BUSINESS CONTINUITY HELPS TO KEEP CUSTOMERS

HOW BUSINESS DISRUPTION CAN WRECK YOUR CUSTOMER BASE

To see how your business can suffer from disruption, try doing a business impact analysis. Business impact analysis (BIA) is the identification of the effect on the organization of the risks to it, should they occur.  We can use the BIA process to achieve a number of objectives at the same time:

• Identifying possible customer attrition rates;
• Estimating the financial and non-financial costs
• Establishing the time window in which recovery has to take place
• Identifying vital materials and records necessary for recovery or continuance
• Making a preliminary assessment of resources required for recovery or continuance
• Justifying spend on infrastructure resilience, disaster recovery and business continuity.
  

We need to establish, if business is interrupted or if a key facility is lost:

• How does it impact company survival?
• How does it impact company profits (or, for the public sector, mission achievement)?
• How does it impact company image?
• How does it impact the most important customers, branches, products, and services?
• Is it time-critical?
• Does it stop a mission critical function?
• Can the customer (or user) cope without it?

What alternatives are there to achieve the same (or acceptable equivalent) deliverables? This paper will focus purely on the marketing and customer retention aspects.

Urgency (and hence whether this constitutes a disaster) may vary depending on the time of day, month or year.  For instance, loss of an electronic point of sale or e-tailing application shortly before Christmas or during an annual sale would probably have a greater impact than service outage on a quiet Sunday.

A look at the management accounts should show problem areas and those products, customers, or services that are vital to survival and success.  Often this will reveal the Pareto Principle (the 80-20 rule) at work.  Usually:

• 80% of the profit comes from 20% of the branches
  
• 80% of the profit comes from 20% of the products
  
• 80% of the profit comes from 20% of the customers.
  

IMPACT ANALYSIS

The BIA examines risks and assesses the impact of their occurrence. The creation of a Business Continuity Plan can typically be justified on one or more of the grounds of:

• Life and Safety
  
• Political / Marketing
  
• Financial
  
• Compliance / Legal Requirement
  
• Quality

The lines between these are far from clear-cut (for instance marketing impact could involve loss of market share and hence loss of profit - a financial impact).  Wherever possible the impact should be quantified in financial terms and care should be taken to avoid double counting.

In public sector organizations (as well as in some private sector operations) political impact is a major issue.  Many public sector operations are under threat of outsourcing, closure or merger with others and adverse publicity may accelerate their demise or lead to budget cuts.

Attracting the unwanted attention of governments, politicians and officialdom in general can generate adverse publicity and debilitate an enterprise, especially if, for instance, monopoly issues are exaggerated at a time when a merger or acquisition is being considered.

It is crucial to retain customer confidence in the event of a disaster.  Seamless integration with the customer is often crucial to retention of market share.  Competition is intense and market share, once lost, is hard to regain.

Often the most powerful corporate advertising can work just as powerfully against an organization in the event of a disaster.  Just imagine the effect on the Commercial Union insurance company if, when hit by terrorist bombers, it had not lived up to its slogan “We don’t make a drama out of a crisis.”  The marketing image of competence and capability so carefully (and expensively) built up over many years could be destroyed in two cartoons.

How much is your annual advertising budget?  What increased market share does it buy you?  Typically an organization may spend three or more times its normal annual marketing budget in the aftermath of a disaster to retain customer confidence and to retain and regain market share.

The traditional Business Impact Analysis too frequently fails to quantify longer term costs (e.g. lifetime value of customers; cost to regain market share and image).  Kingswell’s concept of Marketing Protection looks at the whole value of the business at stake from a marketing perspective.

Brands and companies have outlived nations. Smirnoff, the Diageo vodka brand, has survived the reigns of the Czars, Marx, Lenin, Stalin, Gorbachov, and Yeltsin.  Brands can undergo metamorphosis  and multiply – like the many-headed Virgin products. A PriceWaterhouseCoopers survey claimed that over 75% of most companies’ assets are not in its balance sheet – mainly brand value and customer goodwill. Just one example: the brand value of Coca-Cola was put in one survey by Citibank and Interbrand at a staggering $83,845 million.

The corollary is that, in the event of loss of image or reputation through a disaster, market share losses from “negative advertising” could be equally as dramatic.  These sums of money would have to be spent in addition to the normal ongoing advertising that has to continue merely in order to preserve market share. These days, volume is often the key to viability: lose volume, and viability is lost. The loss of a brand could mean the extinction of a company. Moreover, the “halo” effect (which pulls up all other products within the same brand name) could work in reverse: like guilt by association. Using the argument of Marketing Protection, the justification for spend on BCP becomes immediately obvious and immensely strengthened.

When considering advertising campaigns, few agencies consider the down-side of the advertising slogan. Ever risk manager should consider how a ruthless journalist could turn the slogan against the company. This should be part of a risk analysis of the campaign.  Before the disaster and during each advertising campaign, some creative thought should go into how that campaign would be developed to mitigate the results of a disaster. 

SOURCES OF LOSS

Sources of financial loss could include:

• Brand image recovery
  
• Loss of share value
  
• Loss of interest on overnight balances; cost of interest on lost cashflow
  
• Delays in customer accounting, accounts receivable and billing/invoicing
  
• Loss of control over debtors
  
• Loss of credit control and increased bad debt.
  
• Delayed achievement of benefits of profits from new projects or products
  
• Loss of revenue for service contracts from failure to provide service or meet service levels
  
• Lost ability to respond to contract opportunities
  
• Penalties from failure to produce annual accounts or produce timely tax payments
  
• Where company share value underpins loan facilities, share prices could drop and loans be called in or be re-rated at higher interest levels. This could inhibit the development of new services or products.
  

There have been some spectacular losses following e-business outages.  The biggest hit is not necessarily the loss of customers or profit, but the impact on stock values, especially when the markets are skittish.  Table 1 below highlights some e-vendors and shows the impact on them of even short-term loss of service.

Table 1: E-Losses

 

Company	Date	Duration of outage	Losses / Costs
AT&T	Feb 1998	Outages 6 – 26 hours	Rebates of $40m
Charles Schwab	Feb – Apr  1999	Outages 6 – 26 hours	Losses believed to be >$20m. $70m invested in infrastructure
e-Bay	Jun 1999	22 hours	Revenues: $3 - $5m Shares: down 26%
E*Trade	Feb-Mar 1999	Outages > 5hours	Revenues: 3$m Shares: down 22%

Source: Comdisco

The difficulty is that any prospective customer sees only their end supplier as to blame for loss of service, no matter how many intermediate suppliers there were. It’s the reputation and profitability of the end supplier that is at stake and they need the protection of SLAs to focus the suppliers that support them.

CONTINUITY OR RECOVERY?

With even normal customer churn running up to 16%, added attrition from service disruption could be the final straw for some companies. For many the speed and size of the potential losses are such that there is no time for traditional disaster recovery, restoring systems from off-site tape backups.   Increasingly, the downside of disruption is so immediate and enormous that organizations are investing heavily in non-stop capability.  The technological infrastructure is being replicated to avoid single (and in some cases double) points of failure, with traditional IT and telecommunications disaster recovery being a long stop (and increasingly being handled internally).

The various aspects of risk management (trading and business risk, compliance, operational risk, health and safety, disaster recovery and business continuity) are increasingly being brought together under an overall risk management function.  And increasingly, this function is focusing on achieving uninterruptible service.

© Andrew Hiles 2001.