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Preventing a crisis from getting out of hand.

Preventing a Crisis From Getting Out of Hand

Crisis management has become a buzzword in the business press and a subject of much boardroom discussion. Certainly, the attention is tied to a string of recent, well-publicized disasters that severely impacted soundly managed companies. These crises ranged from oil spills and product tamperings to earthquakes and hostile takeovers, all of which took management by surprise. As a result, corporate response was often lacking.

Executives all too readily agree that companies should establish a mechanism that alerts them to potential crises and outlines an immediate means to deal with these situations. Unfortunately, their words speak louder than their actions. Indeed, research indicates that crisis response and crisis management, although often discussed, are less a part of business plans and strategy than all the talk would indicate.

In "Crisis Management," a book published in 1986, author Steven Fink found that 89 percent of Fortune 500 executives surveyed believed a crisis in their firms was inevitable. However, 36 percent of those who thought their company had more than a 50 percent chance of having a crisis did not have a plan, and 42 percent of those who had gone through a crisis still did not have a plan in place.

In 1988, a survey conducted for the National Association of Manufacturers (NAM) lead to similar conclusions. Although only 38 percent of the respondents stated that their organizations had a formal crisis management team, the proposition that "every organization should have a permanent crisis management unit or team" received a 2.49 respondent rating on a scale of 1 to 7, with 1 indicating strong agreement. However, agreement was almost as strong (2.73) with the statement: "Most organizations, unless they first experience a major crisis, will not engage in a serious program of crisis management." Yet the truth remains that a company without such a plan is taking an unnecessary risk. Just one Bhopal incident or Tylenol tampering case can be so devastating as to make statistics virtually meaningless.

Crises do not occur in isolation. They have multiple dimensions and call for multifarious treatments. Crises tend to take on the domino effect as one often leads to another. Plans should be designed to isolate and manage fluid, unstable and dangerous situations. For instance, when a product is found to be contaminated, the product line is not the only asset at stake: The corporation's public image also is on the line. Lost revenue could total millions of dollars. Hundreds of employees could be put out to work. Likewise, product defects and recalls can affect earnings so significantly that debt payment becomes difficult or impossible. Even a small, seemingly unimportant fire can cause a toxic release that costs millions of dollars to clean up.

Large-scale disasters carry with them their own consequences. Toxic releases are frequently followed by intense media and governmental scrutiny. In addition, employees and neighboring residents often bring legal action. The aftershocks of these and other incidents affect not only the companies involved but spread through the entire industry, as witnessed, for example, by the chemical process safety guidelines proposed by the Occupational Safety and Health Administration.

Crises will occur no matter what advance planning takes place. A sound plan, however, will ensure a more carefully thought out and controlled response, even if a crisis that was not anticipated occurs. The plan reflects sensible risk management principles as well, including pre-loss planning, contingency planning and post-loss recovery. Furthermore, it provides a business strategy tailored to an enterprise's specific environment and culture, decision-making, operating systems and problems. If nothing else, planning for crises and anticipating responses result in reduced stress among those who must deal with them, thus allowing for a more effective response.

Although a crisis management plan is a defensive strategy, it involves a collection of offensive activities which enable an organization to coordinate and control its destiny in a time of turmoil.

Some of the plan's many components include disaster recovery planning, emergency planning and emergency response. However, these terms reflect only parts of the total effort. For a plan to be fully effective, it must encompass six stages: risk identification, advance preparation, risk escalation, emergency response, disaster recovery and return to normalcy.

Risk Identification

Risk identification is the foundation not only of the crisis management program but of the entire risk management effort. This stage involves identifying the worst-case scenarios by thinking the unthinkable and determining the threshold of pain. Through a diligent assessment, an organization should be able to distinguish among those situations for which it should prepare and those which it can ignore. It should identify critical functions and assets, pinpoint severe financial dangers and find potential third-party liabilities, including product exposures.

Crises experienced by others can frequently offer risk managers valuable lessons in managing their own companies. Past experiences help define, and place a perspective on a company's strengths and weaknesses. They also reveal the skills and resources needed to respond to similar crises. In its 1988 survey, NAM asked Fortune 1,000 corporations to identify the most common crises they had experienced in the last three years. Each company reported an average of 10 crises per year, with the most common being product defects and recalls, environmental accidents, plant and equipment failures, computer breakdowns, absence of data processing security, the impact of rumors and loss of confidential information.

Other crisis sources were sexual harassment, occupational health disease and copyright infringement. In addition, companies experienced crises caused by off-site and on-site sabotage, counterfeiting, copycat threats, boycotts, terrorism, hostile takeovers, bribery and executive kidnapping. Less common causes included natural hazards such as earthquakes, windstorms and floods, power failures, the death of an executive or key employee, negative media exposure, government intervention, pending legislation, fires and explosions and unexpected competition.

The identification process can be summed up in four questions: What can happen? What operations will be affected? What will be the overall impact on the company? What can the company do to avoid the effects? By going through this questioning process, from local operations personnel to the chief executive officer, a company can determine the potential downside of each crisis.

The process requires developing risk profiles and a methodology for recording data on impact severity, a ranking of probabilities and a method to rank potential crises in a hierarchy that permits decision-making on a worst-case basis. An excellent tool that helps identify potential crises is the Risk Assessment Master Matrix shown on page 68. The matrix, developed by Marsh & McLennan, links potential hazards or risks to assets on local, divisional and corporate levels and can be used with a coding system that identifies risk by severity and probability. Once impact and loss scenarios are identified, a risk and crisis profile can be developed.

