. . . a company must choose the most appropriate decision from the perspective of business management by accurately identifying the balance between the loss that would be incurred if business were to be halted by an earthquake and the cost for risk mitigation measures which constitute trade-off relationships.
Inevitably, disasters will happen. They can take many forms, from natural disasters like earthquakes to the purely manmade kind like financial shocks. The occurrences of both in the recent past demonstrates dramatically that how a business prepares for adverse contingencies is key to their survival. Kasuchica Asano of the Nomura Research Institute has published a paper exploring business continuity plans, and the lessons companies can take from the March 11, 2011 Great East Japan Earthquake. Asano's analysis focuses purely on business continuity planning for and reacting to widespread natural disaster. Much of his analysis, however, is useful in the context of a financial crisis as well.
Asano explains that prior to the earthquake, Japanese businesses had no reason to rethink a supply chain that spanned the country and made extensive use of cheap land and a willing population. However, the 2011 earthquake disrupted this smooth running supply chain and demolished large parts of the chain's basic infrastructure, halting business operations over a wide area, even when the company's own facilities were not directly damaged. This widespread reliance on infrastructure is similar to many large financial firms, which have counterparty networks and outsourcing providers across a wide span of the global economy. In the financial world, it is not an earthquake, but rather a shock on the scale of Lehman or, potentially, Grexit, that would put those networks to the ultimate test.
"Unexpected" has no place in a business strategy. Corporate executives need to recheck the facts revealed by the March 11 earthquake, heighten their awareness to prepare for the unexpected future large earthquakes and increase their efforts to reduce any related risks.
Preparation for any disaster is a function of proper forethought and planning, appropriate measuring of risk, and allocation of resources to ensure a company's survival if a disaster strikes. Asano points out that the Great East Japan Earthquake was not unexpected; rather, it was merely a matter of time. Similarly, large financial firms should take a close looks at the widespread damage the sudden loss of Lehman Brothers had on the markets and the systems on which they rely, and make some contingency plans for the potential Grexit, or other potential Lehman's on the horizon.
Asano explains that networking can make society very productive, efficient, and robust, but it also can make that society extremely vulnerable. Post quake, many Japanese manufacturers found that their supply chain was such that the interruption of production in a single region, or even a single important producer, caused global disruption of production, rather that merely localized disruption. The network of counterparties, services providers, and trading platforms relied upon by major financial firms makes the global financial system similarly vulnerable. As we learned in the financial crisis, the interconnectedness of the players in global financial system means that shocks in one sector or loss of a large counterparty or intermediary can affect market participants globally.
So, what should financial firms be doing right now to prepare for the next financial quake?
Applying Asano's logic, financial firms should take a critical look at on whom their business relies and why. Then, in short, they should be constantly surveying the landscape, stress testing the business, identifying vulnerable counterparties and service providers, and developing plans to deal with dislocated markets.
For business owners, the most important tasks they currently face are defining blocks that will ensure business continuity by visualizing the risks involved and planning a strategy that indicates what amounts of resources can be put into what activities so as to ensure a company's survival.
Good contingency planning balances the resources required now to prepare for potential risks against the the cost
in the future to the firm should the worst occur. Asano shows us that having a full understanding of the systems and infrastructure on which your business relies is a vital step in weighing risks, allocating resources, and devising strategies to make sure the business survives the next catastrophe, whether natural or human-made.