Don't carry on regardless

In recent years, UK businesses have faced a wide range of external events that have threatened their existence: foot-and-mouth disease, extreme weather, petrol shortages, industrial disputes and terrorist attacks.

These, taken in the light of the current threats still posed by terrorist activity, global warming and a possible bird flu pandemic, prompted Royal & SunAlliance to commission research asking UK businesses how prepared they are in the event of having to close their business for 24 hours or more.

The results reveal that the majority of UK firms are ill-equipped and unprepared to cope in the event of a major incident. Nationally, 61% of companies believed that a closure of just one day would have some impact on their business. Perhaps surprisingly, 40% of small businesses (those with between one and five members of staff) believed that a single day's closure would have no effect on the business at all; conversely, this view was shared by only 18% of businesses with 200 or more employees. But, despite their fears, 59% of UK businesses lack a formal business continuity plan to ensure that they can be operational again quickly.

The research showed some wide regional discrepancies, too. In the East Midlands and the South West, 75% of businesses lacked a formal plan, compared with 67% in London, 48% in Wales and 39% in the South East. The research also showed that larger companies (categorised by turnover and employee number) were more likely to have a formal plan in place than smaller ones. Only 26% of businesses with between one and five members of staff had such a plan, compared to over two-thirds (69%) of businesses with 200 or more employees.

Consideration should be given to the financial repercussions of a closure. The research showed that more than one-third (35%) of UK businesses were not insured for such events and would have to bear the brunt of any costs associated with closure themselves.

The analysis by sector is even more patchy. For example, only 18% of businesses in the agriculture and materials sector were not insured, but 41% in the services sector and 38% in the transport and construction sector lacked cover for business interruption. And this despite the fact that business interruption cover is an easy and - for most customers - reasonably priced addition to most commercial property policies.

While fire is still the most common cause of business interruption claims, and headline-grabbing stories focus attention on it, businesses need to realise that the risks they face are not just confined to bricks and mortar. An enforced closure or interruption can lead to loss of reputation, loss of staff, failure to meet regulatory requirements and, most importantly, the long-term loss of customers.

The 7 July effect

Following the events in London last summer and a perceived rise in the threat posed by terrorism, some businesses have reviewed the arrangements they have in place. The research found that one in seven UK businesses reviewed their contingency plans following the bombings in July. Predictably, businesses in London were most likely to have reviewed their plans, with one in three doing so directly because of the threat of terrorism.

The results also show that larger companies were more likely to have reviewed their contingency plans in the light of the bombings, with only 14% of businesses with between one and five members of staff reviewing their plans, compared with almost half of businesses with 200 or more employees.

In London, some businesses believed that the July bombings have increased the likelihood of businesses facing an incident that could close them down for over 24 hours. Businesses based in the capital were twice as likely as the national average to believe they may be forced to shut (13% compared to 6%).

Worst-case scenario

As part of the research, businesses were asked what they considered to be the greatest external threat to their business. Nationally, three out of 10 businesses considered fire to be the greatest threat to their existence, with that number increasing to 41% in the manufacturing sector. In Scotland, however, an IT systems failure was considered to be the biggest threat (by 22% of businesses, compared with a national figure of 11%). Among larger companies, 43% also feared an IT systems failure the most, while companies with smaller turnovers feared fire above all.

Future concerns appear to be less of an issue, with over three-quarters of UK businesses believing that an incident that could close them for more than 24 hours would either never happen or was unlikely to happen in the next year. The agriculture and materials sector were the most optimistic, with 21% of businesses believing that such an incident would never happen, compared with 17% in the retail sector and 16% in the services sector.

When categorised by turnover alone, the survey found that over half (53%) of businesses with a turnover of greater than £50m believed that such an incident could happen. This compares starkly with companies with turnover below £50m, less than 20% of which considered that such an event could happen.

Unsurprisingly, large businesses with sophisticated risk-management processes and the resources to absorb business disruption were the most prepared. The 'gap' in UK businesses' preparedness lies in the small and medium-sized companies - whose very survival is, arguably, most threatened from a protracted business interruption incident. Yet these are the companies that believe it will not happen to them. These are the businesses that really need business continuity planning and business interruption cover.

The unthinkable

On Sunday 11 December 2005, an explosion tore through the Buncefield oil depot in Hemel Hempstead. It will no doubt take some time before the full extent of the damage caused by the explosion is known. Early indications suggest there will be a variety of commercial claims, ranging from large, multinational businesses to small independent retailers. Some of these businesses will have been directly affected by the fire, suffering structural damage to their premises as well as, potentially, a loss of stock and equipment. Others, such as small independent retailers in neighbouring towns, may simply have been unable to access their premises due to the imposed exclusion zone and will be claiming for denial of access.

The relative impact of these issues will vary greatly between different companies, with one of the key factors being whether or not the company has business interruption cover and a business continuity plan.

Graham Walsh, director of sales at Navigant International, a corporate business travel agency, was thankful that his company had both. Based in the Boundary Way area of the business park nearest the explosions, Navigant's office was almost completely destroyed by the blast. Walsh was unable to gain access to the building until Wednesday 14 December but, because of its business continuity plan, Navigant was nearly fully operational by 8:00am the day after the blasts.

Walsh explains: "Our disaster recovery plan went into full effect at 7:00am on the Sunday morning. Because I live so close to our office, the team met at my house at 9:00am and our IT systems and telephones were transferred to our office in London. We were also given support from our offices in Newcastle, Aberdeen and Reading. Our server is based in the London office and all our data is backed up on a daily basis so, from a data-loss perspective, there were no problems.

"Our business interruption insurance has given us peace of mind since day one. We knew exactly where we were and what we were covered for first thing on the Monday morning.

"We were confident that our business continuity plan would enable us to get the business up and running again, but our concerns were more logistical - for example, getting staff to our London office from Hemel Hempstead and home again. We are now set up in our temporary premises 800 yards from our old office and, as of 9 January, we have been fully operational. I know of other businesses in the area that did not have business interruption insurance and have subsequently not been so lucky."

Lessons to be learnt

With six out of 10 (61%) UK businesses believing that a closure of just one day would have some impact on their business, the research highlights the need for these businesses to do more to prepare against the threat posed by external events.

Many business owners may believe that they are well-placed to deal with a major incident. However, even among businesses that are prepared, the research shows that 42% of businesses with a business continuity plan only review them once a year or less often, and one-quarter of businesses with a business continuity plan have never tested them. Risk management should be addressed regularly by the executives, ensuring that plans are up to date and fully functional. The research indicates that almost 60% of businesses do not currently address this issue regularly at board or executive meetings.

It is clear from the research that a majority of businesses lack the framework to ensure that normal business can continue at the earliest possible opportunity and with the least possible disruption to the business itself. Yet, the events at Buncefield have demonstrated that ensuring there is a viable business continuity plan - whatever the cause of the disruption - is vital, along with business interruption cover.

This is an issue all businesses should be reviewing with their brokers as part of identifying gaps in their risk management. As well as becoming part of a broker's everyday service to their clients, thinking about how your own business would operate if you could not use your normal premises could be time well spent in the long run.

- Graham Heale, Underwriting director, Property and engineering, Royal & SunAlliance.