Archive for September, 2010

Tropical Storm Nicole Wreaks Havoc

Thursday, September 30th, 2010

Nicole's Path

Tropical Storm Nicole’s remnants are wreaking havoc on the East Coast. Right now I am listening to the sounds of 45 mph winds outside my home as rain beats down on the windows. According to the meteorologists, this is just the beginning. Tens of millions of people reside in the projected path of the storm. Flash flood warnings have been issued for every state from the Carolinas to Maine. Indeed, Nicole’s rain and winds have already exceeded the record set by Hurricane Floyd in Wilmington, North Carolina, where the city has received nearly two feet of rain this week.  Floods are actually very common hazards, but as 30% of the communities that flood in any given year have never before flooded, residents are often unprepared.

Flood warnings are of particular concern in this economy. The states’ budget deficits have resulted in underfunded disaster mitigation and relief programs. And households and businesses often cut their insurance protection to save premium expenses. I remember the news reports of families in Rhode Island that had terminated their homeowners and other insurance when their mortgages were paid. Apparently they had only purchased insurance to comply with their banks’ lending requirements. Sadly when the epic floods struck Rhode Island this spring, they had no protection. Those of us in the East Coast should make appropriate plans. I have done all of my grocery shopping and errands and plan to work from home for the next few days.

This interactive graphic shows the projected path of Tropical Storm Nicole and various deviations as the impacts of the storm move across the northward trajectory. As you can see, it is not just the direct coastal areas that are affected as the rain and winds will move inland.

Dreamers or Doers?

Wednesday, September 29th, 2010

I was fascinated to read the new study from the Small Business Administration’s Office of Advocacy, which offers an in-depth examination of the Global Entrepreneurship and Development Index.  The Index includes a number of measures supporting entrepreneurial endeavors. This year, the U.S. fell to third place in the ranking, behind Denmark and Canada.  The researchers found Americans to score higher in aspirations but lower in entrepreneurial activities. Stated more plainly: more Americans fantasize about launching their own businesses, but fewer follow through with the plans. This finding resonated with me as when I was in the process of media interviews for the first edition of our book, I found a lack of interest in the foundations upon which small businesses are built. I finally figured out that the news media outlets I was pitching were not really addressing true entrepreneurs. Rather, their readers would pay $4.95 for a newsstand copy of a magazine about small business to indulge their fantasies of leaving their jobs and pursuing their dreams. Certain media outlets are serving up entrepreneurship as passive entertainment. So I stopped wasting my time chasing the dreamers and devised a new strategy to reach the doers. Good insight for my book marketing, but bad implications for our economic future.

Hitting It Out of the Park

Tuesday, September 28th, 2010

Boston Red Sox Win

Having blogged about the disastrous consequences of the BP oil spill to small businesses in the Gulf Coast states, I was delighted to read this morning’s announcement of the finalists for the 2010 Online Journalism Awards.  The New York Times was nominated for recognition in the category of “Outstanding Use of Digital Technologies for its “Oil Spill Tracker”. I have appreciated the New York Times’ innovative digital platform for timely, up-to-date coverage of the unfolding disaster. Visit the online tracker and you will see tabs across the top organizing information by topic “Where Oil is in the Gulf”, “Where Oil Has Made Landfall”, “Effects on Wildlife”, “Efforts to Stop the Leak”, “Investigating the Blowout” and “Live Video of the Leak”.  The time-series information is presented on a very clear, uncluttered map. Press the “Play” button and you see the oil spill movements with a caption by date as to what happened. A helpful legend explains the scale and proportions of the disaster.  An interactive graphic element on the right-hand side next to the map dynamically presents how the government’s estimate of the size of the oil spill, changed over time. I loved the creative way of presenting many complex, interrelated pieces of information in a clear, user-friendly format. This could be a textbook example on effective visual communication for graphic design students. I appreciate the commitment of the New York Times to provide consistent, in-depth coverage of the unfolding disaster despite BP’s efforts to limit journalists’ access to information.  In case you are wondering, Stefan took photograph on September 24 from a skybox at Yankee stadium. The Boston Red Sox beat the Yankees and I thought this a good image to capture the theme of hitting it out of the park.

Frequent, Low-Severity Losses Take Their Toll

Monday, September 27th, 2010

Moody’s Weekly Credit Report took an in-depth look at the U.S. insurance market. Catastrophe losses for the first six months of this year remained stable at $7.9 billion as compared with $7.7 billion for the same period last year, but still above the $6 billion average over the past ten years. Moody’s writes that while there has not been a severe natural catastrophe in 2009 and 2010 to date, “the underwriting margins of many industry players, particularly those with property coverage concentrations, have suffered significant aggregate losses because of a sharp upswing in the frequency of low-severity perils including tornados, winter storms, hail and covered floods.” In 2010, we have seen epic floods in Tennessee, severe hailstorms in Oklahoma and diverse tornadoes, including those in low-risk areas such as Southern California and New York City.

