- Natural Disasters Are on the Rise
- Even "Undamaged" Companies Can Go Broke from Disasters
- Applying New Science and Technology to Disaster Recovery
- Summary
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Even "Undamaged" Companies Can Go Broke from Disasters
Damage to buildings and infrastructure has an adverse impact on a business, to be sure; however, research over the past decade demonstrates that a business need not suffer physical damage from a disaster in order to suffer business losses and subsequent failure. Many businesses that experience no physical damage, but whose customers or suppliers suffer loss, are unable to continue in business.
In such cases, such "undamaged" firms often find themselves without suppliers and/or customers for their products and services. These firms are victims of what has been referred to as "ruptured relationships"—relationships that were essential to the performance of business functions, and now gone by virtue of the disaster.
We have seen this experience firsthand. In the aftermath of Hurricane Ike, which struck on September 14, 2008, two competitive local exchange carriers in the Houston, Texas area struggled financially because their customers for local phone lines were also affected. Many customers simply stopped paying their bills, which created enormous financial hardships for both companies. One weathered the storm, both literally and figuratively. The other filed for Chapter 11 bankruptcy only two months later.
Relationships among individual components of a system are critical. Following a major disaster, it's not uncommon for local businesses to lose customers, who move out and may or may not be replaced. If they are replaced, it's often by people with different preferences or buying habits. Even those who stay in the affected area often spend their available money to repair or replace their homes, and not necessarily to buy new sporting equipment or meals in expensive restaurants. Consider the examples of Northridge, California and Homestead, Florida. Both sustained disasters, the former to an earthquake, the latter to a hurricane. In both cases, many residents moved away permanently following the disaster and were replaced by people with lower incomes, different consumer preferences, and different skills. This situation changed both communities permanently, resulting in long-term economic, political, and social effects stemming from altered relationships within the community system.
Another reason for losses to these "undamaged" companies stems from a phenomenon referred to as tight coupling—a systemic relationship between two or more components in which there is little or no slack in the relationship. A simple example is a just-in-time (JIT) relationship between a supplier and a manufacturer. Organizations that rely on JIT for delivery of goods and services from a single supplier are efficient when everything works according to design. However, when a disaster slows or interrupts delivery, both parties suffer, along with potential customers who must find a replacement or do without the required services.
So what does this mean to the corporate planner? As an example, it might mean some new expenses for warehousing in lieu of JIT. In disaster-prone areas, warehousing might make more sense than just-in-time delivery because it provides requisite slack in the production (or distribution) system. Production costs go up by the cost of warehousing, but are offset in a disaster by having goods available and being able to continue to do business. Many regional, national, and international economic activities have become increasingly tightly coupled. And the only way to really be able to justify expenses completely is to have accurate information regarding the probability of a natural disaster occurring.
Many companies and private organizations these days proceed on the underlying assumption that reconstructing a building flattened by a disaster constitutes recovery. In truth, this is only part of the task. Serious recovery planning means also looking at how to re-create the relationships that make business systems viable.
Success boils down to finding, screening, interpreting, and presenting data in order to garner management support and funding of the initiative. There are places where such data is available for those inclined to look for it. Insurance companies are one good source for information about probabilities of disaster. The downside to depending solely on such providers is that they tend to think strictly in actuarial terms (such as the cost of rebuilding) and don't usually concentrate on fractured business or customer relationships. One possible exception to this rule might be some providers of business-interruption insurance.
Another option is to look for places where people on the federal, state, or local payrolls have done part of the job (and have therefore borne part of the expense). In previous articles, we've mentioned the Pacific Disaster Center (PDC) as "content central" for information combined with the tools to make that information understandable and meaningful. The PDC literally receives terabytes of data as raw material from myriad state, federal, and worldwide organizations. In its years of existence, the PDC has devised tools to draw useful conclusions from that data.
What the PDC hasn't really done yet is apply this data to private-sector organizations that seek to "go the extra mile" in contingency planning. Energy companies come to mind. We've all heard the scary stories. A hurricane hits a major refinery or offshore drilling platform, and suddenly we're all paying $6.00 U.S. for gas. Many energy companies today feel the public pressure to look into some hard probabilities of this possibility occurring, and what can be done about it. As a first step, the ability to visualize data streams from sensors, satellites, buoys, and other sources is time-consuming for the recovery planner—but absolutely compelling when completed and presented to policymakers.
Consider the diagrams in Figure 2. Pictures are compelling and immediately understandable. Cartoons and animations don't stand alone, however. To be really compelling, they must be based on actual data from recognized experts.
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Figure 2 Diagram courtesy of the Pacific Disaster Center.
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