Small company survival: How to prepare for a business interruption

Like perhaps most business people, Donna Childs did not even remotely expect the 11 September terror attacks on the US. So she could not foresee the collapse of the World Trade Center, which blocked access to her company's sole office on Wall Street for a week and then hampered operations for months afterwards. Problems included no landline phones, irregular power supply and transport chaos that kept some employees at home for three weeks.

Fortunately, Childs Capital LLC was ready to handle a business interruption. Although its "worst case" contingency was conceived for an event far less catastrophic - a fire in the local subway station, which would prevent staff from getting to their desks - it sets out a firm groundwork for getting back to the job.

Back-up files and contact lists were available remotely, which meant skeleton operations could restart almost immediately. Claims for computers, equipment and furniture could be made quickly and painlessly, because Childs had photographs and receipts of everything cached on a remote server. Of course the company limped somewhat, but at least it was walking forward.

Many other businesses in the line of fire were not so much as moving. Childs remembers: "I watched countless small businesses flounder and go under."

Blackouts, blazes and bankruptcy

Precisely how many companies shut down because of 11 September, either temporarily or permanently, is unclear. Official statistics offer little insight into this and business interruption in general.

Nonetheless, in insurance terms alone, interruption is big business. According to reinsurer Swiss Re, business interruption accounts for more premiums and claims than do disability or injury.

This is not too surprising, if one stops to consider the ways that trading can be halted:

Blackouts can bust businesses

• During Hurricane Charley's pounding of the US south-east coast in the late summer of 2004, Outback Steakhouse said its 130 restaurants in Florida, North and South Carolina lost about 130 operating days and almost USD two million in revenues, because of mandatory evacuations as well as interruptions to the power and water supply.
• The August 2003 blackout in the north-east US and adjacent parts of Canada cut off power to 50 million people. The four-day outage caused businesses to lose revenues of about USD 10 billion. (One of the main culprits was a dying tree - while toppling to its demise, it also hit and disabled a critical transmission line.)
• A 1997 fire destroyed a factory that was the sole supplier of brakes to car-maker Toyota. The production halt rippled through Japan's just-in-time supply chain, forcing another 18 plants to shut down for nearly two weeks. The total loss in sales, says one involved underwriter, was in the order of USD 325 million.

As if all this weren't bad enough, there is an even worse case: what starts as an interruption turns into a permanent shutdown. A company goes out of business - and this happens frighteningly often.

A quarter of all companies that are shut down by a disaster never reopen, says the US Department of Commerce. For small businesses the figure may be as high as 50%, other studies claim. The Irish Republican Army's 1996 bombing of central Manchester in the UK is a case in point: by six months after the blast, according to NatWest Insurance Services, of the 452 businesses that were severely disrupted, 250 had declared bankruptcy.

When small is not beautiful

Experts in both insurance and disaster recovery agree that the most likely candidates for permanent closure are smaller businesses. Their three strikes are:

• they tend to be leaner and less established than bigger firms, hence more vulnerable to a shock
• operations often are concentrated geographically, so a single hit can wipe out the entire company
• they tend to be less prepared for an interruption.

The NYSE - now it has 4 backup sites

Perhaps this last point is no wonder, because preparations by some larger firms are so cost- and time-intensive. For instance, broking firm Lehman Brothers operates a fully-equipped building and data-centre in Jersey City, just across the Hudson River from its fully-equipped building and data-centre in New York's Manhattan. This paid off in the 11 September chaos, because even though its Wall Street office was obliterated, all but one employee escaped and most of these were back at work in New Jersey that afternoon. Already on 12 September, Lehman says it was dealing bonds and had 400 traders ready to handle equities when the New York Stock Exchange reopened.

This was not lost on the NYSE, which did not reopen until September 17. The exchange has since spent a reported USD 25 million on a back-up system that could start trading within one day. Part of this involves connections to four other operating sites in four different buildings, allowing officials to shift trading in case of an attack or other disaster. Competing US stock market Nasdaq says its data centres are a reassuring 300 miles apart and that back-up generators are tested every week.

Even a more mundane event, the August 2003 blackout, prodded US grocer Kroger to come up with a contingency concept. After 90 of its supermarkets in Ohio and Michigan were plunged into darkness, the company developed a 50-page emergency plan, spelling out actions such as where to find back-up generators and how to dispose of spoiled food.

A small response for small businesses

After reading the above, many small business people would retort: "We have neither the time nor the money to make that sort of preparation." And this is probably so. But complete unreadiness - which disaster experts say is too often the case - is no answer either.

So perhaps the best way forward is to define some budget of time and money to spend on the issue, and then devote that to addressing five topics:

Data backups - are yours ready to work?

1. What could happen that would interrupt us?
   Earthquake, wind, flood, hail and other disasters - what sort of frequency and to what degree do these happen at your sites of operation? Tip: ask local business people or long-time residents for their insights.
2. How could we recover?
   Where are supplies and back-ups? How do we contact emergency services? How would employees communicate with each other? Tip: ask a low-level, but experienced staff member to help. Besides being flattered, he or she often brings a wealth of common-sense insights to this straightforward, but critical task.
3. How would customers respond?
   As the transport and tourist industries learned to their pain after 11 September, much of their business is discretionary. By contrast, sales of torches, tinned food and first-aid kits often soar around the time of a disaster. The point is to think through: first, where you stand in that spectrum, and second, what you could do about it.
4. How would suppliers respond?
   Would they be affected? Will they force us to honor purchase contracts if we're flat on our back? How would we get spare equipment in place rapidly? Tip: just ask them - many good suppliers will be happy to help.
5. Will our answers actually work?
   For starters, test out the back-ups of some computer files. Are they really backed up, and are they really recoverable? If not, better to know now and to take action. Tip: this needn't be resolved overnight, but getting the answers right could make the difference between survival and oblivion.

As a final step, think through what sort of insurance you need. Business interruption can be lost in the buying shuffle, because it usually is combined with property cover (see article). Make sure that it does what insurance should do: bear the risk that goes beyond what you can handle on your own.