Four ways to counter the costs of disaster
Following the Northridge Earthquake in 1994 many businesses that had survived the temblor relatively unscathed suddenly found their revenues declining. For a number of years prior, the region had been experiencing a minor population exodus as the aerospace industry declined in response to lower government spending. Many people who had lost their jobs and were close to retirement saw the earthquake as the last straw and moved away. The availability of housing attracted a new wave of immigration consisting largely of Korean and Latin American families. Companies that failed to recognize and adapt to the new demographic went out of business.
Why do so many businesses fail after disaster? The answer often lies in a failure to understand the true costs of the disaster.
Disasters are complex and there are many levels of concern that could affect a business. The most obvious is the physical damage produced by the earthquake. One would think that this is both easy to identify and quick to resolve. However, many businesses fail because they either did not carry sufficient insurance or misunderstood the coverage they did have, severely limiting their resources for reconstruction. There is also an assumption that needed resources are available to rebuild. However, damaged infrastructure that affects deliveries and an increased demand for building supplies and contractor services can create delays that prevent timely business resumption.
The physical damage caused by disaster is not the only source of loss. Businesses frequently overlook a hidden financial side to disaster losses. Some of these are obvious, such as the need to pay overtime for additional work by employees to restore facilities or reduce work backlog. Others are more subtle. For example, failure to pay a suppliers bill on time can result in a service charge. Failure to meet the terms of a client contract might result in penalties.
The single biggest mistake, however, is looking solely at the business and not being aware of what is happening in the larger community. There are three main areas that are frequently overlooked:
- What’s happened to community infrastructure? How bad is the damage? Are transportation corridors closed or damaged? If so, for how long? A business may survive but if it depends on the delivery of goods, either from suppliers or to customers, damaged transportation infrastructure will have a direct impact on the company’s recovery. Long term utility outages will also affect business resumption, particularly if the business has not arranged for off-site backups of critical files and records or relies on Voice over Internet Protocol (VOIP) and Private Branch Exchange (PBX) systems.
- What’s the impact on your customer base? Is the demand for services likely to increase, decrease, or stay the same? Is there potential for generating additional business? Commercial linen companies serving the hospitality industry frequently see a drop in demand while those servicing hospitals see an increase. Failure to adapt to these changing demands might result in a competitor taking over the client and experience suggests that once lost, these customers are seldom regained.
- What’s the impact on your labor pool? Are employees likely to remain or will they move out of the area? Will employees leave for higher wages in other communities or with competitors? Will there be large scale evacuations as was seen in New Orleans after Hurricane Katrina? This resulted in a labor shortage that was exacerbated by extended unemployment benefits and government assistance.