Business disruption the importance of continuity plans in the event of a natural disaster

Issue 30 – August 2011

Recent natural catastrophes in Australia, New Zealand, and Japan have tested the resilience of local people and businesses, as well as continuity plans and other methods to counter disruption related risk. Mother Nature unleashed her worst in the first quarter of 2011 with a series of intense floods, earthquakes, windstorms, and tsunamis. Businesses in Queensland, Christchurch, and northeast Japan suffered multiple levels of disruption, from property and infrastructure damage to lack of access to business premises, a fall in demand for goods and services, and disruption to electricity supplies. Even companies outside catastrophe-hit areas suffered from disrupted supply chains and increased commodity prices.

Some organisations recovered quickly thanks to robust structures, contingency plans, and appropriate risk financing. Others suffered from a sudden drop in sales and their inability to access offices, IT systems, and stock, some even going out of business.

Damage is on a different scale in north-east Japan's coastal towns, some of which were razed to the ground by the devastating magnitude 9 earthquake and tsunami of 11 March 2011. With resources severely stretched and the added complexity of the country's nuclear crisis, it will take months before many organisations can return to 'business as usual'.

'Continuity plans are of little relevance if your building was washed away by an inland tsunami, rendered unsafe to use by the earthquake, or obliterated by cyclone Yasi, and the plans had not contemplated widespread disruption of the organisation's internal and external environment,' say Grant Purdy and Roger Estall, both nominated experts for the working group that prepared a new standard on Business continuity – Managing disruption-related risk (AS/NZS 5050:2010).

'Fundamentally, the new Standard requires organisations to develop a deep understanding of the relationship between their objectives, their operating environment, and any critical dependencies,' they explain. 'Events in Australia and New Zealand have shown that some organisations placed great faith in their business continuity plans but nevertheless suffered greatly or were slow to recover. They seemed to have lacked this depth of understanding of their disruption-related risks.'

Organisations with more generic and holistic approaches to contingency planning recovered quicker. Purdy and Estall 'found that the ability to recover and the speed of recovery of many organisations (particularly those that were less damaged or indirectly affected) has been directly proportional to the quality and currency of their risk assessment, the adequacy of their built-in prevention and protection measures, contingent capabilities, and contingency planning, and therefore inherent resilience.'

Effective disaster planning is not just about dealing with the downside. Some businesses were able to boost revenue by acting quickly to realise the benefits. 'Good contingency planning should not just allow organisations to deal with the negative impacts of disruptive events, but should also allow them capitalise on any opportunities.'

Floods, storms, and earthquakes

As 2010 ended it was clear that Queensland faced a major disaster. Continuous heavy rainfall caused widespread flooding across three quarters of the state, leading to 35 deaths and widespread damage to infrastructure, property, and agriculture. Cyclone Yasi caused further damage on 2 February 2011. Catastrophe modelling agency AIR Worldwide estimates the floods will cost up to $10bn in economic losses, with $3bn to $6bn covered by insurance.

Next came a shallow magnitude 6.3 earthquake, which rocked Christchurch on 22 February 2011. Unlike last September's Canterbury quake, this was a human catastrophe with a death toll of 181. Many old unreinforced masonry buildings collapsed under the strain and up to 500 properties will eventually be demolished. The central business district (CBD) was cordoned off and the city divided into four zones.

The New Zealand treasury estimates the combined cost of the quakes to be as much as NZ$15bn with widespread business disruption after the Christchurch quake. 'Parts of the city's CBD remain cordoned off due to concerns about the stability of many older structures, with 23% of the buildings 'red tagged' with entry forbidden,' say Purdy and Estall.

They believe organisations that adopt a narrow or event-specific approach to contingency planning are at a disadvantage, citing a large Brisbane firm which had centralised its email management through a server in the CBD. It was protected from flooding and had short-term replacement electrical supply capability, but had not foreseen that Brisbane would lose its electrical supply for many days.

Another Queensland-based organisation went into liquidation as it 'failed to diversify the geographical spread of its customers and the majority of its units were swept away or flooded, which imposed an intolerable number of warranty claims while its maintenance income 'dried up'.'

