Corporate crisis comes in many shapes and sizes, from a sudden serious cash flow problem to a terrorist attack or natural disaster. Whatever the circumstances, trouble always comes home to roost in the finance department — and financial managers must pick up the pieces. Here's how to prepare for crisis and manage in the face of adversity.
Crisis Management Avoidance Tactics Properties of the Organization
Properties of the Environment
- Our size will protect us.
- Excellent, well-managed companies do not have crises.
- Our special location will protect us.
- Certain crises only happen to others.
- Crisis management or crisis prevention is a luxury.
- Employees who bring bad news deserve to be punished.
- Our employees are so dedicated that we can trust them without question.
- Desirable business ends justify the taking of high-risk means.
Properties of Crises
- If a major crisis happens, someone else will rescue us.
- The environment is benign (we can effectively buffer ourselves from the environment).
- Nothing new has really occurred that warrants change.
- Crisis management is someone else's responsibility.
- Accidents are just a cost of doing business.
- Most crises turn out not to be very important.
- Each crisis is so unique that it is not possible to prepare for them.
- Crises are isolated.
- Most crises resolve themselves; therefore, time is our best ally.
- Most, if not all, crises have technical solutions.
- It's enough to throw technical and financial "quick fixes" at a problem.
- Crises do not require special procedures.
- It is enough to react to a crisis once it has happened.
- Most crisis are the fault of a single, bad individual; therefore, we don't need to reexamine and redo our management structure and culture.
Adapted from "Crisis Management: A Diagnostic Guide for Improving Your Organization's Crisis-Preparedness," by Ian I. Mitroff and Christine M. Pearson, Jossey-Bass Inc., San Francisco, 1993.
Henry Kissinger once said, "There can't be a crisis next week. My schedule is already full." Thinking about a corporate crisis is neither pleasant nor rewarding. Planning for a potential crisis can be overwhelming and somewhat nebulous — with no quantifiable return on the investment of time. But crises cost money, and whether the crisis is embezzlement or an industrial accident, it will ultimately come barreling through the front door of the finance office.
What Is a Crisis?
It's any unexpected event that can harm a company and/or its employees. A crisis can result in lost sales and revenues, damage to a company's reputation, lawsuits and physical injury to employees. Most of us tend to think of a crisis as a big, dramatic event like an earthquake or other natural disaster, a hostile takeover, the sudden death of a key executive, a labor strike or a terrorist attack. But many crises are triggered by less dramatic incidents, like a cash flow problem, loss of a key customer, a faltering partnership, cancellation of a line of credit, cost overruns or adverse government actions or laws.
Financial managers are aware of most threats to their immediate domain. However, Steve Albrecht, author of "Crisis Management for Corporate Self-Defense," says, "Almost anything that happens in business that is negative — any sort of crisis-management episode — is going to cost money, both obvious as well as hidden costs. I never have a problem articulating the money issues of a crisis."
Why doesn't every company have a carefully conceived crisis management plan? There are plenty of reasons why companies find ways to avoid planning for a crisis (see Crisis Management Avoidance Tactics, right). According to Ian Mitroff, co-author of "Crisis Management: A Diagnostic Guide for Improving Your Organization's Crisis-Preparedness" and professor of business policy at the University of Southern California, "Crisis management is not a well-established function in many organizations. It's split between security, finance, the legal department, corporate communications, etc. Different parts of an organization pick up scattered kinds of information about their vulnerabilities, and all of it isn't brought to a central location. Crisis management is very much like total quality management. You've got to think of it systems-wide or it's worthless. The system is no stronger than its weakest link."
Preparing for a Crisis
Without a plan, managing a crisis can feel like a roller coaster ride. You start out in a pit of confusion, take a few positive actions and climb up a bit, then hit an unforeseeable obstacle and spiral into a downward free fall. You recover and then go down again. The following proactive tactics can help you come back up and stay up.
- Identify vulnerable areas. As you scan the company, what potential problems loom in the foreground? What keeps you up at night? Albrecht says, "Anybody who works in an industry for a period of time has an intuitive feeling for what goes right and what goes wrong. You know the areas in which you are most vulnerable. Obviously, you can't plan for everything that can go wrong; so zero in on the ones that would cause the biggest financial upheavals."
- Put a crisis management team (CMT) in place. Identify the key people you need from which departments (finance, legal, information systems, security, environmental health and safety, operations, human resources). The CMT will not only work to prevent a crisis, but will act as the governing body in the event that a crisis occurs. A high-ranking executive should lead the team.
