In the past six months, two businesses in my neighborhood have gone out of business due to major fires. The woodworking shop’s fire was so intense that it warped the I-beams, and the deli’s fire closed both the business and damaged the housing on the second floor. Fires, theft, power outages, computer viruses, and other problems are all part of the hazards of life. All it could take is one bad incident to ruin a company and destroy the business that we have nurtured, cut short our ability to be of service to our customers, and stop our income. However, just because they might happen does not mean that we should have a catastrophic loss.
Fortunately, there are things that we can do to minimize damage from disaster and help us get back on our feet quickly in case something does happen. Over the years I have developed a framework to help plan for disaster by identifying what the risks are and what steps we can take to prevent and minimize damage.
The first thing we do is identify what the risk scenarios are. Simply ask the question, "Where are the areas in the business where we could have risks?" What could happen to your business that would be a problem? What problems have you experienced before? Have you seen other businesses encounter significant problems that might happen to you?
Assess Each Risk
After making the list of risks, we score the risk. The score has two components:
- Likelihood Score: How likely is it that this is going to happen?
- Potential Damage Score: How much significance would this risk have for us?
There are many problems that come up in business that we encounter every day. Missing the train, getting a paper cut, and spilling coffee are common problems, but they are inconveniences that we can live with or quickly remedy. So the likelihood is high, but the potential damage is low.
On the other hand, fires, cars running into the building, meteors taking out the city are low, but the damage would be significant. So how do we compare the different risks we identify? By creating an overall score that multiplies the likelihood score by the potential damage score. For example, a paper cut might have a score of 10 (10 likelihood multiplied by 1 damage), a meteor would also have a score of 10 (1 likelihood multiplied by 10 damage), but a fire might have a score 30 (3 likelihood multiplied by 10 damage).
With the scores done we can now rank the risks and focus on those risks that have the greatest potential of disrupting our businesses.
With our list ranked by potential impact, we move on to preventing them from happening in the first place. Someone I spoke to said, “make sure that we have insurance” (which we will get to in a moment), but the reality is that we don’t even want the event to happen in the first place! So how can we prevent computer viruses? How can we stop inventory loss? How to we minimize employee turnover? These are all questions about preventing problems in the first place.
In spite of our best efforts, Murphy’s law will eventually kick in and bad things will happen. The next question for each risk is “how can we minimize the damage to the business?” Yes, a fire might break out, but having fire extinguishers, a sprinkler system, fire exits, and employee training will minimize injuries and property damage. Automated backups will let us rebuild after hard drive crashes.
Then, while still looking at our list, we need to ask how we would recover from an event. What will it take for us to relocate and reestablish operations after a fire? What will we do if that key employee leaves?
Finally, yes, we want to insure our business. Make sure that the insurance company covers the risk to begin with, and also make sure that the coverage is enough to compensate you for loss so that you can afford to recover.
With all the urgent things that we need to do it is easy to let something that might happen go by the wayside. But all it takes is one bad event to sink the business. However, it doesn’t need to take long to protect your business from disaster. The next time you’re alone at lunch or taking a coffee break, start listing the risks and get the process started. We have worksheets and planning templates available to help.
Here is the Risk Scenario and Score Worksheet.
Here is the Risk Plan Template.