Sink or swim

Research suggests that only 10% of UK businesses have a business continuity plan, and it is questionable how beneficial even some of these may be. However, the corollary is that 90% of UK businesses do not have any BCP and, as a result, the directors are failing themselves, their employees, shareholders and clients, should an event arise that affects the trading position of the business.

A BCP is not a magic wand but it is a step in the right direction. Businesses with a BCP are five times more likely to recover from an event than those that do not. Forward planning is the essence to success but this principle appears to be placed at the back of the minds of many businessmen when the issue of a BCP arises. Brokers have an opportunity to influence this mind set and add value to their client relationships, emphasising that if the client is too busy to create a BCP now, they will certainly be too busy to try and resolve the issues should a catastrophe arise.

The media now regularly brings to our attention serious weather-related or man-made events that have affected the lives of individuals and businesses, and it is clear that on many occasions, the businesses involved will not recover.

Flash flooding

The risk of flash flooding is currently attracting a lot of attention within the industry, due to the current drought conditions and the fear that the hard, parched ground will not absorb heavy sustained rainfall. This could result in accumulation of surface water runoff, which may overrun drainage facilities. Commercial concerns built upon historical flood planes, in low lying areas, in valleys, or near rivers or the sea, are all vulnerable to flooding.

Disaster mapping reveals that many flash floods occur during summer months and reference to AMG's internal management information reveals many incidents across the whole of the UK in June, July and August 2005. Who can forget the dramatic effects at Boscastle on 16 August 2004?

Inadequacy of drainage systems in major cities and other urban areas is well known. However, many commercial concerns are moving to out of town sites where there is no historical record or local knowledge to warn of the risks of potential flooding. Some of these sites are upon natural flood planes and, even where not, development of the land removes yet a further area of natural drainage, adding to the woes of the existing drainage system. Furthermore, most developments now have large car parking and hard standing areas surrounding them, restricting the natural draining away of rainwater and adding to the accumulation of surface runoff. In these circumstances, it is not uncommon for more than one premises, or even an entire commercial estate, to be affected by a single flooding incident. This multiple-victim scenario presents its own issues and difficulties as witnessed in Buncefield.

The potential for flash flooding this summer is clear and, for brokers advising commercial clients, there is both an opportunity and a need to develop or review a BCP as part of the client's overall risk management process.

Fortunately, the vast majority of businesses will never be faced with an incident which threatens their livelihood. However, insurance professionals, particularly brokers and loss adjusters, habitually deal with the unfortunate few and can offer a unique insight into identifying threats and the ways in which they can be managed.

Close liaison between the broker, client and loss adjuster can ensure that at the time of a claim the response is both speedy and appropriate. AMG's experience has found that the following aspects are particularly beneficial: nominated adjusters with known contact details, including out-of-hours telephone numbers; pre-loss meetings to build an understanding of the client's businesses and processes and to build a rapport in advance of any time of trauma; identification of key processes, suppliers and customers; identification of potential consultants, contractors, letting agents and solicitors.

The client knows their business better than anyone else, and as part of the integrated risk management programme, the broker can tailor make the cover to suit the insured's needs and the threats identified by the risk management survey process.

When considering the potential affects of a flash flood, commercial concerns should break down their considerations in to the historical elements of a traditional material damage policy, for example: buildings; machinery and plant; and stock.

Rarely do floods cause long-term structural damage to a building, however, depending upon the depth of the floodwater and the duration of the flooding, the flood water can contain effluent backing up from drains, which can render the building unusable for days, weeks or months. If the client is a landlord owner/occupier, consideration needs to be given to access to appropriate desanitising and drying equipment, surveyors, structural engineers and builders. With pre-planning, involving the insurer and their nominated adjuster, all of these issues can be phased into the BCP.

If the client is the tenant of a building, they are dependent upon the speed of response and actions of his their and their insurers or adjusters, over whom they have little control. The BCP should contain landlord details and, ideally, an agreed contingency plan drawn up between the client and landlord beforehand. Being a tenant can be a positive, as it can enable the client to switch to alternative premises not only immediately but in the medium to long term, or even permanently. The BCP should recognise the covenants of the lease and particularly whether there is a rent cessation clause. If so, this may provide the client with an option to set up elsewhere, many such costs being covered by the increased cost of working section of a suitable business interruption policy.

