Business Continuity During a Recession

The elephant in the room

Let's start by admitting the obvious. As the risk of a company getting wiped out by an economic storm increases, the value of its business continuity or disaster recovery functions diminishes. This is common sense, and it is foolish to claim otherwise. The value of a business continuity program depends upon the probability of it being used, and if a company is less likely to be here tomorrow for market or economic reasons, then it is less likely that there will ever be the opportunity for a disaster recovery plan to be put into effect.

Think of it this way: if you are sentenced to hang next week, it's unlikely that your lifespan will be lengthened if you give up smoking today.

However, as I've written before, companies generally seriously under-estimate the value of their business continuity plans in good times. Even if the chances of the plan being used are less, the value of the plan is probably more than most people think. Now might be a good time to remind people of this. (See my article on "How much is a Business Continuity Plan Worth?" http://www.riskythinking.com/articles/article24.php and the associated Business Continuity Plan Value Calculator http://www.riskythinking.com/tools/bcpvalue.php for one method of estimating the monetary value of a plan).

But there's also another factor to consider. Recessions amplify risks.

Recessions Amplify Risks

Although there is less likelihood that a business continuity plan will be put into operation if a business is more likely to fail due to market or financial reasons, the chances of business failure after a disaster if no business continuity plan is in place is increased.

In the good times when cash flow is good, banks are happy to lend, and customers are waiting at the door, it may be easy to whether a factory fire or an office flood.  Banks will extend credit, new customers can easily be found, and everybody will expect the company to continue in business. A company may well succeed in "muddling through" after an incident.

In bad times this isn't the case. It may be difficult or impossible to arrange temporary financing against a non-operational business; customers may be few and far between and intolerant of delay. Investors will be unwilling to invest extra money. The expectation that a company may fail could easily turn into a self-fulfilling prophesy.

The absence of a tested plan is therefore much more dangerous in a recession.

The bad news...

So apart from its effect on the value of the business continuity function itself, what effects can we expect a global recession to have on the threats and impacts which drive our risk management functions?

1. Layoffs and cutbacks will lead to staff discontent, increasing the risks of internal theft, workplace violence, and the disclosure or theft of confidential information from insiders.
2. Remaining staff are under increased pressure: it will be more difficult to borrow staff temporarily to get non-operational projects aimed to increase business resiliency implemented.
3. Lawsuits for unfair dismissal, discrimination, breech of contract are likely to increase.
4. Rumours of layoffs and similar events can have a devastating effect on staff morale and productivity. These may be internal rumours or rumours circulating in the media. Unfounded public rumours can also affect potential customers and creditors, and will need to be quickly acted upon.
5. Suppliers may disappear suddenly as cutbacks or failures by their key customers causes them to exit business areas or go bankrupt.
6. Vendors may fail. Excessive dependence on a few vendors may create major problems if those vendors experience financial problems and are unable to pay your bills, or if the vendor decides to exit an unprofitable business area.
7. There is an increased risk of arson and vandalism. Put simply, potential arsonists and vandals are less busy doing other things. (Although we should note that the statistical evidence for this may be skewed by an increase in fraudulent insurance claims).
8. Cutbacks in maintenance will lead to an increased risk of disruption due to equipment failure. This will affect both our own equipment, as well as the goods and services we are supplied with by others.
9. Draw-downs in inventories, both by ourselves and our suppliers, will mean that minor disruptions in the supply chain are more likely to result in a disruption to the goods or services we provide.
10. Finally populist government action to protect industries may have undesirable effects. International sales and supplies may be affected by tariffs, quotas, and trade wars.

Tread carefully. It's never good to be the bearer of bad news -- especially when lay-offs are possible.

The good news...

In a recession:

1. The prices of goods and services decrease. It's cheaper to do things.
2. The cost of replacing property decreases. Vacancy rates for office space are higher. There is easy availability of space for temporary office or factory accommodation, so risk mitigation or recovery strategies that involve purchasing or renting real estate will be cheaper to put into operation.
3. Replication strategies which might have been too expensive in normal times (such as duplicating facilities to minimize risk or owning a hot site) may become cheap enough to implement.
4. Cost of services will decrease: there probably has never been a better time to negotiate reduced long-term rates from suppliers of hot sites, replacement equipment, emergency communication systems, etc.
5. Management may be more open to new cost-saving strategies that are good for business continuity, such as virtualization (which makes it easier to move or replicate IT resources). When things are going well there's less incentive to consider alternative approaches.

The neither good nor bad news...

1. Increased pressure on budgets will make it more important to choose low cost solutions which can be adapted for your needs, rather than building the ideal solution from scratch. (Shameless plug here for the Binomial Pandemic Planning System which I helped create - see http://www.riskythinking.com/bpps - which can help you quickly build your initial pandemic plan rather than having to create it from scratch).
2. Outsourcing business continuity projects such as plan development, training, and testing to consultants will have increasing appeal as internal resources have less time available to dedicate to on non-operational projects.

Related Things other people have written...

"Continuity in Recession", is an interesting article by John Robinson from which I stole the phrase "Recession Amplifies Risk". John has a good description for how a company's "risk appetite" is likely to be changed during a recession.
http://www.continuitycentral.com/feature0633.html

"Flames Claims and Automobiles" is an intriguing article The Economist which looks at how a recession affects the insurance industry. If past statistics are anything to go by, it's not bad news. An increased number of claims is balanced by a reduced cost of meeting each claim.
http://www.economist.com/finance/displaystory.cfm?story_id=12948609

"Weathering Difficult Times" from the Business Continuity Institute is a 15-question self-assessment which aims to discover if a business is prepared for the disruptions likely in a recession. It also reminds managers that having a business continuity program in place may allow insurance rates to be reduced or insurance against certain events to be eliminated.
http://www.thebci.org/BCMSurvivalGuide2009.pdf

Michael Z. Bell
21 April, 2009

You can comment on this article at the Risky Thinking Blog.

[ Back To Top ]

Note. Where trademarks are mentioned, they belong to their respective owners.

© Albion Research Ltd. 2010