“In the past, losses from non-hurricane weather-related events were less volatile, allowing insurers to charge sufficient premium to offset exposure to these perils,” Moody’s wrote. “But this recent uptick in volatility is problematic for insurers given the thin underwriting margins in what is largely a commodity business, particularly in the homeowners segment.”  Insurers are also assuming more of these losses on their own balance sheets, Moody’s noted. “Although insurers typically purchase reinsurance protection for hurricanes and earthquakes, these small-scale weather-related losses tend not to trigger reinsurance protections.” As the cumulative effect of these low-severity events is catching up with insurers, it is not surprising that they should respond by filing for rate increases on their homeowners’ coverage. Expect them to follow suit for commercial rates. If you can renew your coverage before rates increase, you would be wise to do so.

The Devil You Know

Sunday, September 26th, 2010

They Move Slowly

Gulf Coast residents who had complained about the glacial speed with which BP paid claims for losses related to the oil spill now appreciate that everything is relative. Since the federal government has assumed responsibility for the claims payments, the process has slowed down. The extent of the anger over the delays and miscommunications became clear at a meeting last month in Orange Beach, Alabama attended by roughly a thousand small business owners from Alabama and Florida’s Gulf Coast. Mayor Tony Kennon called the meeting which was attended by the federal government’s “claims czar” Kenneth Feinberg. Among the many stories related by small business owners, some common themes emerge.  The first concerns the severe consequences of delayed claims payments.

As we know from our experience in disaster recovery, cash flow is critical to the survival of small businesses. Florida Governor Charlie Crist was correct to criticize the claims process, saying “I think it would be more appropriate for us (the governor and cabinet) to co-sign a letter encouraging increased urgency. It’s becoming increasingly difficult for (some businesses) to be able to hang on. Twenty billion (the sum of money in the BP claims fund) is no small sum of change, but it’s no good unless it’s utilized.”

Consider what delayed payments mean for employment. In most states, the law requires that employees be paid their wages within two weeks of performing their work. Without the cash to pay wages, small businesses have no choice but to lay off staff. They simply cannot run the risks associated with vague promises for claims reimbursement when they have legal obligations to fulfill.

The second key theme relates to our evolving paradigm of economic losses and physical disasters. After 9-11, the Federal Emergency Management Agency was unable to come to grips with the consequences of business interruption and income losses to small businesses. Their view was the economic losses correlated with physical damage. But this is an anachronism: certain service-related businesses located in the World Trade Center suffered total losses of property. But because their work was not location-dependent and because they had appropriate backup, they were able to resume operations. Other businesses, slightly more removed from the scene of the disaster, such as restaurants and retail shops, sustained little or no physical damage. But the interruption of convenient access to their businesses caused severe losses in income. Nine years later and our government has made no progress in its understanding of business interruption losses. The administrator of the BP claims fund, Kenneth Feinberg had stated that claims from business not in the immediate proximity of the disaster would not be paid. The problem, of course, is that the entire Gulf Coast tourism industry lost business this summer because of perceptions about the oil spill, even though many of the beaches were free of oil.

The third theme relates to how we compensate losses incurred by businesses with very short operating histories. The Daily Beast reported the story of Keith Brooks who had launched a new web-based business, with committed advertisers on board – until the Deepwater explosion. His claim for business losses was challenged, but finally documented to the satisfaction of the BP adjuster. Then it was turned over to the federal government’s management and the process began all over again. In the first edition of Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses, we presented the example of the Lower Manhattan pizza parlor that opened for its first and last day of business on September 10, 2001. Our startup businesses are the most vulnerable to disasters and yet we need them to resume job growth.

Finally, we need to stop fighting old battles and begin to look forward. In an apparent reference to the 9-11 disaster (in which the famous Dunkin Donuts franchise in Oregon successfully applied for a disaster relief program), Feinberg states that if proximity to the oil spill was not given relevance in the claims process, the claims center would “be inundated with claims from 50 states.” True enough, but is it fair that small businesses in the Gulf Coast states should be punished as fearful government employees made blunders with claims payments in previous disasters?

If there is one lesson from this experience, it is that our inability to learn from our past is becoming increasingly costly, both in human and in financial terms. We need a comprehensive and forward-looking plan for disaster relief programs.

It’s Just a Test

Saturday, September 25th, 2010

Courtesy SDSU VizLab

The image shown here is an illustration of a partial collapse of Scripps Hospital in La Jolla following a hypothetical earthquake, part of a two-day earthquake drill in California organized by San Diego State University. The drill, named Exercise 24 or X24, was conducted to explore the effectiveness of social media in disseminating news following a catastrophe. Twitter was widely used following this year’s earthquake in Haiti and floods in Pakistan. Eric Frost, director of SDSU’s Immersive Visualization Center or VizLab, which produced the image of the collapsed hospital, noted the value of citizen journalists in the aftermath of a disaster. “You get a lot of citizens who become your eyes on an event,” he said. “You get people reporting on not only things like a fire but a traffic accident or whether Mrs. Smith is still at the convalescent home. People come to take care of their own community rather than expecting government to do all of it.” The drill began when a test message published on Twitter reported a 9.2 magnitude earthquake in southern California, followed by additional test messages on the consequences of the disaster, such as a commuter rail accident. The participants in the drill directed the public to, a U.S. Navy site that shares disaster relief information. The goal of the drill was to see the participants, emergency responders and relief agencies as diverse as the American Red Cross and the California Department of Public Health, share information. I was fascinated to read of this drill as we had reported in the first edition of our book how the news media frequently misreported events in the aftermath of 9-11. Everyday tasks such as the commute to work became a struggle as information on changing commuter paths were difficult for larger organizations to keep up with. Instead, neighbors relied on one another, including our infamous lobby bulletin board, to stay informed. But that was before Facebook, Twitter and other social media platforms took off.

BP Forms New Safety Unit

Friday, September 24th, 2010

BP has established a new risk management unit responsible for company-wide safety. The unit is to be vested with “sweeping powers” with full authority to enforce safety standards. Mark Bly, the executive who led BP’s internal investigation into the Deepwater Horizon oil spill, will lead this new unit. He will report directly to Bob Dudley, who succeeds Tony Hayward as chief executive officer on October 1. BP is immediately putting into effect a corporate reorganization, which includes embedding safety in its operations worldwide. In connection with that reorganization, the company will examine how it manages its third-party contractors and how to align its compensation strategy to reward improved safety practices. No doubt the Gulf Coast residents will be watching with great interest as the oil industry, upon which their local economy is dependent, must rebuild confidence in its practices before the moratorium on offshore drilling will be lifted.

Cost-Effective Preparedness Solutions

Thursday, September 23rd, 2010

Forbes has posted an interesting commentary piece on the critical need small businesses have of cost-effective disaster preparedness solutions. Because small businesses cannot diversify their risks, they are more vulnerable to disasters than big businesses and have fewer resources from which to rebuild.  In the first edition of Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses, Stefan wrote that while network failures are relatively rare, the network is a good first test of how far contingency planning has progressed. He added, “When someone tells you that their network is completely protected and fail-safe, tell them that you would come over to their office and ‘pull the plug’ on any one network cable. Observe their response!” So I really enjoyed Forbes’ account of one small businessperson who, in a live test for his management, unplugged a file server and then walked over to his desk to manually trigger a failover to the remote copy. That’s confidence! Check out the article. It is a good read.

Igor Strikes Canada

Wednesday, September 22nd, 2010

Hurricane Igor continues its way up the Atlantic coast, bringing 200 mph winds to the province of Newfoundland, Canada. Igor’s heavy rains have flooded towns, submerged roads and stranded residents in their homes. This is not Newfoundland’s first experience with a major hurricane; a good part of Newfoundland was evacuated when Hurricane Juan struck. We typically associate hurricane-inflicted damage with the Gulf Coast states. This is yet another reminder that we need our businesses to be resilient to a wider range of disasters than those that are “typical” for our geographic region.

Hospital Closure Devastates Local Businesses

Tuesday, September 21st, 2010

Since St. Vincent’s Hospital closed its doors, its 3,500 employees, patients and their visitors are no longer patronizing small retail businesses in the hospital’s immediate vicinity in Lower Manhattan. The Greenwich Village-Chelsea Chamber of Commerce reports that the hospital’s closure has resulted in 40 – 50% declines in operating profits among small businesses in the city blocks around the old hospital site, with one business reporting a revenue decline of 80%.  State Comptroller Thomas DiNapoli met with neighborhood businesses to make them aware of small business loans available through the comptroller’s New York Business Development Program. I think that there are three takeaways from this experience. The first is the risks to small businesses that lack a diversified customer base. The second is that our paradigm of disaster is outdated, focusing on physical damage as a measure of economic losses. In fact, in our service economy there need not be a correlation between physical damage and economic losses, as this example illustrates. Finally, our policymakers need to understand that debt is not the answer to every problem. With revenue declines of 40 – 50%, how are these small businesses to repay the loans they are being encouraged to take out? Borrowing to continue a lifestyle that is no longer sustainable will only make matters worse for the small business owner.