Delays or denial of insurance payouts for a disaster can be critical to businesses. In Queensland, confusion over the number of events and type of flooding led some insurers to decline claims. 'Events in both countries have also highlighted the mistake of so many boards of directors in being too concerned about insurance premiums and insufficiently concerned about the policy wording and the ability and willingness of insurers to pay,' say Purdy and Estall.

Overstretched resources can also prolong the claims paying process. Although insurers in Australia and New Zealand typically fly in specialists from the neighbouring country, the convergence of events meant most loss adjusters were already busy when the Christchurch quake struck.

Supply chain risk

Another significant element of the recent catastrophes is the weaknesses they exposed in global supply chains. The floods affected most of Queensland's 57 mines, prompting many to declare force majeure on their contracts. While the mines resumed output fairly quickly, damage to basic infrastructure meant coal could not be transported to the ports for global distribution.

Companies have to consider how they would be impacted by disruption to the global supply of goods; something which became apparent to many businesses following the April 2010 eruptions of Iceland's Eyjafjallajökull volcano when flights to and from Europe were grounded.

'Attempts to improve marginal efficiency – such as adopting 'just in time' techniques, globalisation, and pressures to limit working capital – have all acted to increase the dependency of organisations on more perfect functioning of their supply chains with a resulting increased vulnerability to disruptions in the chain,' say Purdy and Estall. 'Confidence in the continuity of external infrastructure – of even the most basic commodities such as electricity, water, and sewage – has discouraged investment in on-site backup services,' say Purdy and Estall, citing the extent and duration of disruption to background infrastructure in Christchurch following the February 2011 earthquake.

Denied access

Some small businesses struggled or went under following the Christchurch quake. While last September's quake and the earlier bird flu pandemic scare helped to the extent that many organisations revisited business continuity plans, the total closure of the CBD and human tragedy that unfolded were elements that took many by surprise, thinks Darren Tomlins, a qualified risk practitioner at the New Zealand Customs Service.

'While large government and larger commercial sector organisations have been fairly resilient with redundant systems in place – alternate accommodation, computers, phones, and other systems in Auckland or Wellington – there was still the issue of dealing with relatives, colleagues, or friends who suffered loss of life or serious injury,' Tomlins explains. 'Despite business continuity plans it would have been callous to carry on regardless in some instances.

'However, as has been seen recently, business owners in Christchurch have become increasingly incensed with denial of access to business property as the authorities grapple with the scale of devastation. The businesses most affected were those with accommodation in the central city and with no alternative base for continued operations.'

Depopulation of the CBD also meant a dramatic drop in customers for businesses. An estimated 17% of Christchurch's citizens have moved out and are unwilling to return while the aftershocks continue.

Small businesses could prepare better, suggests Grant Milne, country head of Marsh New Zealand, for example by holding some stock elsewhere as a small contingency plan. 'A number of smaller business owners believe that because they take out an insurance policy that they have done enough to mitigate their risk exposures.'

Marsh New Zealand's role as a risk advisor and insurance broker became all the more poignant when the company found itself directly in the firing line. Its Christchurch offices in the Pyne Gould building collapsed and three staff members were killed. 'We've utilised our three major locations – Dunedin, Wellington, and Auckland – and we've replicated most of the functions into those three operations,” explains Milne.

Phones were switched to another location on the same day and as the office was not reliant on a hard-wired IT infrastructure employees could access soft copies of important files and documents remotely, using a secure wireless network. Laptop computers, 3G cards, and mobile phones were brought in and Marsh Christchurch was 'back to business quite quickly' from the customers' perspective.

'One of our clients took a slightly different approach because of their retail-style operation,' continues Milne. 'They had branches of their organisation in the CBD affected and they transferred those out to the suburbs closest to Christchurch. They also brought people in from Auckland and Wellington to run those operations.'

Summarised with permission from an article by H Yates in Risk Management Professional, 13 June 2011, pages 32 to 33.

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