Business Risk Management Lessons Post Katrina.

Business Risk Management Lessons Post Katrina.

Katrina was an expensive mess of a natural disaster compounded by human negligence, inexperience, greed, and political bungling, but from it we’ve obviously learned a number of things because the next few natural disasters we’ve faced as a nation have been handled much more responsibly.

But from all the lessons we’ve learned from Katrina, personal, governmental, and corporate risk mitigation has universally taken a back seat in all of the policy and budget discussions to date. It’s almost to the point where no one wants to believe that it could happen again, or that it could even be worse.

And yet…

Researchers from LSU have discovered that the coastline of Louisiana, which has been noticeably shrinking for the last decade is on an almost unalterable course to lose as much as 4-5,000 square miles of coastline by the end of the current century, or an area about the size of Connecticut. Their research, according to the paper published in the Nature Geoscience magazine, shows that not enough sediment is being deposited by the Mississippi and the Atchfalaya rivers to replenish the sediment being eroded from the coastline by the ocean. Combined with rising oceanic water levels, much of the Louisiana coastline will be flooded over the course of this century, they claim.

This research largely echoes a number of other risk assessments for Louisiana and parts of Texas that the Army Corps of Engineers and various independent research groups have concluded. Since this seems to be a general consensus, one key logical question is therefore presented: what are we doing about the implied risk to life, economy, and environment?

If you know that the incidents of hurricanes has been steadily increasing in recent years, ocean levels have been rising, according to people who claim to know and measure such things, and that we cannot prevent catastrophe from striking again this century using our current strategy of rebuilding in low-lying coastal areas – if you know all of this is going to be punctuated with a wall of water over 20 feet high serving up wanton destruction just like it did with Katrina, what, precisely, are YOU going to do about it?

Yes, I said ‘YOU.’ As in you, my reader. As in you, the tax payer whose tax moneys went to the rebuilding efforts in Louisiana and Mississippi whose complete investments will be destroyed sometime in the next 90 years, if any of our researchers’ work is validated. As in you, whose friends, family, neighbours, and businesses will feel a financial and personal impact when those investments are needed again and again because our business and government leaders refuse to take action to mitigate the future risks.

What actions can they take? Should they take?

It’s a very long list, but the start of it is to recognize the real and present danger and long term risk that that and other regions of the country currently face of catastrophic disaster and start seriously thinking about it.

But to keep things clear and concise here, let’s limit this down to an individual example. Let’s suppose that you own a small petrochemical refining plant near the Louisiana coastline that has somehow managed to survive the various hurricanes thus far. Fair enough?

So you have about 300 employees who will, on average, live within 20-60 miles of your facility. Your contribution to the GNP is probably somewhere in the range of $12-15 million annually, and your company would be responsible for local and state taxes in the neighbourhood of $250,000 annually.

Your company would probably be one of only a handful of suppliers in your market space, so your contribution to your customers is significant, but not completely irreplaceable.

Now imagine a 20 foot wall of water hitting every building within 20 miles of your facility. At least 40% of your workforce would be homeless or worse. Your facility would be flooded, causing serious potential of a critical leak into the local water system – an environmental hazard whose cleanup costs would be directly attributed to you.

You would not be able to meet your current contract requirements for months to come and any inventories would be unsalvageable.

Your workforce would be strenuously depleted as they sought higher ground out of the devastation, and you would not have access to reliable power or communications networks like phone or internet for days or weeks to come.

Suppliers would not be able to deliver your next batch of supplies, and even if they could, you’d have nowhere to put them.

Your landlord or bank loans, however, would still require payment at the end of the month. Your utilities may not accrue more debts, but they’ll sure charge for everything they think they can get away with. With the emergency run on cash at any operating local banks, you will have access to virtually no credit to manage cash flow, and basic resources will be rationed in small quantities.

Your costs continue to mount, but your revenues become nigh on impossible to achieve.

You are headed straight for bankruptcy along with your 300 employees whose lives have just been dealt a truly appalling blow.

Or… you could look at the option behind door number 2.

Suppose you recognize that your facility in Louisiana is at a certain degree of risk. Sure it’s an ideal location for the refining of chemicals based on the supplies pouring in from the Gulf, but as we mentioned above, it’s subject to some pretty serious risks too. So you want to find a way to minimize your risks without dramatically increasing your costs. What do you do?

For starters, you need to know where else you can develop your products in the case of a natural or other disaster. Is there a suitable site you could buy 200-300 miles inland? Could you rough in the guts of the facility over time, maybe run a smaller scale operation there as a secondary output facility?

Is there another area altogether different that you could set up a secondary facility in a lower risk environment, again, running it in small scale, or simply establishing it over time so the cost impact would be minimal to any one year?

Could you contract the facility out for a few years to pay for it while the imminent risk is a little lower so that it is paid for and available when you need it down the road?

Do you have a financial planning instrument that will help you to set aside a war chest or emergency safety valve for the very rainy and windy day when you desperately need it, and is it ironclad secure?

Do you have an insurance contract to cover emergency environmental cleanup costs in the event of a natural or other catastrophic disaster? Can you count on that insurer to make good on their coverage?

Do you have an evacuation and relocation plan for your company and your employees to get everyone out safely and maintain your company as best as possible for the duration of the disaster?

Do you have an ironclad communications plan in case of catastrophic utility failure?

Do you have suppliers who could handle a drastic change in your supply contracts in the event of a disaster or are they also subject to the same disaster’s whims? Do they have a disaster recovery plan?

In reality, is it necessary and cost-beneficial to be located where you are to begin with, or could you gain tax and other advantages of equal or greater measure by relocating your company out of harm’s way?

I know full-well these questions lead directly to the inescapable conclusion that a costly backup plan is necessary to keep your company, family, and employees happy, safe, and profitable during disasters, but since the cost is so much higher when disaster strikes and you are unprepared, it only begs logic that some basic preparations are necessary so you can roll with the punches under the worst circumstances we can honestly prepare for.

Which leads me back to Louisiana, post-Katrina. This is not the approach being taken in Louisiana today. Oblivious to the facts surrounding the expected loss of land mass in the state over the next 100 years, ignorant of the warnings that the revised levies are not strong enough to handle another very serious weather-maker, ignorant of the flooding impact from hurricanes of recent memory, Louisiana’s businesses are relying fully on the State and the federal government to make all preparations and take all necessary precautions.

Just like those brave if completely ignorant souls who live in Tornado Alley in trailers who refuse to adapt to the eternal reality that their trailer homes will inevitably feel the wrath of a tornado leaving them destitute once more, businesses and citizens of New Orleans and Louisiana as a whole are ignoring reality and are not taking those steps needed to ensure their long term survival and prosperity. The billions of dollars going into the local economy there have gone to rebuild, but not to rebuild better, smarter, and with an eye to surviving and withstanding the future. And that cost, as inevitably as a tornado will strike Tornado Alley, will be resurrected as a new cost once more in the event of the next weather-maker to hammer the Gulf states.

The lesson, though, is not just for the poor citizens and residents of Louisiana, but for the world – prepare. Save yourselves the worry, the hurt, the lost lives and lost fortunes by preparing, each according to the risk you reasonably face. If you live in a desert, prepare for power outages and drought. If you live in the north, prepare for blizzards and power outages. If you live in the Pacific Ring, prepare for earthquakes and volcanic activity. If you live in the flood plains, surprisingly enough, prepare for floods.

Either way, prepare.