Risk management is all about being on the ‘front-foot’ and it must reach across your entire operation. By Kevin Kevany.
You are the owner/manager or a long-serving employee of a reasonably successful small business. It’s Thursday morning and the week is nearly done; but Friday usually is a little crazy.
Ah, well. You park your car and walk round the corner to find your premises cordoned off with emergency tape.
A polite man leads you to another location and you are left to contemplate how you would recover all of your data (including paper files, insurance and legal documents) in order to get your business up and running again.
That nightmare scenario has been employed by Kevin Christie, director of Tauranga IT company, Computer Worx, to give local companies a vivid and dramatic experience of what faces any company physically, technically and financially – if you are unprepared.
“A large percentage of businesses will be in for a shock if disaster strikes, as few of them have tested backups and strategies in place. We are urging businesses to consider all potential risks and plan accordingly,” says Christie, who was inspired by the Canterbury earthquake disasters to develop ‘a holistic and robust Business Recovery Service’. An entire image of a client’s computer system is captured on a ‘cloud’ server, daily, so all software and programs can be recovered in an emergency, rather than data files alone.
“You need to be able to retrieve data in support of your insurance claims, obviously. But it’s not just about being able to retrieve data so businesses can continue trading. You have to know the MTO (Maximum Tolerance Outage), the RTO (Recovery Time Objectives) and have procedures in place to ensure recovery within these times,” says Christie, who says his service allows businesses to access all their documents and data within a matter of hours.
“Kiwis have this ‘she’ll be right attitude’and the simple fact of it is ‘she won’t be right’ when disaster strikes and you are not prepared. Business Recovery could be the most crucial thing a business does, and it is imperative that it’s done right,” adds Christie.
One of his clients has followed up by employing someone for six months to scan all documents held in files, so they can be backed up off site. And, yes, he does have one ‘insider’, and he can provide the service nationally.
His very successful marketing ploy is yet another example of how recent disasters have changed the game in this country, in so many ways. Certainly the impact will be felt long after the Great Financial Crisis, which many experts are picking as the reason we were so unprepared and uninsured or under-insured. Money is still tight. And insurance is still thought of by many as a grudge purchase. It shouldn’t be in this environment.
80 percent under-insured
So far, no one in government or the reinsurance industry has been prepared to tell us what it is going to cost in the future to insure goods, property and businesses in the ‘Shaky Isles’ – now lumbered with an empty EQC piggy-bank. Or even whether we’ll be able to get full cover.
“Research tells us around 80 percent of New Zealand businesses are underinsured; they either have no insurance or inadequate cover to protect their business and ensure its survival when something goes wrong,” says Karl Armstrong, executive GM, NZI, who is particularly anxious not to be seen as insensitive to the plight of a number of Canterbury quake victims, for whom these issues are very real.
“We know that for some it’s a calculated decision to shoulder some of the risk themselves, in return for lower premiums. However, for many it’s a case of not taking the time to seek the right advice and ensure their business insurance needs are met.”
NZI is encouraging business decision-makers to think about how the changes they make within their business – altering supplier arrangements, exporting, or upgrading equipment: anything that significantly impacts their balance sheet – might affect their level of cover.
“We’re asking them the question: ‘Have you sat down with your broker and actually reviewed, not just renewed your insurance cover in the past year?’
“Each business’s situation is unique and, in the rapidly changing environment businesses operate in, insurance needs are also unique. Brokers will highlight where it’s essential their business is properly protected so they can make more informed choices to ensure its long-term sustainability,” Armstrong says.
Positive yet defensive strategy
Steve Vaughan, executive director, NZ Society for Risk Management, is recognised as one of the leading, if not top, experts in the local risk management arena – and sees risk management as a positive as well as defensive strategy.
The matter of making sure your business can keep going in the face of ‘disruptive events’, boils down to three things he says:
• Spending some time and effort understanding what the possible disruptions could be (earthquakes, floods, currency movements, volcanic eruptions, power cuts etc.)