Advance Preparation

After possible crises are flagged, the organization is ready to develop its crisis management plan and appoint crisis management team members. The plan should provide methods to minimize the extent of disruption and damage and limit escalation of the crisis; establish continuing or alternate operating procedures, including reduced-capacity procedures; identify staff, equipment, supplies and modes of transportation needed for recovery; delineate tasks to be performed; assign responsibility; establish emergency operating procedures; and set forth lines of communication from the team to employees, senior management and board members and from the company to the media, government officials, shareholders, investment analysts, bankers, suppliers and customers.

A plan must also permit flexibility. Management should realize that the plan only sets the framework for action, stating where and how to begin. Thus, by limiting the number of uncertainties, it builds confidence and reduces stress.

The team's composition depends on the nature of each crisis. Ideally, the team should include the risk manager, legal counsel, the chief executive officer, chief operating officer, chief financial officer, chairman of the board and directors of public affairs, security, environmental affairs, engineering, personnel, safety, marketing and research.

The team's leader should be designated by the CEO and should have access to the CEO. The team leader must be someone who can take control, focus on key facts and find opportunities in a sea of confusion. Sometimes an outsider can provide valuable insight and help reduce the size of the vacuum in which crisis decisions are made. Alternates and replacements are also vital during long crises and disaster recovery periods because burnout is a major concern in drawn-out crises.

The team's designated spokesperson can be an irreplaceable asset during a crisis if he or she follows some basic rules. Most important is that honesty is the best policy in crisis communications. It is safe to assume that whatever information is available on the cause of the crisis, the actions taken during and after the fact will become public knowledge. If a company covers up facts, the discovery of the truth will most likely escalate public pressure and, at the very least, destroy the company's credibility. Past crises have shown that it is possible to present bad news in a positive light. For example, the company can surround the bad news with positive facts about corporate activities prior to the crisis and measures it is taking to end the crisis.

The spokesperson should also be prepared to respond immediately to the media and other key groups, including employees as they are often outsiders' first source of information. Supplying the media with updated press kits that tell the company's story is an essential component of the plan. In addition, the spokesperson should have direct access to the CEO and other senior management and be a permanent member of the team. Finally, he or she should have good relations with the media prior to the crisis and maintain those relations by continually updating the press until the crisis is over.

Risk Escalation

Before a crisis occurs, there is usually a warning period during which an astute management team can recognize the signals and events that increase the likelihood of disaster. During this period, the company can accomplish the most at the least cost. Even if it cannot prevent the disaster, knowing it is coming makes the company better prepared.

Some well-known disasters can illustrate this point. There is little doubt the Alaskan oil spill put the oil industry on alert. Shortly afterward, several oil companies incorporated tighter controls into their shipping operations, and several contemplated switching to double-hulled vessels. Likewise, after the explosion and fire in Pasadena, TX, many chemical and other firms reassessed their potential for business interruption loss, and as a result of the Tylenol incident, virtually all pharmaceutical and food products were repackaged with tamper-proof seals.

Emergency Response

At this point, the damage has already begun. Initially the team's focus is on damage control--protecting life and property. To that end, it must identify the source of the crisis and isolate and measure its severity. Immediate decisions, and often any future ones, will stem from this analysis.

To manage the crisis efficiently, it is usually best to divest crisis management team members of all other responsibilities and give the team the authority, directly from the CEO, to make whatever decisions are necessary. The emergency response portion must not be viewed rigidly. Rather, it sets in place the mechanisms necessary to assure information flow, coordinate the logistics of locating and using emergency services and start damage control as soon as possible.

The team needs to get facts quickly and make decisions immediately. Its goals are to minimize operational interruption, reduce the financial impact and maintain vital functions. Although nothing should interfere with the team's activities, others should go about their regular duties as much as possible. An important point to remember throughout the crisis is to record all activities and decisions. Keeping records of activities, including the decision-making process, improves the team's ability to make decisions in the first place. It also helps ensure truthful recall for the questions that the media, government, shareholders and employees are likely to ask.

Disaster Recovery

During the disaster recovery period, the search for answers begins. The team's objectives at this point are to minimize the extent of disruption and damage; prevent its escalation; effect a rapid, smooth transition to alternate operating modes and sites; ensure the maintenance of critical corporate activities; minimize the economic impact; and restore normal operations as quickly as possible.

Throughout this recovery period, particularly when normalcy returns, the team must continue its ongoing relationship with the media, government regulators, the financial community, customers, suppliers, shareholders and employees. A consistent communication plan that presents the desired message will go a long way toward restoring the public's image and faith in the organization.

Return to Normalcy

This stage, like disaster recovery, begins when the emergency response phase ends. It is an excellent time to assess new risks and exposures, rethink the crisis management plan, assess team performance and redefine crisis strategy. The purpose of a crisis management plan is to return the company to its pre-disaster level of activity. While this is a commendable goal, it may not be practical or even desired. In fact, after a disaster or crisis, total restoration is rarely possible. Many factors, such as business strategies, market conditions and the legislative and socio-economic climate, have most likely changed. If the plan and the disaster recovery stage have been kept up to date, they will reflect the company's new operating conditions and environment and will likely indicate new opportunities.

The six stages of a crisis management plan represent an ongoing, interactive and proactive effort to safeguard a company's assets and reputation, in effect guaranteeing its survival. According to Mr. Fink's survey, organizations without plans experienced crises lasting two-and-a-half times longer than companies with plans. Of course, using one stage to the exclusion of the others is self-defeating too. It achieves little more than increasing a company's chance of getting lucky when disaster strikes. However, organizations with plans that incorporate every stage not only limit the negative impact of a disaster but often find opportunity amidst the chaos.

Harry Taback, P.E., is managing director of M&M Protection Consultants, a unit of Marsh & McLennan in New York.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Taback, Harry
Publication:Risk Management
Date:Oct 1, 1991
Words:2345
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