- Make a plan and write it down. Keep the plan focused and practical — as simple as possible. What are the immediate consequences of the crisis? What needs to be done and what role will each team member play? What should you do to ensure that the company's critical operations do not suffer during the crisis? As you work on each potential crisis, consider which of your stakeholder groups will be most affected by the crisis. Stakeholders can include employees, customers, suppliers, stockholders, competitors, creditors and labor unions. Once the plan is formulated, keep it updated.
- Learn from your own experiences. If your company has had crises in the past, how well were they handled and what lessons were learned? Paul Lewis of MC2 Corp., a Warren, N.J.-based computer-network services company (See When Disaster Strikes, below) that lost a considerable amount of money due to a blizzard, says, "We have many, many contingency plans now in place. Rotation of inventory — we are watching more closely. Backups of our systems and storing things off-site — we are doing more religiously. We now have plans for space we can acquire rapidly, and we know the steps involved in how to build an office overnight."
- Keep a vigilant watch on your legal liabilities and your insurance coverage. If you don't have the resources to thoroughly review those arenas, then hire outside experts.
- Pay attention to early-warning signals. Mitroff says, "A crisis is almost always preceded by early warning signals, but they are the part of crisis management which is almost always neglected. Crisis manuals and plans are usually reactive — what to do after the crisis has happened." He adds, "Organizations that are crisis-prepared make a deliberate point of probing and regularly scrutinizing operations and management structure for warning signals of potential crises."
Managing a Crisis
Following are some critical actions that need to be taken when a company is hit with a crisis. Some or all of them can be incorporated into the crisis management plan.
Take immediate action. The company needs to show that the crisis is under control. Stakeholders in the company — be it the employees, stockholders, customers or creditors — need reassurance that the company is on top of things. If the safety of a product is the issue, you might have to recall the product and halt its production. If an employee is suspected of criminal wrongdoing, you may have to fire the employee or put the employee on a leave of absence. Be prepared for attack. Oftentimes, there is an adversary lurking around your crisis. It might be a competitor, an investigative journalist, a disgruntled stockholder, an in-house whistleblower, or any number of people or groups who seem to find a way to capitalize on your misfortune. Identifying in advance who the adversaries might be can lessen the pain of dealing with them. Effectively communicate your crisis response. Who is the spokesperson? In a major crisis, the CEO usually steps forward. Whether or not the spokesperson is the CEO, Albrecht advises, "It needs to be someone who is trained to handle all kinds of ambiguities and a lot of data, and is able to make use of diverse expertise." Be aware of existing documents that could negatively affect the handling of the crisis. For example, environmental compliance documents filed with a government agency (public domain) may surface if you are involved in an environmental crisis. An in-house memo about irregularities in financial documents may somehow be leaked when you are in the midst of a financial crisis. Constantly reassess the crisis and your response. As facts are gathered and analyzed, the team may discover additional problems that require attention.
- Gather and analyze the facts. What actually occurred and what is the immediate damage? What caused the crisis and how much of it was due to human error? Is the crisis an isolated incident that can be easily controlled, or might it set off a chain reaction of additional crises? The crisis management team looks at best-case and worst-case scenarios.
Psychologically speaking, most financial managers would rather not dwell on potential crises. In addition, companies can wince at dollars spent for preventive actions like pre-employment background investigations, expansion of internal auditing functions and crisis management plans.
While the cost of a crisis management plan needs to be considered, Mitroff says, "Don't let cost be the main determining factor. If you want to do something, you will find a way to do it. For crisis management to work, it has to be taken seriously. To be taken seriously, it has to be a part of one of the key objectives, programs or missions of the organization. The best way to do crisis management is to integrate it with something like total quality management or environmentalism."
"At the very least," says Albrecht, "you should discuss crisis management issues at a roundtable. Get some things down on paper. The plan won't be perfect but it could serve as a shell for what you one day might have to do. And senior management will have some idea what the financial repercussions are in terms of any kind of serious event. Get your ducks in a row and then go back to your core business."
Florence Rogers, former CEO at the Federal Employees Credit Union in Oklahoma City, who survived the bombing of April 19, 1995, (see When Disaster Strikes, below), has spoken about crisis management to both large and small companies. Rogers, who attended two or three funerals a day while she rebuilt her company, says "Know in advance all the hard decisions you will have to make. It's too difficult to think about them when you are in the midst of a catastrophe."
When Disaster Strikes
April 19, 1995. The Alfred P. Murrah Federal Building in Oklahoma City was bombed, killing 168 people. Eighteen of the dead were part of the 33-member staff of the Federal Employees Credit Union which was located on the third floor, and an additional six credit union employees were injured. Despite the fact that the credit union was a singular entity — no branch offices — the financial institution was back in business 48 hours, 18 minutes after the blast.