• Asking ‘how long can I afford to not operate the business at something like normal?’
• Putting in place the things you can reasonably do to get your business back to normal operation (or partly).
“A good example is how Air New Zealand dealt with the Chilean ash cloud problem,” says Vaughan. It was clear after similar events (Ruapehu a while back, the various Icelandic volcanoes etc) that Air New Zealand had done some homework on what could be done to get as near-to-normal service, as quickly as possible, he adds. They were then able to put that into place quickly (e.g. flying different routes/altitudes) and keep as much normal service as possible, while their competitors shut up shop. In a competitive market, the result was fairly predictable.
“Of course, it cost to do this but Air New Zealand had figured that out ahead of time, so they were able to act quickly when they needed to,” says Vaughan.
“No organisation will succeed unless it takes some risks, and the reality is that risk management tools apply equally well in working out how best to do that risk-taking. This does require a mind shift away from ‘risk management is all about keeping the bad things that might happen under control’ - to clearly understanding the organisation’s objectives and using those same tools to make and execute the decisions needed to get there.”
Vaughan points to AJ Hackett , inventor of bungee-jumping and one of our larger adventure activity operators, who has never flinched at taking-on new challenges to grow the business – but always on a platform of extremely high safety standards, while providing different and exciting experiences for its customers.
No room for complacency
Grant Milne, country head for Marsh insurance brokers and risk advisers, had to deal with the consequences of their Canterbury operation being in the doomed Pyne Gould Corporation building. Tragically, the company lost three employees in the second quake.
“Few would have predicted that an earthquake would happen in Canterbury, which reinforces that we should never be complacent about having solid risk management plans in place for any type of disaster.
“Some of those who have been impacted by events have discovered that their insurance policy did not cover what they thought it may and this too reiterates the importance of having regular insurance and risk reviews with your adviser.
“I’m pleased to say Marsh does practise what we preach to our clients. In June last year we had done a test run of our business continuity plan (BCP), little knowing that it would be required in September. Following that earthquake we undertook a review of the plan and looked at what we could do to enhance it and be better prepared for future events.
“Nothing however could have prepared us for the loss of life that would unfortunately ensue and the impact that this would have, not just for our colleagues in Christchurch, but right around the country,” says Milne.
Major practical lesson learnt this time? Setting up a web-to-text system so they could quickly stay in contact with colleagues when mobile calling wasn’t possible. Something that should be on everyone’s BCP, says Milne.
Managing credit risk
Veda managing director John Roberts reckons not having and implementing a company credit policy is not an option for any SME, in this time of slow payments, tight credit and a serious rise in bad debts. He’s frustrated so many New Zealand companies choose to look the other way when they need to tackle their approach to credit head-on.
“Now is the time for SMEs to deploy the smarts that got them into business, to sharpen up their back-office with improved systems and 21st century tools to position them for a sustainable and growing future.
“We find so many SMEs simply write off bad debts as a cost of doing business, but what they will find is that over time these mount up, or one seriously bad debt will tip them out of business.
“Our credit checks cost little but save thousands and mitigate business risk,” Roberts says.
And, just when you thought you’d ticked it all off on your risk management list, a final thought from Steve Vaughan, who is concerned that a company’s reputation is missing from so many BCPs: think Telecom’s XT network; Rupert Murdoch’s News Corp; Adidas and the rugby jersey price scandal.
“In every case, something could have been done which would have prevented the problem.”
So why this blind spot? Perhaps because reputation appears less ‘real’. But the reality is, risks to reputation are like other risks a company faces; they need to be identified, assessed and treated. They certainly deserve the same level of attention as other risks.
“This really means two things; your risk management has to reach across your whole operation, and risks to reputation have to be considered along with other more visible risks like those for health and safety and financial return.
“Doing things right, even when this means doing more than simply complying with the law, is a big help. Asking what might go wrong and being able to ‘front-foot’ putting it right is equally important. This is not hard to do, though it can require a swallowing of pride.”
Risk management is indeed all about being on the ‘front-foot’.