The critical lessons Covid taught CFOs about business interruption risks

Since the start of the Covid-19 pandemic, organizations have learned to expect the unexpected and have carefully laid plans in place for the next major disruption, experts in business interruption and disaster planning told CFO Brew.

“I think it opened the eyes of many companies realizing they…need to have a business plan in place as to the various perils that could impact their business,” Robert Glasser, a managing director at BRG in its business insurance claims practice, said.

The pandemic also taught companies to look for “weak signals” that could lead to major disruptions, Jennifer Elder, CEO of The Sustainable CFO and coauthor of Faster Disaster Recovery, said. For example, she said, many people may have felt like Covid-19 came out of nowhere. In fact, it originated in late 2019 in Wuhan, China, and took months to spread to the US and the rest of the globe before it was classified as a pandemic, according to the US Centers for Disease Control and Prevention.

“One of the lessons learned, I think, is to listen for those weak signals of disruption,” Elder told CFO Brew. “I often find when somebody says, ‘Oh, that will never happen,’ that’s when my ears prick up and go, ‘Oh, we better plan for something around this.’”

There’s no end to potential disasters (see: the Red Sea attacks or the drought at the Panama Canal), and the next big disruption event may not be another pandemic. Elder and Glasser listed scenarios including climate crisis-fueled natural disasters, a major cyberattack, or any number of other significant supply chain disruption events.

Role-playing game. Whatever the next big threat may be, more companies want to be prepared, according to Glasser. Many turn to tabletop exercises to play out any number of theoretical scenarios.

No—experts are not recommending the C-suite gather for a game of Dungeons & Dragons (although that may be a great team-building activity). A tabletop exercise helps organizations plan out mitigation plans to lessen the impact of a major disruption, Glasser said.

“Human beings, we don’t like to think about the worst that could happen,” Elder said. “A lot of organizations don’t do business continuity planning until they’ve experienced a disaster. And they go, ‘Yeah, we should have thought about this before.’”

The CFO’s role. Finance leaders have an important role to play in business continuity planning, Glasser said.

“I think the CFO of an organization quite often…has risk management under them, so they’re very important as a facilitator to bring all the operational heads of a company together,” he said.

Once company leaders are in a room together to conduct the tabletop exercise, the CFO should, according to Glasser, ask questions like:

• What are the high-risk revenue streams that would be affected by the disruption?
• What are the critical components and where are they coming from?
• Where are major suppliers and customers located?
• How can the organization mitigate the loss by, for example, minimizing its exposure to the risk ahead of time?

“I think the CFO would be in a perfect position to try to assemble a team of people throughout the organization to orchestrate these meetings to go over the critical business units, the critical people, and analyze what would be the impact as a business interruption value,” he said.

Supply chain spotlight. The pandemic, which disrupted global trade, shed light on supply chain risk for many organizations, according to Glasser, who said the issue “has really risen to the top of a lot of corporations’ [minds], especially if they are importing any of their critical components and or any of their finished goods from overseas.”

Glasser said some companies learned the hard way that just-in-time inventory management, where companies hold as little inventory as possible, “doesn’t work anymore,” and that if they have suppliers located in areas at high risk for disruption, they need to find backup suppliers.

Companies need to carefully consider which backup supplier makes the most sense, Elder cautioned. If both suppliers rely on the same port or trade route—say, the Panama Canal—it won’t do the company much good if the canal is bottlenecked, she said. She added that to better secure their supply chains, some companies have also chosen to reshore their suppliers, meaning they’ve opted for domestic suppliers instead of those located overseas.

Continuity planning emphasizes agility to adapt to new challenges, Elder said.

“Sometimes, this is when we get into some issues with people’s creative thinking. They’ll go, ‘Well, we can’t do that, and we can’t do this,’” she said. “The better question is, ‘What if we could?’”

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