Crisis Management Plan Introduction

Principal

SOPER & ASSOCIATES, LTD.

RISK AND INSURANCE MANAGEMENT SOCIETY

All too frequently, creative risk and insurance management programs lack the vital, but elusive, Crisis Management Plan segment. Even when logical, proven risk and insurance management techniques and effective loss control activities are utilized, crises must still be anticipated.

Many major organizations devote from one to ten percent of gross revenue to annual expenses of insurance purchasing, risk funding and loss control as well as internal and external risk management administrative activities. In addition there are significant capital expenditures in the risk management and loss control arena which are seldom considered as segments of crisis exposure mitigation. A few examples include automatic sprinkler systems, building code compliance and duplicate MIS installations. Many of these major organizations allocate significant operating expenses and capital investment to risk management and loss control, yet have not implemented a Crisis Management Plan.

As with many other management challenges, crises are inevitable and should be planned for. This requires agreed upon executive support and established action priorities to be implemented upon crisis occurrence.

The results of a loss can definitely be minimized through the adoption of a Crisis Management Plan which encompasses: life safety, risk funding, contingency planning, loss control and legal compliance management techniques. A crisis management plan is normally justified through sound management reasons including insurance premium and funding expenses reductions, expediting of operations restoration, contribution to stability of stock value performance, improved legal compliance and financial impact loss control.

The creative risk and insurance management program for a major organization has many key segments as illustrated in Exhibit 1.1. The illustration indicates a comprehensive program and identifies the elusive crisis management segment.

'Crisis is nothing new to corporate America. But the very nature of crisis has changed as technology, the rise of formal public opinion and the general literacy of the masses have developed since the eighteenth century. Indeed, the risk of public opinion in the twentieth century is significant prior to any in-depth discussion of crisis management. Public opinion and crisis management are inevitably linked. How an organization is viewed by the masses is a clear reflection of its value, the amount of respect it commands and whether it can withstand short- or long-term damage.' (Laurence Barton, Ph.D., Penn State, Crisis in Organizations, Managing and Communicating in the Heat of Chaos, Cincinnati, Ohio: College Division South-Western Publishing Co., c. 1993, p. 15.)

Even with the increased awareness caused by the high efficiency of the news media reporting, there is only a limited commitment being exercised by business executives and risk management and insurance community to prepare for the inevitable crises. 'Recent surveys show that fewer than half the Fortune 1,000 companies have either crisis management staff or even a plan in place' thus emphasizing the serious magnitude of this risk management program void. This critical situation concerning the missing Crisis Management Plan segment must be rectified. (Quote from Ian I. Mitroff, Ph.D., School of Business Administration at the University of Southern California.)

Following are typical risk and insurance management industry stakeholders who, all too often do not include the illusive Crisis Management Plan segment as an integral part of their risk and insurance management considerations:

Frequently do not have formulated emergency plan involving a detailed response action plan and documented evidence of pre-and-post incident strategic planning.

Clients' comprehensive risk and insurance management programs are typically devoid of emergency non-business hour contacts and recommended pre-crises and post-loss procedures including suggested contingency plans.

Regularly issue policy contracts with virtually no instructions regarding an action plan to be implemented in the event the loss, which is insured, should occur.

Routinely complete major corporation annual audits and issue reports with statements concerning the adequacy of insurance but often neglect to address the lack of a Crisis Management Program or even minimal contingency planning.

Perform audits of existing risk management programs as well as provide on-going risk management consulting services and, subsequently, developing findings and recommendations: but recurrently, fail to suggest structuring of a Crisis Management Plan.

Crisis management is an evolving discipline which is becoming a necessity in the current aggressive business management arena. The crisis management plan is coming of age and is a required segment of a creative and responsible risk management program. The crisis management plan segment is a necessity if the risk management plan is to focus on life safety, operational continuity and financial survival as well as protecting the broad range of stakeholders.

Involved stakeholders should consider a crisis management plan to be absolutely essential in complex organizations. Examples of activities requiring crisis management plans include, but are not limited to complex manufacturing processes, limited resources of critical items, service activities involving life safety considerations, distribution activities with reliance on stock accumulation centers (unique inventory, single source items, critical resources, etc.), operations subject to adverse publicity, seasonal fluctuations, cyclical economic impacts or multi-national organization activities.

In the true concept of contingency planning, crisis management should not be construed as the traditional 'Band-Aid' approach to an insured (or uninsured or uninsurable) fortuitous event involving only a simple emergency plan.

Effective crisis management should be conceived of as a broad approach to major catastrophe exposure containment interfacing with life safety, operational continuity and legal compliance as well as long-term business and financial survival. The definition of crisis management must remain broad in nature and not become inhibited by the traditionally narrow considerations of only those perils addressed by standard commercial insurance policies.

'Problems are commonplace in business. What differentiates crisis from the routine or even extraordinary management dilemma is very much open to debate. A good place to begin is with the following definition:

A crisis is a major, unpredictable event that has potentially negative results. The event and its aftermath may significantly damage an organization and its employees, products, services, financial condition, and reputation.

The term crisis is heavily overused. We have the AIDS crisis, the Mideast crisis, the ozone layer crisis, and even the federal debt crisis. All are important. Each needs our attention. But for our purpose, we will consider only those that fall under the preceding definition.'

