April 2011 | Special Edition: Dealing with Disasters - Emergency Preparedness
Consequence-Based Analysis: An Emerging Risk Assessment Paradigm
Media coverage of recent catastrophes has heightened the legal community's awareness of these events' potential to disrupt business. In some cases entire communities have been shattered for prolonged periods while others have disappeared forever. Whether due to natural hazards, human error, or the threat of a devastating pandemic, law firms across the country are more aware of the importance of preparedness and contingency planning. This has many firms re-thinking their preparations planning and causing a shift from recovery focus to proactive mitigation and continuity planning. Central to this change is a new approach to threat and risk analysis. Referred to as consequence-based assessments, this approach breaks with the conventional four-step methodology used to estimate risk.
Traditional Risk Assessment: A Four-Step Process
This done, the threats are assigned a probability based on their likelihood of occurrence. Third, the cost to the firm in lost income and added expense of dealing with each threat is estimated. Last, this estimate is multiplied by the probability of occurrence to determine the firm's annual loss exposure (Figure 1).
This type of table provides management with insight into which threats pose a danger to the firm and an understanding of the potential loss associated with each type of event. Some organizations use this information in various ways including as a budgeting guideline for risk control and mitigation spending.
Dealing with Shortcomings
Second, many threats are not represented even though they pose a significant risk to the organization. This is especially true of unanticipated secondary and tertiary effects that may be triggered by an identified risk. The nuclear disaster at the Fukushima power plant is an example of an unexpected threat that arose from an unpredictable set of cascading events. Who would have imagined that one of the countries best-prepared for all types of natural disasters would suffer a nuclear accident because of an offshore earthquake?
An Alternative Approach
As is the case with ALE risk table, the heat map analysis should be re-evaluated at least annually.
The advantage of the heat map model is that it gives visibility to low probability events that have the potential to significantly disrupt operations. When combined with an Annual Loss Exposure analysis, a heat map adds significant value to management understanding of the risks facing their firm. Unfortunately, even this improvement does not help businesses prepare for unforeseen events or the chaos associated with disasters.
A New Approach: Re-thinking Risks
Figure 3: Common Areas of Operational Disruption
This approach dramatically simplifies the risk assessment process since rather than attempting to develop an exhaustive list all possible threats, the planner can spend time understanding the capabilities and capacities of a limited number of operating components. Only elements that are critical to the actual business need be reviewed. Once these critical components are analyzed a decision can be made as to when and how to enhance them.
Focusing attention on the segments of the operation which would be impacted during a disruption is proving to be a successful management strategy. Consequence-based analysis provides firms with all the benefit of the traditional risk assessments, while eliminating the uncertainty associated with these techniques.
Donald Byrne is an entrepreneur and former venture capitalist, Don Byrne is a Partner at the consulting firm GRCS, LLC. An Adjunct Professor at Boston University, he teaches graduate courses in risk management and compliance. In 2011, Don became a Senior Fellow at the Stephenson Disaster Management Institute at Louisiana State University. A certified contingency planner (CBCP) and Lead Auditor, he regularly consults with some of the largest certification firms in the U.S. He holds degrees in mathematics, philosophy, and international marketing, is a member of the national board of the Association of Contingency Planners, and a contributing writer for several media outlets.