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Understanding of BCM

Clearly the fact that few executives will have had any hands-on BCM experience in their career has slowed the recognition of the importance of the discipline. This is exacerbated by the almost total absence of BCM in MBA syllabuses and executive education programmes. That said, numerous articles on BCM have appeared in mainstream business publications and the quality newspapers so awareness should be improving. Furthermore BCM now has a number of powerful advocates including (in the UK) the Institute of Directors, MI5 and the FSA. Ultimately, BCM is not a complex subject to grasp and a reasonably articulate BC Consultant or Manager should be able to communicate the important messages in a short space of time.

Experience of Crises

One often hears the explanation that executives fail to appreciate the importance of BCM because organisational crises are seen as being so rare in modern times. However, a study of a large number of UK companies over the period 1997 to 2002 revealed that:
• 99% of companies experienced a crisis resulting in a loss of value of over 10%; and
• 40% of companies experienced a crisis resulting in a loss of value of over 30%.

Whilst it is perfectly possible that an individual will not experience any personal involvement in a crisis over the course of their career, nobody in a senior management position can be truly unaware of the numerous high-profile recent disasters.

Lack of Time

Undoubtedly in many organisations, executives’ time is one of the scarcest resources. Indeed in his classic 1975 Harvard Business Review article “The Manager’s Job: Folklore and Fact” Henry Mintzberg revealed that half of the activities that CEOs engaged in lasted less than 9 minutes and only 10% exceeded one hour. However, the same article also highlights a more positive point: 93% of CEO’s verbal contacts are arranged on an ad hoc basis so getting “face-time” with key decision makers would appear to be largely a matter of persistence.

What’s in it for Me?

Generally people focus in work on the tasks for which they are best rewarded and much work in recent years has gone into designing incentive schemes to ensure that employees’ interests, particularly those of senior managers and executives, are aligned with those of the shareholders of the company. These include various profit-sharing schemes and the widespread granting of shares and share-options. There is a common drawback in all of these schemes though, in that the risks that were taken to generate greater profit (or an increase in share price) can manifest themselves long after bonuses are paid or share options are cashed in.

An executive considering a BCM proposal must therefore weigh up the up-front cost of the programme – which will impact negatively on this year’s bonus – against the potential long term pay-off. Given the increasingly short tenure of executives (particularly CEOs); many people in this position would be forgiven for wondering if they are going to be around to see the upside.

– Case Study - Northern Rock

Whilst not a mainstream BCM story, the recent crisis at Northern Rock is illustrative of the potential mismatch between executives’ and investors’ interests when it come to risk. The graph below shows profit before tax for Northern Rock over the last 5 years, together with the CEO’s salary and bonus for the period.

The graph shows a clear linear relationship between the increase in profits and the CEO’s remuneration. Superficially this makes sense: executives should be rewarded for delivering value to shareholders. However, as was spectacularly demonstrated in August 2007, Northern Rock had taken on increasing risks to generate these magnificent profits. Whilst the executive’s salaries and bonuses were safely in the bank, the increase in shareholder value proved to be illusory.

If executives will not sacrifice some profit to mitigate risks that are fundamental to their business, and for which they are clearly responsible; it seems extremely unlikely that they will spend a great deal of money on mitigating risks that they could not possibly be blamed for such as floods, pandemics and terrorist attacks. This does not bode well for BCM.

There are many reasons that executives do not devote as much time and resources to BCM as we in the industry feel that they should. The familiar arguments of lack of understanding and lack of time are clearly important although the much-cited argument based on the infrequency of crises lacks any objective validity (although that is not to say it has no effect). This article has suggested though that an equally, or possibly more, significant issue is simply that the long-term payback of a thorough BCM programme does not fit well with the short-term basis of most current executive incentive schemes.

Two approaches to remedy this situation are immediately apparent: a bottom-up solution and a top-down one:

• As BCM practitioners, we need to be more vigorous in promoting the wider business benefits of BCM, such as creating a competitive advantage, rather than focusing on the insurance analogy; and
• As shareholders (which most of us are nowadays, if only indirectly) we should be insisting that risk is explicitly captured in executive remuneration schemes to provide an incentive to take BCM seriously.

The latter is obviously an ambitious goal but ultimately presents the greatest prospect of truly embedding BCM in the culture of organisations.