Florence Rogers, then CEO at the credit union, had a disaster-recovery plan. However, she says, "The irony of our whole story is that we never printed our plan off of the computer, but we had enough things in place because we had been working on the plan for a few years. Between my controller and I, and the grace of God, we were able to remember enough to put the plan into action."
Raymond Stroud, then controller and now CEO of the credit union, was at a business meeting in Florida when the disaster occurred. As he flew home, he knew of only two staff members still alive — himself and the data processing manager who was off on army-reserve leave. Stroud says, "Part of my position then as controller was the responsibility for data processing. I was very familiar with it. From that standpoint, I knew we could put the credit union back together. But there were a lot of other things to do. We had a $70 million credit union with 16,000 members. How were the two of us going to get the place up and open for business?"
When Stroud returned, he learned that there were survivors, including Florence Rogers, and that recovery was underway. Central to the plan was the fact that computer transactions had been backed up daily by an independent contractor and stored off-site. The credit union had a "hot site" in Valley Forge, Pa., and the data processing manager was immediately dispatched to the site where he remained for two weeks.
Temporary office space was located. An advertising campaign was launched to assure members that their money was safe. Until the new office was in place, Stroud says, credit unions in Oklahoma offered to honor members' checks up to a limit of $250. Staffing was a crucial problem since almost 75 percent of the employees were dead or injured, but credit unions across the country volunteered employees. Rogers maintains, "Those volunteers really saved us; they knew our basic operation. We even had the luxury, if you can call it a luxury, of picking volunteers who were on the same computer system as we were on. There was no time to train anybody."
One of the biggest challenges, explains Stroud, was "rebuilding April 18" and the few transactions that took place on the morning of the bombing (data that hadn't been backed up). He says, "It wasn't until December of 1996 that the process of reconciling all the accounts was finished. We finally said, 'We can't find the out-of-balance transactions and we have to write them off.' It took that long to finally clear out the outstanding items."
January 8, 1996. A blizzard hit Warren, N.J., and Paul Lewis, 32-year-old president and CEO of MC2 Corp., a computer-network services company, arrived at work to find that a huge section of the office building where he rented space had collapsed due to snow buildup on the roof. His 8,500 square feet of office space was not damaged, so Lewis retrieved what equipment he could get out of the building and set up a temporary office in one room (1,500 square feet) of a nearby warehouse. Stranded inside the snow-wrecked building was a lot of MC2 equipment as well as high-end, expensive computer equipment purchased by MC2 and intended for resale to customers (who had not yet paid for their purchases). As his 30-member staff scrambled to keep business alive in their new home ("the sweatshop"), Lewis stepped up to the plate to manage and contain the crisis.
Strike one. Lewis called his insurance company. He recalls, "If our space had been destroyed, we would have been able to put in an insurance claim, but our insurance company kicked back any claims under 'lost contents' because they said we really didn't lose any contents." To make matters worse, says Lewis, "We thought we had business continuation insurance, and we had notes where we had verbally requested that it be added to our policy, but we didn't have any written documentation that it had ever been added."
Strike two. A colleague tells Lewis, "There are all sorts of government agencies set up to help companies in your exact position." Lewis says, "I couldn't find any of them. There was a lot of finger pointing. I called the governor's office and they said to call FEMA. FEMA said to call the SBA and the SBA said 'Call your bank.'" In the meantime, the snow-damaged building was temporarily condemned, and no one knew for sure when Lewis would be able to reclaim his space and property.
Strike three. On a day that the accounting manager was absent, Lewis intercepted a message from the IRS. He called back and was astounded to learn that MC2 was delinquent in $50,000 of payroll taxes. The IRS was not happy, nor understanding.
One snowstorm had taken a thriving, aggressive company and perched it on the brink of disaster. Lewis said, "We knew we were in a lot of trouble." He went public with the crisis — contacting customers and letting them know that they might see a drop in service. Then he personally called the presidents of the companies with the largest outstanding accounts and asked them to please pay their bills — and they did. Most importantly, his bank came to the rescue. Lewis states, "Summit Bank really saved us. This was a time when the company really had its back against the wall. Traditionally, a bank would look at that and say, 'We better pull our line of credit with those guys because they are going under.' But the bank, with no additional collateral, increased our line of credit substantially."
Lewis has paid his debts, recovered his revenue stream and is adding to his client list. "However," he says, "I don't know if you ever fully recover. In winter I get nervous when I see those gray snow clouds overhead. I don't think about how nice it would be to go skiing. I've got other thoughts on my mind."