What Is a Business Contingency Plan?
A business contingency plan is a “plan B” or blueprint for how to keep your business running in the event of a natural disaster, major technical issue, or other unforeseen disruption. A contingency plan identifies potential risks to your business and outlines steps your management team and employees can take if confronted with one of those risks. It helps protect the health and safety of your workers after an event has occurred, while also minimizing business interruptions that can result in financial losses. A well-thought-out plan can mean the difference between staying in business and shutting down.
Alternate term: Continuity plan
Do You Need a Business Contingency Plan?
Every business should have a contingency plan so it can resume its operations as soon as possible after a disruptive event occurs. Rather than fretting about what you should do, you can simply follow the steps you’ve laid out ahead of time.
How to Create a Business Contingency Plan
The first step in creating a contingency plan is to determine what risks are most likely to impact your business and the functions they will impact. Think about how your business normally operates and the types of events that could disrupt its major activities. Your risks depend on the nature of your business and your geographical location. For instance, hurricanes and earthquakes are risks in some areas but not others. Here are examples of events that could cause disruptions:
Physical damage by fire, windstorm, or other peril to a building that your business occupies Damage to machinery or breakdown of equipment An extended utility outage (electricity, water, gas, or telecommunications) Resignation or extended absence of key employees Damage to your computer system or a data breach Interruption of your supply chain Blocked access to your business location
Some of these events could also have legal implications. For example, all 50 states, along with D.C. and U.S. territories, have laws requiring businesses to notify individuals whose personally identifiable information has been stolen or released in a data breach.
Run an Impact Analysis
The next step is to conduct a business impact analysis so you can predict the potential outcomes of a disruption of one of your business functions or processes. An analysis can help you estimate the operational and financial impacts of a disruption. It can also help you gather the information you will need to develop recovery strategies. Here are examples of the potential operational and financial impact from the disruption of business functions and processes:
Lost or delayed sales or incomeIncreased expenses, such as overtime, outsourcing, and expediting costsRegulatory finesContractual penalties or loss of contractual bonusesCustomer dissatisfaction or defectionDelay of new business plans
A hurricane, structure fire, or data breach may have a greater effect on your income or costs if it occurs during your busy season than when business is normally slow. Likewise, a disruption that lasts for a day will have less impact than one that extends for a week or a month. You can use the results of your impact analysis to rank your risks in order of priority. Risks with the greatest potential impact should be listed first. One of the easiest ways to write a contingency plan is to use a template, which is provided by several state and local websites including, for example, the one for Cambridge, Massachusetts.
Plan for Continuity
Once you’ve analyzed your risks and estimated their impacts, you can begin writing your contingency plan. You’ll need a plan for each of the risks you’ve identified. For example, suppose your manufacturing business is highly dependent on a grinding machine. If the machine became inoperable due to physical damage or a malfunction, your business might have to shut down temporarily. You draft a contingency plan outlining steps you will follow if your machine becomes unusable. Your plan, in turn, might include contact information for two companies that rent machines similar to yours. When writing your contingency plan, be sure to identify specific people who will need to take action. For instance, suppose your firm employs a highly-skilled salesperson named Susan, who generates 50% of your firm’s sales. If Susan left your firm or was unable to work for an extended period, your sales would plummet. You know a retired salesperson (Jim) who could step in for Susan temporarily. However, before you include Jim in your plan, you should explain the roles and responsibilities you’d expect him to fulfill and obtain his consent.
Contingency Plan Example
Here’s an example of how a company might use a contingency plan. Tom owns Tasty Treats, a manufacturer of frozen prepared meals. The firm generates 60% of its revenue from sales of frozen pizza, all of which is made at a central location. Tom worries that his business could be severely impacted if a catastrophe occurs at the pizza manufacturing facility and he’s forced to shut it down. Tom thinks his biggest risks are fire, windstorm, equipment breakdown, and an extended power outage, and that all have a high probability of occurring. He drafts a detailed contingency plan. Here are the highlights.
