Disaster Recovery
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The Illinois Manufacturer – Spring 2004
By Ronald Dukes for the Spring 2004 edition of the The Illinois Manufacturer Magazine
Are companies still taking a ‘Sgt. Schultz approach’ to disaster recovery — “I know nothing, nothing”? Research from the META Group reveals that a mind-boggling number of companies may be aping the Hogan’s Heroes character’s modus operandi: 80 percent of large businesses do not have a comprehensive recovery/continuity plan. Due to size and scope of resources, small and medium size firms are likely to feel the reverberations from a crisis more intensely, making disaster recovery more important to long-term goals. But research found that only 35 percent of small and mediumsized companies had a plan in place.
While Schultz’s intentional obtuseness played comically to the Allies’ advantage, his feigned repression of knowledge, interpreted lightheartedly by sitcom viewers, only served his immediate needs. The character used the ruse to avoid confrontation, unpleasantness and responsibility.
Such motivation, when coupled with inaction and an inability to comprehend how actions influence an entire organization, can be detrimental in ways never imagined. According to Gartner Group research, two of five organizations that experience a disaster will cease to exist in five years. But in a tight economic environment, companies are more likely to play the odds because the possibility of experiencing a disaster seems remote. “I know nothing” seems a safe, comfortable course.
Since Sept. 11, 2001, many people limit their definition of disaster, associating it only with previously unimaginable catastrophe. Terrorism and the accompanying changes in everyday living dominate perception of the magnitude of a disaster and its causes. But disaster often takes the form of transit strikes, power outages, fires, theft, system interruptions and storms. Catalysts for disaster can be mundane behaviors that are never questioned — until it is too late.
Reports indicate that two major law firms located in the World Trade Center went out of business because they did not protect vital papers.While the terrorist act was extraordinary by any definition, damage or loss from fire or water is not. Safeguarding and having access to vital papers key to clients is an expected service.
During the summer months, a machine shop routinely left the rear loading dock door open to cool things off. The open door was an invitation a small-time burglar couldn’t refuse.He stole a laptop, hoping to fence the hardware.
Losing that laptop was a devastating blow to the 75-person business. The computer contained the company’s only copy of software used to manufacture Tomahawk cruise missile components. The business lost a major contract and had to spend $50,000 to have the program rewritten.
The small company’s destiny would have been drastically different had it developed a disaster recovery plan. The assessment conducted as part of the plan would have identified an open door as a potential risk. Regular off-site back-up of data and programs would be given priority status and instituted immediately.Modifying the existing ventilation system or installing a security system might have surfaced as recommendations.While such expenditures are more significant for a small business, either would have been comparatively small prices to pay longterm.
Data loss is a major factor in whether a company can recover. Gartner Group research found that if a disaster occurred, one of three businesses in the country would lose vital data or operational capabilities.
Dennis Schneider, former vice president of global operations and supply chain for Stanley Bostich, understands exactly what the impact can be if appropriate disaster recovery measures aren’t in place. “At Stanley Tool, we had a pre-arranged buffer system that let the shop floor continue to be productive if the system went down.When you are doing just-in-time manufacturing (JIT) and running 24/7 to meet customer requirements with a heavy penalty cost for nondelivery, you have to have a plan to keep the line going.You don’t have the time or capacity to catch-up. You’re too lean.”
Too lean can be too much for companies to handle. Last year, the Disaster Recovery Journal reported that 43 percent of organizations suffering a massive data loss would never reopen. A majority (51 percent) will open only to shutter their doors forever within two years. The two-year mark is no safe haven: The U.S. Bureau of Labor Statistics found that 93 percent of organizations experiencing major data loss cease to exist in five years.
But back-ups don’t determine corporate survival. Studies conducted by the University of Texas found that 90 percent of organizations that do survive a disaster without a recovery plan in place are out of business within two years. Interestingly, the major factor in failure wasn’t the restoration of physical aspects of loss. Companies studied included those that recovered their facility, infrastructures and employees. The fatal damage was to business relationships.
Accommodating customer needs and wishes with customized systems and services is a great relationship builder. That is, until something goes wrong without the proper processes in place to seamlessly rectify a situation.
“When I assumed responsibility for engineering and quality at International Truck and Engine Corporation as group vice president and chief technology officer, the engineering group had a considerable problem supporting the truck-ordering process as well as in supporting the build and assembly process,” says Gary Diaz. International has been an Illinois Manufacturers’ Association (IMA) member since 1903.
“Our ordering process was structured around a historical build-your-own truck from ‘rail to wheels’ dealer to Original Equipment Manufacturer (OEM) model. This allowed tremendous customer responsiveness, including customerengineered options. It also allowed tremendous complexity to be introduced into the manufacturing process,” adds Diaz.
“On an infrequent but nagging basis, our newly implemented information technology system, which generated truck configurations that linked customers and manufacturing, suffered catastrophic failures.Why? Because the IT project had not planned and implemented a vigorous disaster recovery capability.”
Diaz explains, “If the truck configuration system generated a single truck configuration failure, the entire system would go down for 24 to 72 hours, throwing manufacturing planning and scheduling for a loop. I proposed a new IT investment without traditional return on investment, arguing that we were buying an insurance policy against business interruption. The investment was quickly made, and within months, we had a fault-tolerant system.”