SOPER & ASSOCIATES, LTD. defines 'Crisis Management Plan' as a strategic technique to accomplish two objectives:

Crisis Management Plan objectives interface with the identified needs of the operating entity and involve a broad focus encompassing life safety, business impact analysis, pre-loss planning, post-loss recovery, asset conservation, operational continuity, legal compliance and maintenance of revenue production with the ultimate goal of financial survival. Also of concern are loss exposure perils affecting such issues as life safety including evacuation and medical emergency, fire, explosion, earthquake, structural collapse, pollution abatement, flooding, severe weather, workplace violence, civil commotion and bomb threats.

In summary, the proposed methodology in a Crisis Management Plan (i.e., Policy Statement, Committee Operation, Manual) generally remains consistent. The factors that vary significantly involve the business impact analysis results, crisis loss exposure and vulnerability. The importance of an effective crisis media management and public relations strategy cannot be over emphasized. Finally, a key consideration is an evaluation of the adequacy of insurance and risk funding.

'Strategy', in the systems context of crisis management plans (involving disaster avoidance, loss mitigation and maximizing recovery), is a structured methodology designed to meet immediate objectives as well as long-term goals. Crisis management strategy entails two equally important and interrelated tasks:

'All of the planning that an organization can muster will only partially prepare it for the actual crisis. The true measure of success is how it deals with the problem when it finally comes to pass. If the plan is comprehensive enough, managers will at least start from a strong position. These are the most important steps to follow in terms of communication during a crisis. Every crisis is different, which means that managers must adapt the suggestions below to meet their needs. But crises have enough common elements for us to offer the prescription as a starting point.

(In) Conclusion: We all know that crises are a normal part of our private lives. Managers must realize that the same is now true for organizations. Unfortunately, the short-term orientation of most managers today prevents them from acknowledging the risk to every organization. An anti-terrorist task force for the World Trade Center told the Port Authority eight years before the devastating blast in February 1993 that the center's parking garage was vulnerable to a bomb attack and should be closed to the public (according to press reports following the blast). Ignoring the advice of experts ended up costing peoples' lives, millions of dollars, and the disruption of hundreds of businesses. Getting senior managers to pay attention may be the most important part of crisis communication before rather than after a crisis develops.'

The Crisis Management Plan places major reliance on effective business practices including Total Quality Management (TQM), decision analysis concepts and comprehensive contingency planning. The risk and insurance management program should include the crisis management plan segment as an effective operating component.

The strategic crisis management focus is sufficiently broad to provide a generic guide to Crisis Management Plan with wide application throughout the community, yet provide support for complex, detailed plans for specific types of organizations, i.e., manufacturing, wholesale distribution, service entities and global operations as well as being applicable to public sector.

Crisis management plan implementation is normally justified by sound management reasons including, but not limited to:

There is seldom any justification to require staffing for an operating crisis management plan. Normally the individuals involved in the crisis management plan simply incur a broader responsibility range. The responsibility may be defined as the job description being appropriate for the periods of prior, during and following crisis incidents.

Adoption of a crisis management plan should not generate any capital expenditures. In the majority of cases, the on-going general expenses would most likely be compatible with the entities' current operating budgets.

Crisis management plan consulting activities should be completed in defined segments with fixed costs and capped general expenses. From the clients' standpoint, it is important that there be a clear understanding of the scope and intent of a consulting project and that the price be clearly defined.

Frequently, the expense of a crisis management program is offset by premium reductions and insurance deductible adjustments. It is not unusual for the consulting expenses of a typical crisis management plan formulation and implementation to be paid for with a return on investment (ROI) in three years or less based on insurance and risk funding savings.

In today's business climate there are many legal considerations directly or indirectly related to the aspects of an effective crisis management plan. Certain of these legal considerations have a significant effect on the crisis management program operation. The following is a partial overview of a number of legal requirements warranting consideration as they relate to a comprehensive crisis management program:

SEC - Securities and Exchange Commission SEC Staff Accounting Bulletin No. 92 (SAB 92), June 1993, requires all companies whose shares are traded on U.S. Stock Exchanges to:

Requires educating employees for their reporting of exposure and, if employees are dissatisfied with employers procedures and conclusions, the employer is required to inform then that they can take the situation to the EPA (protection for whistle blowers)

Superfund amendments and Reauthorization Act of 1986

Emergency Planning and Community Right-to-Know

List of materials are found in 40 CFR 355 and, depending upon their quantity and degree of hazard, requires notification of:

Numerous workers safety regulations including emergency response preparedness, OSHA (29 CFR 1910.120) requires the business to have the incident Command System in place, its employees properly trained, equipped and responsive to the hazardous incident

Along with the Department of Transportation Marine Pollutant regulations (49 CFR) have expanded responsibilities and liabilities related to hazardous incidents and spills on navigable water

Now requires an Oil Spill Prevention and Response Plan (by 9/30/93) for any vehicle transporting 3,500 gallons of any petroleum oil and any facility with tanks of 42,000 must have a spill plan on the vehicle and at the facility. Also, DOT regulations now cover shipping and receiving areas, operations and employees.

Exhibit 3.1 identifies the numerous advantages and opportunities associated with the adoption of an effective Crisis Management Plan which include, but are not limited to the following topics: