From Expense to Asset. What We Plan To Accomplish. BCM Challenges

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Reginald Osborne
6 years ago
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1 From Expense to Asset A Re-Examination of BCM Plans and Their Value Mike Keating & Aaron Miller Protiviti What We Plan To Accomplish Demonstrate why solid BCM programs have value like assets Discuss ROI measurements Explain ways to demonstrate value in your BCM Program Give you the language to make your case BCM Challenges Provide optimal operational and financial resiliency at minimal cost Protect the organization from both known and unknown threats subject to probability neglect Assure officers of organization that full regulatory has been achieved with limited access to legal resources Validate process through exercises in as few as 48 hours each year 1

2 BCM: Expense or Asset? Assets are managed to maximize value to the organization Expenses are minimized to maximize profit An Accounting Precedent Prepaid insurance is viewed in accounting as an asset It is a prepaid expense with future value Why not frame a BCM Program as a prepaid expense that expires through time? BCM Asset Valuation Organizations manage assets so that their values are maximized Often assets are insured to protect their value Valuations are often based on replacement value 2

3 BCM Replacement Cost What is the replacement cost of every point of failure in your enterprise? How would you separate the BCM Program from other resiliency efforts of the enterprise? What would it cost to redo the work of a comprehensive BCM plan? BCM as an Asset ROI Challenges ROI v. Cost Avoidance (Soft Dollars) ROI Simple Calculation: ROI% = Benefits Costs X 100 Costs Calculation performed on an annualized basis What are the quantitative Benefits to a BCM Program on an annual basis? Uncertainty & ROI Uncertainty of BCM events makes the ROI calculation on an annual basis difficult. What is the Mean Time Between Failures? How often will be plan be activated? Every 5 years or every 50 years? How protected are we already? What is the incremental value? 3

4 The Mathematical Approach Optimal decision making in uncertainty Approach based on probability and cost considerations Incorporates mathematical risk model and company s existing resiliency Answers the question: What is additional preparedness worth to me? v. How much does that preparedness cost? Doing the Math C P(x) Sum of the costs associated with the solution multiplied by the probability of occurrence Yields Expected Monetary Value (EMV) Analysis of each scenario provides a range of values for consideration Economic Utility Approach Am I going to pay more than I receive in benefits? If benefits > costs, insurance is a good buy If costs > benefits, self insurance makes the most sense How to apply this approach? 4

5 Utility: An Insurance Example Suppose insurance in the amount of $100,000 costs $800/yr (-800) A Devastating event wipes out your business Total losses as high at $500,000 Insurance helps by paying $100,000 to rebuild (+100,000) Net utility from example > +99,200 Engineering a Win Win Probability of a disaster is 1 in in 200 chance of collecting $100,000 Yearly, you pay $800 for $500 of utility (100,000/200) Average utility is 500,000/200 > is 1700 Real Life Example Company has $600m annual revenue Their BCM Program costs $150,000 annually $40k internal staff time and expense $10k dedicated technology / bandwidth $100k/ yr services provider retainer Risk to prevent: 4-month interruption affecting 1/3 of revenue > ~ $67m 5

6 Example Details Probability of loss: 1% (of $67m) Expected MonetaryValue = $670,000 Additional Costs Sole source discount $75,000 yr Dual $50,000 / yr Onsite trip $6,000 / yr Adding It Up on Annual Basis EMV = $670,000 Less BCM Program ($150,000) Less Sole Source Discount ($75,000) Less Dual Shippers ($50,000) Less travel expenses ($6,000) Utility of BCM Program: $389,000 The Business Approach Like Pre-Paid Insurance, Pre-Paid Preparedness is an asset It requires a substantial up-front investment of time and money That investment s value diminishes over time as the information expires 6

7 BCM as a Financial Asset Minimizes lost revenue from an interruption Optimizes cash flow during an interruption Matches spending with criticalities (IT and Business Process) Provides critical information to minimize extra expenses during an emergency BCM as an Operational Asset Identifies gaps between expectations and operational capabilities Assures that the most critical applications and data are the most resilient Validates the capabilities of the program and the organization through exercises BCM as a Competitive Advantage Auditing plans of suppliers and vendors assures uninterrupted supply chain Improving customer service through resiliency Assuring availability of data through IT plans, which is where more and more organizational value resides 7

8 Frame the Debate: Some Cognitive Fun Don t think of an elephant I am not a crook A BCM Program is an Asset Using the Power of Language Use terms investment and value in your discussions Stress depreciation and the need for valuemaintenance Remember that what we do is BCM, not BCE (Business Continuity Expense) Make the Change BCM as Asset Refer to your BCM plan as an asset Stress the important advantages with each audience (financial, operational, executive) Demonstrate the value with examples from business and finance and economics Use the language to reflect your efforts Reiterate the value position of the BCM program 8

9 Questions? Thank You Contact Information: 9

1. Define risk. Which are the various types of risk?

1. Define risk. Which are the various types of risk? Risk, is an integral part of the economic scenario, and can be termed as a potential event that can have opportunities that benefit or a hazard to an