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Foresight must be 20/20 when creating a crisis management program.

Foresight Must Be 20/20 When Creating A Crisis Management Program

While many organizations devote from 1 percent to 6 percent of their gross pre-tax revenue to risk funding and loss control, as well as internal and external risk management administrative activities, they do not have an effective crisis management program. Even when proven risk and insurance management techniques and effective loss control strategies are employed, disasters must still be anticipated.

As a segment of an operating risk management program, crisis management may be defined as a strategic technique to reduce the effects of a loss situation (emergency and/or catastrophic) through risk identification, measurement, loss mitigation and management accountability, with a primary focus on pre-loss planning and post-loss recovery. A crisis management strategy is made up of strategy formulation and strategy implementation. The definition of effective crisis management must be broad and not become inhibited by the traditionally narrow considerations of most standard commercial insurance policies. Crisis management objectives should interface with the needs of a company and incorporate the concepts of safety, pre-loss planning, post-loss recovery, asset conservation and revenue production maintenance with the goal of financial survival.

Key Strategic Elements

An effective crisis management program should include the key strategic elements of planning for specific periods and program development involving sequential tasks to be implemented in the event of a crisis. When planning for a time period, it is best to create a time schedule. This schedule should focus on the periods prior to, during and immediately following the crisis and allot time for post-crisis recovery.

The following elements are appropriate for the creation of an effective strategic program for most types of major organizations:

* Establish an operational executive crisis management committee of key management personnel who have the authority and responsibility for creating, implementing and maintaining the program.

* Organize an emergency response team for each defined physical area, which shall provide immediate response capabilities at the time of the crisis.

* Formulate executive crisis management committee analytical capabilities and resources for the purpose of identification, measurement, magnitude assessment, forecasting and intervention for each potential crisis.

* Develop vulnerability reduction programs to mitigate or eliminate the identified crisis and loss exposures.

* Implement a crisis management program strategy including contingency relocation planning, alternate administration capability, management information computer systems backup, including offsite storage retrieval, production contingency planning and alternative inventory sources, internal and external communication system alternatives, backup systems for transportation and distribution and sales and marketing plan modifications.

* Institute chronological action guides that identify tasks to be performed before, during and following an emergency.

* Maintain a continuing crisis management education program with dual emphasis on specific response capabilities and general emergency preparedness.

* Operate a crisis management audit committee to assure the attainment of objectives and identification of program areas requiring improvement, modification or enhancement.

Operating Authority

Operational authority should be provided through the use of an executive crisis management committee comprised of senior staff members. The committee system approach should be mounted within the existing line of authority and the immediate objectives and long-term goals of the company. This approach has been extremely successful and, to function effectively, allows a minimal time commitment by all members.

The emergency response team should operate in the interim, prior to the arrival of outside assistance (police, fire, paramedic, utility company, etc.) and, in the event outside help is not readily available, should have the additional responsibility and training to provide all necessary emergency services.

The emergency team should answer directly to the executive crisis management committee. Whenever possible, subcommittees should be established to handle and review specific task assignments. Task assignments should include, but not be limited to, administration, communications, executive succession planning, alternate headquarters site selection, alternate headquarters operating strategy, offsite computer center operations and the development of alternate operational resources.

Program Development

Recommended crisis management methodology involves a systems approach to producing a strategic action plan to be formulated and implemented prior to the occurrence of a crisis. When creating a comprehensive crisis management strategy it is important for the risk manager to predetermine the most effective sequence of task actions, establish appropriate priorities and delegate management authority.

The crisis management program may be developed in a logical sequence of task activities which interface with the identified crisis exposures. A successful project approach frequently uses a five-part system with the following scope:

* a feasibility study to determine the scope, warranted program magnitude and strategic plan requirements;

* an assessment of the project scope including identification, measurement and definition of crisis management requirements, such as the evaluation of the existing risk management program and insurance coverages;

* project formulation including decision analysis, creating a specific crisis management program operations manual and developing appropriate strategies;

* project implementation including executive and management briefings as well as implementation seminars for all involved staff; and

* project maintenance including crisis management program operation, monitoring and assessment of management and staff participation and preparedness.

Loss Exposure Assessment

Often, the risk management planning process is myopic in defining the probable magnitude of loss exposures. A significant task in the formulation of a crisis management program strategy should be to broadly identify and measure the various potential crisis and loss exposures. The analytical assessment process may include establishing the extent of financial and/or operational impact on the organization for losses for several classification groups relating directly to a probable loss frequency and severity.

Severity and frequency may be categorized in groups at several established levels of loss magnitude. These categories may range from a minor event, which can be funded by the existing risk management program, to a major catastrophe, which threatens the ultimate financial survival of the organization. Major event exposures most frequently effect life safety and assets, as well as the ability to maintain or re-establish operations and revenue generating activities.

In developing the crisis exposures assessment, the traditional insurance industry perils of primary concern should be considered. They include fire, flood, severe windstorm, collapse, embezzlement, theft, business interruption including contingency, death, disability and intentional and/or unintentional torts. In addition, consideration should be given to other adverse exposures such as hostile takeovers, product extortion, product contamination, product recall, government regulatory problems and destructive union and strike activities.

Dr. Frank Press, president of the National Academy of Sciences, has remarked on numerous occasions about the necessity of mitigating the consequences of natural disasters. The importance of crisis management is further emphasized by the fact that Dr. Press has called for the establishment of an international "Decade of Natural Hazards" to focus attention on the interdependency of many industrial activities.

A nonstructured crisis management approach attacking catastrophic situations as they arise is neither prudent nor acceptable in the current socioeconomic climate. Executive management must accept the responsibility on behalf of employees and investors to identify and manage potential crisis. From a personal standpoint, the risk manager, chief financial officer, executive, insurance broker and underwriter should review the crisis management program as a key career growth protection feature in their respective area of responsibilities associated with services and asset conservation.

Richard H. Soper is the director of Soper & Associates, a crisis, risk and insurance management consulting firm in Palos Verdes Peninsula, CA.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Soper, Richard H.
Publication:Risk Management
Date:Sep 1, 1989
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