Mismanaging a potential risk exposure can cost your organization money as well as reduce your shareholder value. It can also leave your company unprepared to take advantage of business opportunities and limit growth and innovation. The more an organization understands its risk exposures and plans ahead of time for certain risk events, the better it will be prepared to make more informed business decisions.
Business continuity planning provides a structure to better anticipate surprises, recover from a business interruption, adapt to changing conditions, and leverage emerging opportunities. Creating a resilient business continuity plan starts with an enterprise risk management (ERM) program that identifies particular events or circumstances relevant to your business objectives, assesses them in terms of likelihood and magnitude of impact, and then determines a response strategy.
An interruption event might not only result in property damage but also lead to productivity disruptions that can pose a serious threat to the continued existence of a business. Every year, several thousand companies close their doors forever because of an unexpected event interrupting the flow of operations that their management team was unprepared to cope with. Following are two examples.
A Tale of Two Companies
On March 17, 2000, a lightning bolt stuck a high-voltage electricity line, causing a fire to break out at the Royal Philips Electronic radio frequency chip manufacturing plant in Albuquerque, New Mexico. Philips’s plant employees reacted quickly and extinguished the fire within ten minutes and initially identified that eight trays of silicon wafers on that line had been destroyed.
The wafers had produced chips for several thousand cell phones used by both Nokia and Ericsson, which together accounted for 40% of the plant’s shipments. Philips’s management evaluated the situation and told both companies that they would be back to normal production within a week.
Soon after, the plant personnel at Philips discovered extensive smoke and water damage that had contaminated millions more chips that had been stored for shipment. That level of damage created a calamity for Philips, but Nokia and Ericsson reacted differently to the situation. Nokia’s production planner followed an articulated process to managing chip inflows from Philips. He saw that he did not receive a routine notice from Philips and notified his own plant’s purchasing manager, who then notified the top component purchasing manager at Nokia. Nokia’s production planner began checking the status of the five parts made in the New Mexico plant once a day instead of the customary once a week.
Nokia also intensified tracking and communications with Philips, but that did not make Nokia any more confident that Philips had the problem under control. Nokia’s executives began urging Philips to take stronger action, but were not convinced that enough action was being taken by Philips to resume production.
Nokia then began to implement the business continuity plans that the company had developed for just such an event. On March 31, two weeks after lightning had struck, Philips acknowledged to both Nokia and Ericsson that it would need more time to fix its production problem. Nokia took three key steps to advert business interruption:
1) –Key executives at Nokia met with executives at Philips and made arrangements to relocate to factories in Eindhoven and Shanghai.
2) –A second cross-continental team redesigned some chips so that they could be produced in other Philips and non-Philips plants.
3) –A third group worked to find alternative manufacturers to reduce the pressure on Philips. Two alternative suppliers responded within five days
In contrast, Ericsson’s planners and managers were slow to detect any discrepancy in Philips’s performance and management and had no reason to doubt that Philips could be back in operation within a week. Ericsson did not see a need to execute any business continuity plans because the company’s leadership felt that Philips had the problem under control.
For its part, Nokia’s first perception of potential production problems at the Philips’ plant saved the day. In the third quarter of 2000, Nokia’s profits rose to 42% as it expanded its shares of the global market to 30%.
Unfortunately, on July 20, 2000, Ericsson reported a $200 million dollar loss due to the fire at the Philips’ plant, which damaged many chips meant to be used in the company’s mobile phones. Six months later, the company reported divisional annual losses of $1.68 billion, a 3% loss of market share, and corporate operating losses of $167 million.
Ericsson also announced that it would start outsourcing the cell phone manufacturing to Flextronics. The result was that Ericsson had to eliminate over several thousand jobs. Flextronics took over Ericsson’s plants in Brazil, Malaysia, Sweden, the United Kingdom, and the United States. In April 2001, Ericsson signed a Memorandum of Understanding to create Sony Ericsson.
Business disruptions can cascade across product lines and geographic borders. A single disruption in an organization or with a supplier can have multiple effects that can affect both the tangible assets of an organization such as property, environment, people, and with intangible assets like data security, knowledge management and brand reputation.
A great example of an effective business continuity plan can be seen by the University of California. In 2007, the University of California’s Office of the President announced a major business continuity planning initiative for the ten UC campuses and the five UC medical centers known as UC Ready. Key to the success of UC Ready was the development of the UC Ready Continuity Planning Tool which was developed to support campuses and medical centers efforts in business-continuity planning.
To create and store a department’s business-continuity plan, UC’s campuses and medical centers use a web-based department-level planning tool, the UC Ready Continuity Planning Tool. The tool asks detailed questions about what the departments need to continue their normal operations.
Once a department has answered the questions in UC Ready, its business-continuity plan is created. The plan can also include emergency preparedness documents, evacuation plans, contact lists, and process documents, all to help ensure safety, smooth communication, and continuity of operations with faculty, staff and students. Every business continuity plan also includes “action items,” which make up an essential to-do list of things that can be done, starting right now, to make the department more prepared for any type of disruption.
A resilient business continuity plan can help an organization understand the business environment around them and to identify mission-critical activities, dependencies and relationships with suppliers and customers. It is important that business-continuity plans assess threats and vulnerabilities to the organization as well as identify potential opportunities for growth and innovation.
Kristina Narvaez is president and CEO of ERM Strategies LLC.