Enterprise resilience: companies must look beyond traditional risk management to fully protect the key components of their operations. (Life/Health: Selling Insight).

Imagine what would happen if your company's underwriting function was located in a single facility and a flash flood knocked out the building for three months. Or imagine a front-page scandal that caused significant brand erosion or even agent defections? What do you do?

Hypothetical situations of this sort are far more real than we might like to admit. They can be particularly devastating because, as in the examples above, they strike directly at a company's earnings drivers--those key capabilities that organizations use to create, expand or protect their profit streams. Conventional risk-management approaches to such events simply won't work, as they tend not to be purposely aligned with a company's earnings drivers. The solution is an approach we call enterprise resilience, which works to identify the strategic and operational risks to key earnings sources and then reduces or eliminates these vulnerabilities.

Enterprise resilience operates across the entire organization and often requires collaboration. For example, a company's ability to rapidly re-price a product due to changes in the returns of certain asset types requires collaboration across product design, marketing communications, channel management and technology. This is in sharp contrast to traditional risk management, which focuses solely on determining appropriate levels of risk transfer for hazard and financial risks, usually as part of the finance or treasury functions.

Ignoring today's highly unpredictable risk environment is quite simply not an option. Maintaining earnings consistency has become more challenging as business models have become more complex. At the same time, investing public and regulatory bodies are demanding more from corporate boards and leaders. They carry elevated expectations for ensuring continuity of the enterprise as well as the need to proactively create and sustain shareholder value through consistent earnings growth.

How great is the risk? The 2003 Protecting Value Study, conducted by FM Global and two financial organizations and polling nearly 400 chief financial officers, treasurers and risk managers, showed 75% of respondents said a major disruption to a top earnings driver would cause either a sustained impact on earnings or threaten their companies' continuity of operations.

The first step in putting enterprise resilience into place is the development of a resilience profile that identifies high-priority vulnerabilities. Understanding the current level of spending on risk-mitigation activities, management will then be able to make strategic investment decisions based on the organization's tolerance for risk for each of its key earnings drivers. It is crucial to ensure that the organization's resilience strategy is aligned with the overall corporate strategy and that strategic planning exercises take into account the major risks identified for the organization. These risks can include employee misconduct, disruptive government regulation, terrorism, infrastructure failures, brand deterioration, disruptions of sales channels and intellectual-property theft.

Enterprise resilience affords both boards and corporate leaders the ability to understand the risks they face and the controls needed to address them. Senior executives have found that aligning strategy operations, management systems, governance structure, and decision-support capabilities can help them uncover and adjust to continually changing risks, endure disruptions to critical business capabilities, and create advantages over less adaptive competitors.

Aligning the organization to both corporate and enterprise resilience strategy goals may require adaptations of the operating model, reporting frameworks, business intelligence and performance metrics. However, the benefits of ongoing resilience management are significant and wide-ranging. Specifically, they:

* Arm management with information to improve decision-making across functional silos;

* Provide increased risk and resilience transparency for corporate leaders and boards of directors;

* Ensure the most important threats to earnings are appropriately managed or mitigated;

* Reduce vulnerability to the organization's most devastating risks;

* Align resilience and recovery spending with those capabilities most important to stable, growing earnings; and

* Enable management to seize competitive opportunities without sacrificing important sources of earnings.

Enterprise resilience is an ongoing process that enables a company to become fully aware of its risk environment, adapt to changes, and at the same time, take advantage of market opportunities. It is a substantial undertaking, but the new standard of care demanded of business leaders and the increasing complexity of major organizations virtually demand such an approach.

Gary Ahlquist is a senior vice president in the Chicago office of Booz Allen Hamilton. Gil Irwin and David Knott are vice presidents in Booz Allen's New York office. Kimberly-Allen is a senior associate in Booz Allen's San Francisco office. They can be reached at [e-mail].