Planning for Business Interruptions Reduces Risk
One of the most serious risks companies face is business interruption, which can render them unable to manufacture products or deliver services. Such interruptions may happen due to both natural and man-made causes. These include hurricanes, earthquakes, floods and tornadoes as well as power outages, server crashes, security breaches, and cybercrime.
Interruptions like these can cause significant damage — for example, by shutting down manufacturing facilities or making it impossible to access the equipment and data employees need to do their jobs.
Problems Have Solutions
One solution is to engage in formal business continuity and resiliency planning. Start by creating a business resiliency and disaster recovery plan. This plan should detail how your company will respond in the aftermath of a serious disaster or interruption.
Your plan should accomplish two main objectives:
Outline immediate emergency response procedures. Here, you want to make sure your critical infrastructure and systems are operational as soon as possible after the interruption. These typically include your physical facilities (such as your manufacturing plant and office) as well as computers, telecommunications and IT equipment, and anything else that's essential to your operations.
Check out nearby disaster recovery hot sites where your employees can work temporarily until your facilities are back up and running again. Also consider storing your data and network applications in a secure offsite location — this will make it easy for employees to get back to work quickly after the interruption.
Help ensure your business's long-term viability. The statistics with regard to long-term business success after a serious interruption are discouraging. According to the Federal Emergency Management Agency, 40% of businesses fail to reopen after a disaster and 25% fail within one year of a disaster. Additionally, a separate study by Gartner Group found that 40% of businesses fail within 5 years of a disaster.
Therefore, it's critical to plan detailed strategies for how you will minimize the long-term impact of the interruption. This includes how you will ramp back up to your preinterruption manufacturing, production and service levels as fast as possible and maintain these levels over time.
Gauge Your Vulnerabilities
Your business resiliency and disaster recovery plan should also identify the areas where your company is most vulnerable to a serious interruption. You can then quantify the potential impact of different kinds of interruptions on your operations and prioritize your recovery steps so the most important functions are restored first.
An effective way to gauge your vulnerabilities is to conduct a business impact analysis which will anticipate the main consequences of an interruption to different aspects of your operations. Based on this, you categorize your company's systems and functions as follows:
- Mission critical. Your business cannot operate without these systems. They must be replaced with fully operational and identical capabilities before you can resume operations.
- Vital and essential. Your company can manage by performing these functions partially or manually on a short-term basis. However, full capabilities must be restored as soon as possible to avoid negative long-term impacts on the business.
- Sensitive and important. These can be interrupted for a longer period of time without doing serious harm to your business. But lasting damage can occur if they aren't eventually restored.
- Noncritical and minor. These are the lowest priority in terms of restoration. They can be interrupted for an extended period of time without having any serious impact on your business.
In addition, your business impact analysis should create a recovery team that manages all postinterruption efforts. This team will be responsible for a wide range of tasks, which includes making sure that mission critical and vital systems are restored quickly, employees are told when and where they should return to work, and external stakeholders like vendors and customers are kept abreast of your postinterruption progress.
Procrastination Is a Mistake
Don't make the mistake of thinking that a major interruption or disaster always happens to "someone else." Start working on your business continuity and resiliency plan now so you'll be prepared if a serious business interruption occurs.
Should you buy business interruption insurance?
One way to help protect your company from the damaging effects of a serious business interruption is to obtain business interruption insurance. This type of coverage becomes effective if your company is unable to operate or suffers property loss due to a serious interruption or disaster.
Business interruption insurance goes beyond just replacing tangible items (such as buildings, inventory and equipment) that are damaged or destroyed. It also provides income to help replace lost profits during the time your business is nonoperational.
Coverage periods can range from 30 days up to a full year, or even more — the longer the period, all else equal, the more expensive the policy. A coverage period typically starts on the day when damage or lost income due to the interruption takes place and ends when damaged property is repaired or replaced and business income is restored.
Talk to your insurance professional about the different types of business interruption insurance available and the appropriate amount of coverage for your business.
For more information regarding planning for business interruptions, contact one of our commercial partners at (973) 328-1825.