Creating a new paradigm for disaster preparedness.

• Author: Childs, Donna R.
• Position: BUSINESS CONTINUITY

It's a paradox: Compelling images of damage from, the aftermath of major disasters, like hurricanes and floods, are likely to attract the attention of chief financial officers, but unlikely to motivate them to create effective measures to protect their businesses from future calamities.

How do financial executives explain this paradox and what can they learn from it?

Most executives discount these catastrophic events because they are statistically unlikely to experience one. Thus, they can justify not investing the time or effort needed to create a business disaster plan for such a remote possibility.

The relatively few businesses that actually experience a disaster will learn, the hard way, the lessons of ex ante--or before-the-event--analysis. This focus on, the catastrophic undermines effective preparedness and distorts perception of risk in a way that makes businesses more vulnerable even in the course of ordinary operations.

This concept runs completely counter to the conventional wisdom. Imagine a spectrum of risks. On the far left side, are the "high frequency/low severity" risks or disasters. These are the everyday disasters, such as human errors, computer crashes, power outages such as blackouts and brownouts, etc. These disasters frequently occur, but they are not typically catastrophic.

At the other end of the spectrum are the "high severity/low frequency" events such as major natural disasters: hurricanes, earthquakes, terrorist attacks, etc. Events such as fires, floods and environmental hazards fall somewhere in between. (See chart on the next page.)

CFOs usually focus on the catastrophic risks, those at the far right end of the spectrum. They assume that automatically subsumes preparation for all lesser risks. While this approach generally holds true, it should not form the basis of disaster planning.

It hardly makes sense to initiate a full-blown disaster recovery plan every time the business experiences a minor deviation in operations. Such a response is too expensive and cumber some. And a focus on the catastrophic risk can induce paralysis, as employees will start to reasonably fear that they cannot prepare for every contingency.

By contrast, the approach of preparing for the everyday disasters offers the advantage of immediate benefits against more imminent threats at more affordable costs, while building resilience to the more serious, but less likely, threats.

Consider, for example, a power outage. Outages commonly...