While focus on the customer is imperative, a company should never underestimate the power of its relationship with employees. Ian Mitroff, professor of business policy at the Marshall School of Business at the University of Southern California, conducted surveys and interviews of Fortune 500 companies concerning crisis planning. Findings suggest that a company’s attitude toward employees, as part of its overall philosophy, influences its response and recovery.
The study identified two company profiles concerning the approach to crises. Proactive companies are ready for crises out of the realm of their experience. Reactive firms allow a disaster to occur and then they prepare.
Many companies say the reason such planning or ongoing programs do not exist is lack of budget.However, the findings lend support to the belief that this is an investment with a positive return, not a cost negatively affecting the balance sheet.
During a three-year period, proactive companies averaged fewer crises than reactive organizations, 22 compared to 33. The average return on assets for proactive firms was higher than that of reactive ones, 6 percent versus 2 percent.
According to Mitroff, proactive businesses value the individual and embrace a “do no harm to any person” philosophy. Reactive companies allow the corporate coffers to dictate their actions. If deemed cost-effective, these firms will do the right thing.
Conventional wisdom would hold that the reactive companies are more profitable because action is tied to the bottom line.However, the study found that proactive companies are more profitable.
Profitable companies make for happy shareholders, and disaster preparation has been found to be an influence on shareholder value. “The Impact of Catastrophes on Shareholder Value,” a study conducted by Rory Knight and Deborah Pretty of Templeton College of Oxford University, shows a correlation between long-term stock price and crisis preparation.
Companies were classified as “recoverers” and “non-recoverers”with respect to bouncing back after the crisis. The stock values of recoverers were down 5 percent after the disaster occurred. However, they were at an even point or higher 50 days later.
The price of non-recoverers’ stock declined 11 percent immediately after the event. Twelve months later, these companies were still waiting for a rebound.
The study cites planning and implementation of disaster recovery as the reason for the disparity. Findings also point to the reaction and leadership of top management as factors.When senior management communicates effectively and continuously with constituencies, the company’s publics, including shareholders, employees, vendors, media and others, have confidence that the company is well managed during a disaster.
The first Tylenol-tampering crisis in 1982 took Johnson & Johnson leadership by surprise. They had no plan to deal with the disaster. Fifty days later, shareholder value was calculated as 10 percent lower. The second tampering in 1986 showed the value of preparation and involvement of top management. A plan was flawlessly executed. Integral to its success was having key executives as spokespeople. Fifty days after the crisis, shareholder value was up 8 percent.
Shareholder value can be affected by suppliers’ disasters and executive response.Nokia and Ericsson used Philips Electronics chips in their mobile phones. A fire at a Philips factory in March 2000 left both without a supplier. By monitoring the supply chain carefully and continuously,Nokia knew of the problem before being informed by Philips. It identified other suppliers and had the chips needed to meet production demand. Ericsson was caught short. Other chip suppliers could not accommodate the company. As a result, Ericsson’s market share declined 50 percent, and the company lost approximately $600 million.
The continually increasing activism of shareholders and the litigiousness of Americans beg the question:Will it be long until someone tests a company’s liability concerning disaster planning? Bruce Blythe and Terri Stivarius examined the issue in a March/April Industrial Management article.
The authors clearly state that law does not extend to negligent failure to plan.However, they believe such a test is imminent. They suggest that executives and board members prepare to answer whether every reasonable precaution was taken in a disaster situation and whether the company was prepared to respond in a manner that would protect employees.
Blythe and Stivarius doubt that directors will be able to plead, “I know nothing, nothing” in the future. They think that in the event of a disaster, a shareholder may be able to show corporate directors were obligated to plan in advance if the directors knew of a study showing a correlation between the anticipation of potential disasters and the creation of appropriate plans and shareholder value. That argument establishes a basis for a suit to recover the loss on investment.
Participation of top management in this initiative is critical. Understanding what measures currently exist and establishing reasonable expectations are imperative.
In a recent Network World interview, David Palmero of SunGard Availability Services, a leading business continuity firm, states, “The business executive is unrealistically optimistic of how quickly they can recover.” Data from the Harris Poll bears this out. As to how long it would take to recover applications and data as a result of a loss, CEOs and other top executives said 10 hours. Managers of information technology believe it would require up to 30 hours.
Top leaders and the team assembled to handle disaster recovery efforts must be on the same page. They must integrate disaster recovery with overall strategy and other processes throughout a company, the practice at Bearing Inspection, Inc. (BII).
“As a [Federal Aviation Administration] FAAcertified aircraft part inspection and repair center, the ability to maintain ready access to, and if necessary, quickly recover loss of destroyed business and process documents is essential. Therefore, Bearing Inspection’s disaster recovery challenge goes well beyond the basics of business continuation,” says David V. Heminger, president and CEO.
“A dynamic, comprehensive and continuous program — incorporating paper and electronic media, off-site duplicate storage, and an effective library cataloging system — is required. BII routinely explores methods to improve ease-of-use and the cost effectiveness of disaster recovery. As with the company’s commitment to aircraft parts refurbishment excellence, the quality of the company’s Disaster Recovery Program is essential. Testing, reporting and corrective actions are regularly employed. Obviously, this degree of sustained effort requires the commitment and support of top management, as well as a significant investment of financial and manpower resources.”