the crisis team and what are everyone’s duties.” While not every crisis can be avoided, increased knowledge, preparation and proper training can help a company put unexpected events under immediate control, and keep them under control as the issue is addressed. What are some inexpensive disaster-preparedness steps you can take? Try the following advice from several business owners and crisis experts:

Make duplicates of important communications materials. Debra Caruso operates DJC Communications, a New York City PR firm that was located three blocks from the World Trade Center when tragedy struck on 9/ll. When her business was temporarily displaced, she learned the hard way that she should keep copies of business checks in a remote location. “The branch I banked at was [inaccessible], so I had to go to another branch and prove who I was to get counter checks to pay taxes and other bills,” says Caruso, 45. Now, “I keep [copies of] certain important materials at home: checks for my business account, com-pany letterhead, envelopes, important phone numbers and passwords.”

Keep copies of important records in a remote location. Some business owners were attempting to recreate records after their facility was destroyed in a hurricane. Though they kept important documents in a safe-deposit box, the bank, too, had been destroyed in the hurricane. “This type of record loss happens more frequently than people think, and reconstruction is a major inconvenience,” explains Connie Bracher, disaster chair for the California Society of Enrolled Agents and a tax preparer at Acorn Bookkeeping & Tax Service in Crestline, California. “Important documents should be copied and stored in another part of the country with a brother or sister, or in a safe-deposit box in another state.”

Run through a test drill of your disaster plan. The owner of a small manufacturing business in Oklahoma built two tornado cellars and wrote a disaster preparedness plan about a week before a severe tornado hit the area. He confidently had his staff go to the tornado cellars expecting to be able to communicate with those in the other cellar and with outside business partners only to find his communication system (handheld radios) did not work underground.

Prepare multiple contingency plans. A law firm located in the World Trade Center had planned for the possibility of emergency by renting a “hot site,” an office with computers some distance away from the main office where staff could quickly resume work if their office had to be evacuated. The firm learned what many others learned then: The hot-site owners had the same arrangement for the same site with multiple companies, assuming the likelihood that they would all need the site at the same time was slim. But in the hours after 9/11, it was first come, first served. The law firm had to quickly come up with a Plan B.

Don’t skimp on insurance. Eureka Networks CEO Raul Martynek, 39, says business interruption insurance saved his $30 million company. In September 2001, the 200-employee company had just completed 20 percent of the telecom and broadband hard wiring for its marquee account, the World Trade Center. After 9/11, the property was lost, as well as “the opportunity to leverage that contract and the million dollars we had invested in that,” he says. But stablization measures, including a two-third reduction in staff and a reprioritization of efforts toward highest-margin products—as well as business continuity insurance—helped him stay afloat until he could gain more clients. Martynek now has more than 400 buildings under contract while most of his competitors in 2001 are no longer around. “If you lose your people in a flood, fire or hurricane, all the data in the world and insurance coverage to rebuild your facilities won’t do you any good,” says Brad Forsythe, a small-business risk management consultant, founder of Milford, Ohio-based Best Practice Advisors and author of Bulletproof Your Business: Cutting Risk for Small-Business Owners and Managers. “As an owner, you should buy business income interruption insurance. It’s the only way to buy the time to rebuild your facilities and rehire people. Small companies tend to skimp on insurance coverage, especially when it comes to things like business income interruption insurance. If they do get insurance, I see them get the least amount they can. It is very cheap to buy additional coverage, but is extremely expensive to pay for ongoing expenses out of your pocket.” When it comes to disaster preparedness, “we must determine the kinds of risks we can do something about and the kinds of risks that can affect all businesses in the same way,” says risk consultant Paul Laudicina, author of World Out of Balance: Navigating Global Risks to Seize Competitive Advantage. “In all of this, you will never have perfection. Perfect risk protection just means being protected better than your competitor.” SBS

Here Comes Trouble

When most people think of crisis management, they think of fires, explosions, natural disasters, workplace violence and even terrorism. However, businesses are more likely to experience a smoldering crisis than a sudden crisis, says Larry Smith of the Institute for Crisis Management in Louisville, Kentucky. “These are the type of crises that start out small and may take days, weeks or even months before they get out of control,” says Smith. Smoldering crises, such as sexual harassment, discrimination and white-collar crime, accounted for 71 percent of all business crises in 2003, the ICM study says. Smoldering crises are more preventable than ones like casualty accidents and workplace violence, says Smith. “The CEO needs to encourage his or her direct reports to not be afraid to come and tell the top person if they see something that could be a problem down the road.”

Dare to Prepare

You’re ready to handle a disaster and save your business if you can answer yes to the following questions:

Have you identified the impact an outage would have on employees, customers and business interfaces?

Have you determined how long your company can afford to be inoperable before your business is critically affected should one or more of your services or operations experience disruption?

Have you developed, documented and tested a comprehensive business continuity plan for facilities, employees, processes, systems, data and networks that address recovery and restoration and internal communications, with other offices and customers?

Have you determined how your business will operate should key business partners and vendors be affected by a disruption or disaster?

Have you negotiated vendor contracts or lease agreements necessary to acquire equipment and services in the event of a significant disruption or disaster?

Sheree R. Curry specializes in management best practices and is an award-winning business journalist and former staff reporter at Fortune. She currently freelances from her suburban Minneapolis home.

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FLIRTING WITH DISASTER? Don't Be Caught When a Calamity Strikes Your Business