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Causes and Consequences of Business Disruption

Franchising World December 2011

 

By: Marcus Pollock

 

According to National Oceanic and Atmospheric Administration estimates,  natural disasters so far this year in our country have been the  cause of more than $45 billion in economic loss.  That includes more than 10 separate disasters that have caused more than $1 billion in economic loss apiece.  This year has certainly taught business owners the importance of building prepared and resilient communities. 
Whether you are a leader of a large corporation or a small-business owner, you play a key role in helping build that resiliency in your community.  Not only is preparedness good for your community, it’s also good for your bottom line.  The impact of hazards—natural or human-induced—are likely to include operational disruption, unanticipated costs, data loss, impaired facilities, impacted business relationships and possible fatalities among franchisees and employees.
A disaster can be a natural occurrence, such as a storm or flood or any event that halts the immediate operation of a business. Disasters can also include contained incidents, such as infrastructure and lifeline disruptions and supplier delay of goods and services critical to business operations.  Consequently, the loss of these services in disaster situations plays an important role in predicting economic losses, franchise relocation or closure. Of businesses struck by a disaster, 40 to 60 percent never reopen and, of those that do, 25 percent close within two years. 

Sources of Preparedness Support
According to the 9/11 Commission Report, 85 percent of America’s infrastructure is rooted in the private sector. Moreover, 97 percent of U.S. exporters are small and medium-sized businesses.  Thus, communities affected by disasters worldwide are dependent  on a reslient private sector to support their recovery. More than ever, franchisors and franchisees benefit from preparedness as part of their business models to better ensure continuity and recovery. As the recognition for the value of preparedness grows, businesses are turning to a variety of resources to prepare for, mitigate and respond to disruptions caused by disasters. Resources such as the American Red Cross’s “Ready Rating,” the Institute for Business and Home Safety‘s “Open for Business,” the Small Business Administration’s “Prepare My Business,” and the Department of Homeland Security’s Federal Emergency Management Agency’s “Ready Business” and “PS-Prep” are available to assist franchises in implementing preparedness plans through the integrated use of best practices or preparedness standards. 
Since a franchisor can end the franchise agreement for a variety of reasons (e.g. failure to pay as a result of a disaster), it’s vital to have a business continuity management plan in place. This may reduce a business’s period of disruption and restore normal operations as quickly as possible. If the franchisor closes up shop because of a disruption due to a disaster, consider the following questions: Will you need the franchisor  to succeed? Will you have access to the same suppliers or will you have to find others? What other issues might confront you?

Voluntary PS-Prep and IFA
It is vital to incorporate standardized processes of various kinds among franchise agreements, but especially important are standardized processes aimed at disaster preparedness.  The International Franchise Association can serve as an invaluable link in the preparedness chain by facilitating preparedness activities on the part of its member franchises.
As part of National Preparedness Month in September,  the Federal Emergency Management Agency made efforts to advance its voluntary private sector preparedness accreditation and certification program, known as PS-Prep. This preparedness program introduces a methodology beneficial to franchise operations—a systemic approach to business continuity and recovery that allows leadership to unify preparedness activities under a standard. When implemented, standards provide policy, processes, procedures, performance measures and quality-improvement practices that are updated regularly to ensure ongoing relevance.
Entrepreneur Magazine’s Franchise 500 Rankings placed many well known, highly recognizable business names as top franchises in 2011. These franchises represent familiar brands that consumers trust; it is vital that consumers also be able to rely on them to continue operations during disastrous events. How well businesses manage financially following a disruption (e.g., temporary closure or relocation) depends on its financial status, as well as existing preparedness measures being in place before the disruption. PS-Prep allows a business to follow best practices or align its operations to a chosen standard. For those franchisors or franchisees that find value in developing a management system similar in concept to other quality management systems, PS-Prep  also offers certification as a third option.
While no two organizations are exactly alike, PS-Prep provides franchises the opportunity to select a standard for preparedness, continuity and recovery processes that will best meet their business needs.  The standards were developed by preparedness experts, approved by the American National Standards Institute and adopted by the Department of Homeland Security. They allow business leadership to evaluate the critical areas of franchise operations (e.g., equipment, employees and processes) and to assess how those areas would be impacted if they were disrupted by a disaster. Owners must then address the procedures and best practices in place for handling such circumstances. Once an assessment is performed, business leaders may discover that their franchise is actually more closely aligned to a chosen standard or practice of preparedness than they had originally thought.