Moving equipment

If one of the viable options is to stay put, the BCP should allow for contingencies of moving equipment and plant to upper parts of a multi-storey building or other structures. Damage to peripheral areas beyond the immediate buildings should also be considered, as it is not uncommon for access roads, tracks, delivery routes and even bridges to be washed away.

If the business trades from more than one location, are the buildings at those other locations equipped to accommodate all or key areas of the business, at least in the short term? If not, contingency plans need to be put in place where, perhaps via the payment of a retainer, local surveyors and estate agents will provide priority to the insured when seeking alternative premises.

In respect of machinery and plant, excluding IT equipment, many such items are portable and, with any prior warning of any impending flood, may be lifted beyond the depth of anticipated floodwater. In the eventuality of flash flooding, which may occur out of business hours, simple uplifting of portable machinery and plant would not be possible. To guard against this scenario, offsite plant and asset registers should be maintained, along with details of suppliers that can be contacted should a catastrophe arise.

Many items of plant and machinery, particularly in manufacturing concerns, are not portable and are either fixed or only capable of movement using heavy lifting equipment. Often such items of equipment and plant are expensive, key to the production process, and not readily available.

Utilising the plant register, the BCP should identify key items of equipment, maintenance and service providers, details of suppliers and potential contacts, even within the second-hand market. Invariably, even in the shallowest of floods, low lying components will be the worst affected, and this often incorporates motors and integrated circuits.

Identifying what spares can be practically maintained in back-up storage, on racking high enough not be affected by flood, is a prudent step. Advance discussion with manufacturer's agents, upon how they would treat machinery to avoid secondary damage is another prudent step. Details of specialist damage mitigation contractors, with the ability to attend to affected machinery, is yet another.

Adequate back-up processes

Close liaison with a loss adjuster upon these aspects is often a fruitful source of information. Separate distinct production lines at different locations, should not be overlooked, despite economies of scale.

Few commercial concerns trade these days without IT systems. All data should be backed up daily, with copies kept safely off site. Unfortunately, many companies still do not do this and at the time of a crisis have no access to the most basic details, including their customers' and suppliers' names and telephone numbers. Adequate back-up processes, and the ready availability of replacement hardware, and software assists with the swift restoration of IT facilities.

Stock is often very vulnerable to floodwater, even when insureds have complied with requirements of stillage warranties. Stock can be ruined by direct contact with water or the high humidity levels created by the presence of the floodwater. The client needs to investigate whether the business can carry buffer stock, ideally at an alternative site, and establish the availability of replacement raw materials and components. With finished goods, how quickly can these be remade either at other locations of the business or with specific tasks subcontracted elsewhere. Can finished stock be purchased from other sources to maintain customer's needs?

The BCP should be clear as to how the client will finance securing alternative premises, replacement machinery, replacement computer equipment, software engineers, replacement stock and maintain the payment of wages to the workforce.

A further essential element of the BCP is that of personnel. Employees can provide valuable input to the preparation of a BCP and should be consulted and familiar with the plan. Staff retention, confidence and motivation at the time of a crisis is imperative, and a BCP provides clarity and instils confidence in the business.

Having addressed the issues and needs surrounding material property and workforce, the BCP should not overlook the importance of suppliers and customers. Communication is essential, unless these parties are kept informed and reassured that there will be a swift return to business as usual, the client is vulnerable. Competitor threat should not be underestimated or ignored when compiling the BCP. All customers should be contacted immediately following an incident and key customers updated regularly. Suppliers, that may be fearful that outstanding invoices will not be paid, should be similarly courted.

Once the various threats have been identified and strategies to deal with them put in place, roles and responsibilities should be agreed. Ideally recovery and key business functions should be handled by separate parties. The plan should be reviewed regularly, updated and communicated.

