Terrorists and hackers may spook corporate managers, but the forces of nature remain the biggest threat to the daily operations of most companies. It didn’t take much besides fallen trees, after all, to knock out electrical power throughout the Northeast two summers ago.
To ensure that such an outage doesn’t hurt its business, International Rectifier, a maker of power-conversion chips and circuits, is now in its third year of contingency planning (in conjunction with Marsh & McLennan). The $1 billion (in revenues) company started the first year by conducting a high-level review of liabilities, then devised plans to deal with those risks. Each successive year, says executive vice president and CFO Michael McGee, management has attempted to drive its business-continuity plan down one level. The ultimate goal: to be able to fulfill orders even if one of the El Segundo, California, company’s 12 far-flung manufacturing plants goes off line for a full year.
To be sure, risk management has long occupied the attention of finance managers. But of late, operational resilience (that is, business continuity or disaster recovery) has taken on a new importance. In fact, International Rectifier is hardly alone in its contingency-planning efforts. A recent survey conducted by Deloitte & Touche LLP and CPM Global Assurance found that, over the past five years, the number of companies that have devised business-continuity plans has jumped by 20 percent. Many observers believe this heightened interest stems from newfound worries about terrorist attacks and network outages.
Certainly, bomb-toting extremists or “black-hat” hackers evoke fearsome, powerful images in the minds of corporate risk managers. But according to government data, fully a third of the U.S. gross domestic product is directly affected by weather. Indirect effects are harder to measure, but weather-triggered events like downed phone lines or downed corporate jets can throw a spanner into a company’s operations for hours, days, even months.
In this era of on-demand manufacturing and razor-thin inventories, interruptions can have dire consequences. That’s especially true for companies that supply larger businesses with parts and raw materials. For those companies, a tornado in Topeka or a landslide in a California canyon can crimp production and, in turn, obliterate hard-earned reputations. In such cases, indemnification may not be enough. “You can insure your assets,” says Michael Morganti, a client-training manager at insurer FM Global in Johnston, Rhode Island. “You can replace your building, but you can’t replace the customers who don’t come back.”
Larger companies are not immune to the weather, either. While multinational corporations are rarely shut down by the rain, harsh weather can stall plant operations and impair services. Worse, unseasonable temperatures often gut sales, particularly for retailers. In fact, scores of companies mentioned bad weather in their 10-Ks and 10-Qs when discussing poorer-than-expected results in 2004. Of course, one can’t help but wonder how many of these references were simply an excuse for poor performance. But some surely were not. In October, for example, management at airline operator ATA Holding Corp. blamed, in part, the four hurricanes that tore through Florida last fall for the company’s descent into Chapter 11 bankruptcy.