Areas assessed might include:

• Material damage,
• Business interruption,
• Professional indemnity,
• Loss of income due to accident or
 fatality,
• Employer liability,
• IT liability, and
• Trade credit insurance.

The standards of FEMA’s PS-Prep program cover the following:

• Disaster and Emergency Management and Business Continuity (NFPA 1600): This standard is for a franchise seeking a holistic approach to preparedness; it addresses organization management, risk assessment, prevention, mitigation, resource management, response, continuity and recovery.
• Organizational Resilience and Security Preparedness and Continuity Management (ASIS SPC.1-2009): This standard is for businesses looking for the steps necessary to prevent, prepare for and respond to disruptive incidents and disasters; it promotes survival and ensures organizational resilience. In this case, resilience suggests that the affected franchise will improve performance upon its return to the marketplace.
• Business Continuity Management (BSI BS 25999): This standard is for businesses desiring a plan to avoid business interruption; it provides a basis for understanding, developing and implementing a business continuity plan.

Once the PS-Prep program is officially implemented, businesses will be assessing their preparedness and business continuity levels against these standards.

Risk Management
Whichever type of preparedness action your business chooses to take—best practices or the PS-Prep consensus-based standards approach (alignment or certification)—identifying the risks to business operation and mitigating their potential impacts is essential to business continuity, protecting the business reputation and the business’s bottom line. Risk management involves a systematic approach to identifying risk and putting into place actions to reduce the impact of such risk on business operations. Some risks may be reduced through foresight and prevention; it is the risks that can’t be eliminated that companies must address. Key examples include the following:

• If a franchise’s operating systems and databases are securely backed up off-site or managed via a cloud computing network, disruption at one franchise location may not affect all other locations.
• In case a franchise location should be destroyed by a disaster, its leadership can provide ahead of time for the protection and support of employees by identifying the requirements of the franchise’s business continuity strategy, operational plans and procedures for relocating employees and maintaining revenue streams.

The Value of Preparedness
Becoming prepared is an ongoing process of making improvements over time. PS-Prep provides a consensus based standards option to create a preparedness management system that unifies different areas of your franchise (risk management, IT, security and so forth) and outlines the same principles across those areas. When implemented, standards provide a system of policy, planning processes, performance measures and quality improvement practices. For franchises that find value in third-party validation of their preparedness efforts, certification places them among a prestigious community of forward-thinking business leaders.
Pursuing a preparedness policy will enable a franchise to:

• Create a plan of action that is shared with franchisees and employees and is practiced through exercises for handling disruptions;
• Assist in minimizing potential impact to essential operations, thereby increasing a franchise’s opportunity to operate;
• Enhance corporate image by proving an organization’s ability to survive all hazardous conditions;
• Help protect data and information, facilitating key decisions toward organization recovery;
• Aid in defending market share and minimize financial losses by being proactive and accounting for recovery resources before they are needed;
• Promote industry recognition by promoting preparedness with suppliers and consumers alike; and
• Reduce time requirement so owners may focus on running a successful franchise.

Preparedness measures can be addressed by the franchisor in the early stages of the franchise-development process. During the initial planning phases, the franchisee should be aware of the preparedness measures adopted by the franchisor. Explanation of such measures can be included as part of the overall business model and training/planning phase. As formalities are handled with the franchiser’s quality control team prior to opening, franchisors and franchisees can review aspects of the disaster preparedness plan. These steps could be taken well before the Franchise License Agreement is signed.
“Preparedness is not a luxury; it is a cost of doing business,” according to The 9/11 Commission Report.  With more than 120 different types of franchises representing a wide range of industries—restaurant, automotive, health and fitness, financial, maintenance and more—it is important that franchises recognize the increasing commitment to protect franchisees, employees, consumers, their communities and, ultimately, the U.S. economy.

Marcus Pollock is chief of the Federal Emergency Management Agency’s Standards and Technology Branch.  For additional information, visit http://www.fema.gov/privatesector/preparedness/.

Sources of Information:

Small Business Administration.  www.Preparemybusiness.org (accessed Oct. 4, 2011)

U.S. Chamber of Commerce.  http://www.uschamber.com/international/agenda/help-small-businesses-export.  (accessed Oct. 4, 2011)