People often confuse crisis management and contingency planning, using the terms interchangeably. Crisis management (or disaster recovery) occurs during and after an event (such as the outbreak of a fire). Crisis management asks ‘What now?’ questions. Contingency planning happens before (planning a fire drill). Contingency planning asks ‘What if?’ questions, such as what the firm should do if exchange rates or interest rates rise.
What is contingency planning?
Contingency planning, or disaster-recovery planning, refers to prepare for potential disruptions to a business organization in case of crisis. It is like having a Plan B in place to minimize the impact of unexpected events that can disrupt business operations.
Specifically, contingency planning is a set of procedures – planned and coordinated steps – applied in handling, containing and resolving an emergency.
Contingency planning seeks to anticipate future events that are not expected nor wanted or likely, but possible to occur due to changes in the business environment. By identifying all probable threats, the business organization will be able to put a plan of action in place to respond effectively.
Remember that more identifiable and quantifiable the crisis is, the more effective a contingency plan is going to be as the business is able to identify what might happen, prepare alternatives and examine what outcomes these may have in resolving the problem or minimizing its effects.
Reasons for contingency planning
Contingency planning is proactive rather than reactive. It prepares a business organization for both unexpected and often unwanted events, predictable and quantifiable situations and situations for which there is advanced notice to employees.
The purpose of contingency planning is to ensure that a business can continue with its business activities. It helps business managers with crisis management in order to ensure the continuity of the business operations. Hence, managers should always examine what might happen, estimate the likelihood of these events happening and assess the probable effects on the business.
Effective contingency planning enables a business to be better prepared rather than being totally unprepared to cope with the crisis when it happens. And even prevent the crisis it from happening in the first place, ideally.
While contingency planning does not eliminate all eventualities of a problem occurring, careful planning and preparation can mean that the number and extent of surprises are reduced, so they should have a less damaging impact. It simply improves preparedness and resilience of a business organization.
Case study 1: The founder of US low-cost carrier JetBlue has been ousted from his post as chief executive in response to problems suffered earlier in the year. Back in February, there proved to be little love lost between the budget airline and its passengers. A snow storm on 14 February triggered hundreds of cancellations, with knock on effects lasting for many days beyond the original weather problems. Over the six days affected, it is estimated that 100,000 customers suffered delayed or cancelled flights. After thousands of complaints made to the firm, the BBC reported that 'The firm admitted that its problems were not only caused by severe weather but also by the fact that it had no alternative plan of action in place to reroute so many stranded flight crews.' Insufficient contingency plans resulted in the need for the business to suffer huge costs to salvage their damaged customer service. Under what the firm called their Customer Bill of Rights it pledged to issue vouchers to compensate people hit by delays, costing the firm up to an estimated USD$30,000,000 which sounds like an enormous cost to restore consumer confidence. However, for a service sector firm – this is important. The Times 100 case study describes the business Enterprise rent-a-car holds central to its high customer service central to its corporate strategy. The case study states that 'This is a characteristic that it shares in common with every successful service company, large or small.' A painful lesson, however perhaps the USD$30m bill is a worthwhile cost for the long-term benefits of happy customers.
Examples of contingency plans
Contingency plans will include actions such as response rates (how efficiently people evacuate the building) and other tests performed under safe conditions. Here are a few examples:
Building evacuation plans. This plan includes procedures for evacuation of the buildings (including the use of emergency exits) and contacting the emergency services (fire, police and ambulance). Fire drills are rehearsed to test the contingency plan.
Cybersecurity breach. This plan would outline steps to contain the breach, minimize data loss, and restore operations quickly. It might involve isolating affected systems, notifying relevant authorities and customers, and activating a data recovery protocol.
Severe weather warning systems. Examples of these plans include typhoon warning system in South-East Asian countries – all businesses and schools are closed as the severe weather conditions threatens people’s safety. The government of the Philippines has contingency plans for the onslaught of torrential rain. In the Middle East, severe heat warnings are signaled by governments, so schools and businesses are closed if the heat proves too dangerous for people to be outside.
Supply chain disruption. This plan could involve identifying alternative suppliers, working with existing suppliers to mitigate disruptions, and adjusting production schedules to minimize impact.
Product recall. This plan would detail communication strategies to inform customers about the recall, procedures for returning faulty products, and steps to ensure product safety in the future.
What does a contingency plan look like?
Most organizations have a contingency plan that includes details of the roles and responsibilities of members of the crisis management team. Contingency plans, though specific to each situation, generally follow a similar structure:
1. Identifying risks and threats. The first step involves identifying potential disruptions through ‘What if?’ scenarios. These may include natural disasters, power outages, cyberattacks, or economic downturns.
2. Developing an action plan. Once risks are identified, specific actions are outlined to address each scenario. This plan should include assigning roles and responsibilities to team members, establishing clear communication protocols and securing necessary resources. A review is conducted and a report is submitted to the senior management team with recommendations for further improvements to the contingency plan.
3. Testing and improvement. Finally, the crisis plan needs to be tested. The plan’s effectiveness is tested through simulations or drills. This helps identify areas for improvement and ensures everyone involved is familiar with their roles. Based on testing and feedback, the plan is reviewed and revised to ensure its effectiveness.
Business managers always need to consider the impact of contingency planning for a given business organization or situation in terms of cost, time, risks and safety. It is necessary for the business to be better prepared to manage a crisis (proactive), rather than being totally unprepared to cope with the crisis when it occurs (reactive or passive).
In short, successful business should be able to respond to significant disruptions to their business by implementing a contingency plan to restore its business operations. Crisis management is not contingency planning though.