Any broker that has first hand knowledge of the successful use of a BCP plan will extol the virtues of the process. They are not easy to compile, for they need careful thought, consideration and planning but the time to do this is now. Reinforce your relationships with your clients, providing vital professional advice and adding true value. Hopefully the situation will not arise where they are chest deep in flood water but, if so, at least they will be well prepared.

Mike Bond, Unit Manager, Specialist Adjusting Unit, AMG

BUNCEFIELD: CASE STUDY ONE

This company did not have a business continuity plan in place. That is not to say that they had not thought about what risks they faced, they had simply neglected to do anything about them. The extent of pre-loss planning was that if an incident occurred, they would attempt to transfer production to their other, smaller factory in the Midlands. For days after the explosion the directors were forced to sit back while the Police denied access to property, which prevented them from assessing the impact of the explosion on their factory, and the future trading ability of the business. Only through press reports did they gauge that the overall extent of the damage was so bad that their premises were unlikely to be fit for use.

The cold realisation then dawned that the Midlands factory was totally unsuitable for the transfer of production lock, stock and barrel. The production capability was supplementary to normal needs rather than complementary. Enquiries were made with local commercial agents, only to find that what vacant units had been available prior to the explosion, had been snapped up already. In common with other affected concerns the search radius extended outwards, until premises were found 10 miles away and then at a premium cost. Subsequent lengthy discussions were required with bankers, prior to extending the overdraft to fund the lease.

Generally, customer and supplier contact details were not duplicated offsite, and it was only the most valuable customers and suppliers whose details were available through stored mobile telephone details. Communication with customers and suppliers was ignored as the directors and staff focused on acquiring temporary premises and stock. First contact was not made for over a week and, by that time, most had assumed something was seriously amiss and many had made alternative arrangements with competitors. The company has struggled since to recover two-thirds of the custom they previously enjoyed.

There are valuable lessons to be learned from this company's experience. Where an organisation operates from more than one location this is usually an advantage. With some forethought it should be possible to transfer the management function at short notice. Wherever possible, the ability to duplicate production, either directly or with minor alterations to existing machinery, should be planned for. Communication in the hours and days after disaster strikes is a vital aspect of securing the business' future and should not be overlooked. The goodwill of suppliers and customers should be maintained and the competitor threat should not be underestimated.

BUNCEFIELD: CASE STUDY TWO

The second concern had an effective BCP in place and implemented this immediately. Despite the fact the incident occurred on a Sunday, the key personnel were notified, met at noon that day and agreed to implement the BCP.

The plan had identified that they would require considerable office space and, rather than risk trying to source this at short notice, they had paid a retainer to a company that provided them with first refusal upon duplicate furnished offices. Senior staff were instructed to contact as many employees as they could, the details being available from the backed-up database held off site. Employees were instructed to meet at a local hotel on the Monday morning, with transport laid on to take them to the temporary facility. All customers and suppliers were contacted that morning with details of the temporary facility. Orders and sales were maintained and any concerns that customers may have had were assuaged by the continuing provision of sales and services from the temporary facility. This response was a good example of how a BCP should be implemented and has served to maintain the business with little in the way of detriment. This company had commenced trading from its temporary facility before the managing director of the first concern had even sat down and thought about what he could do.

While the company's BCP was well planned and implemented, with hindsight it could have been even better. This demonstrates the benefit that can be gained by rehearsing a plan.

One of the problems that the company encountered was the fact that the bandwidth from the temporary premises was not as great as at their usual premises. This resulted in access to software packages that controlled ordering and invoicing being too slow. Consequently, the business could not run at optimum efficiency. The staff had to be shuttled to and from the site of the damaged premises as the company could not vary their hours of employment. This caused a loss of productive time as the staff were travelling when they should have been working. Better planning for staff movement and flexible working patterns would have been more effective.

However, in direct contrast to the first case study, the value afforded by the company's investment in time and planning to create a BCP is all too apparent. The company had a clear set of directions, staff with designated roles and responsibilities and viable contingency plans which it could activate immediately. The problems encountered were surmountable rather than major impediments to the recovery of the business.