Business continuity planning involves the identification of major areas of risk in your business and putting in place strategies to minimise the impact if they eventuate.
Regardless of size, all businesses should have a formal and comprehensive business continuity plan as part of their risk management processes. The business continuity plan should be a straightforward document that is tailored to the business and provides practical strategies to follow in a crisis. The plan needs to be regularly tested, reviewed and updated to make sure it remains current and useful.
What to include
Business continuity plans often focus on disasters such as fires, floods, storms and explosions, but neglect to address the risk of deteriorating financial conditions, for example. An effective business continuity plan needs to address the potential risk of a key supplier or customer ceasing to trade, as well as the loss or destruction of physical assets.
A good business continuity plan will give you a better understanding of how your business works, the risks it faces and the steps that need to be taken to ensure you recover from an incident with minimal adverse consequences. As opposed to pure disaster recovery planning, business continuity plans are intended to be proactive, identify potential risks and implement strategies to minimise the potential impact of these risks in advance.
The mere existence of such a plan can also aid in minimising the threat of possible negligence claims, insurance, legal and other such disputes that commonly arise after major incidents occur.
A business continuity plan needs to be tailored to fit an individual business, but as a minimum it will typically include:
- An identification of the essential business requirements
- An identification of the major risks facing the business
- An assessment of the impact each risk would have on the business
- A strategy to respond to, manage, and recover from an incident
Who should write it
To ensure that all relevant risks are identified, accurately assessed and that the most appropriate and practical strategies are put in place, it is prudent to include a range of stakeholders in the planning process. External advisors such as legal and financial advisors can be invaluable in this process to ensure that issues are not overlooked and that vested internal interests do not influence the process. Independent advisors can also be useful to identify alternative strategies to deal with the risks identified.
Protecting your supply lines
While it is common for businesses to have back-up plans to address risks such as natural disasters, computer viruses or power outages, risks such as primary suppliers not being able to maintain supply of a key input are often overlooked. There are a number of steps that businesses can take through their contractual arrangements as part of the continuity planning process to guard against this risk.
- Range of suppliers
The vast majority of businesses will have a wide range of suppliers that are responsible for providing goods or services to the business. From a business continuity perspective the issue for the business is being able to ensure continued supply of key products and services. If a supplier is unable to continue supply, consideration needs to be given to:
- The potential flow-on effects to other parts of the business (and how these can be minimised)
- Potential alternative sources of supply (either on a temporary or permanent basis)
- Exclusive suppliers
If the arrangements with suppliers contemplate some form of exclusivity (i.e. the business cannot obtain goods or services from competitors of the supplier) the supply arrangements need to provide some flexibility if the supplier is unable to guarantee supply for a period. Ideally, the contract would require advance notice of any anticipated problems with supply to allow time for alternative arrangements to be made.
- Critical suppliers
If the product or service being supplied is critical to the ongoing operation of the business then the contract dealing with the supply needs to restrict the ability of the supplier to terminate the arrangements. Depending on the type of product or service, a compulsory transition period might also be appropriate. If the contract relates to the provision of software, then it may be appropriate to have a version of the software held in escrow by a third party which can only be released in certain circumstances.
- Unable to supply
On the other hand, businesses need to limit their potential liability to customers in situations where they are unable to continue to supply the relevant product or service.
The inclusion of a "force majeure" clause in customer contracts is one way to mitigate against the risk of being unable to continue supply. The concept of force majeure is that a party will not be liable for failing to fulfil its contractual obligations if the failure is due to circumstances beyond the control of the party. These clauses can be very general (for example, any unforseen events which are beyond the control of a party) or quite specific (for example, fire, flood, earthquake, act of terrorism etc.) as to what constitutes a force majeure event.
Generally the obligations under a contract will be suspended for so long as the event continues and a right of termination will be triggered if the event continues for a defined period. Suppliers and customers will have competing interests when negotiating such clauses.
- Protecting your goods
Another business continuity issue that can be addressed, is securing payment for goods or services supplied to customers. The use of properly drafted "retention of title" clauses in supply agreements or terms of trade are essential to protect against the risk of customers or distributors becoming insolvent.
A retention of title clause (also known as a Romalpa clause) is a contractual provision used in supply agreements under which the supplier retains ownership of goods supplied until payment is received. Properly drafted retention of title clauses give a supplier a right to repossess products supplied in the event of non-payment and may also give the supplier the benefit of ranking ahead of other unsecured creditors in an administration.
Expect the unexpected
Preparing for the unexpected and planning to minimise risks in an organisation is a difficult task but one that is becoming increasingly important. In addition to ensuring that a business continuity plan addresses the traditional concepts of natural disasters and other similar incidents the plan should also contemplate the risk of adverse financial or market conditions.
With a comprehensive business continuity plan in place, your business will be in a much better position to deal with any incidents that arise. Ensuring that business continuity issues are addressed in supply arrangements with key suppliers and customers is an essential part of an effective business continuity plan.