Wednesday, April 1, 2009

This week's question: What's Your Financial Pain Threshold?

I don't know of any organization that can "afford" a crisis.

When the Institute for Crisis Management began 20-years ago, our founder Bob Irvine would ask a prospective client what their "pain threshold" was -- at what point would a crisis or business disruption really hurt the business or organization?

The pain theshold was usually a dollar amount. I was working with a large telecommunication client, beginning the development of a crisis communication plan, and had a room full of senior management and communication staff. I wanted to know at what point senior management would take notice and take an interest in dealing with a business crisis.

The dozen or so folks sitting around the conference table looked at each other in bewilderment. In a corner was the company's CFO. She had been sitting quietly detached from the disucssion. It appeared to me she would rather have been anywhere but in this meeting. When no one spoke up to answer my question, she matter-of-factly replied, "50-million-dollars." That number did not compute with me. My checking account doesn't go that high!

This was a big, successful company, and she explained that if the loss or cost of a business crisis began to approach $50-million, it would have a significant impact on the bottom line and share value.

Ultimately, when we wrote the crisis communication plan, among other "triggers" to activate the crisis plan, we set a "loss" of $250,000 as one of those triggers.

A reporter called from South America last week wanting to know how a significant business crisis would impact a company's share value. I refered her to a study conducted by Oxford University on "The Impact of Catastrophes on Shareholder Value.

Researchers Rory Knight and Deborah Pretty looked at 15 case studies over a 20-year period and concluded that organizations affected by catastraphes fall into two distinct groups -- recoverers and non-recoverers. The report says the initial loss of shareholder value is approximately five-percent on average for recoverers and about 11-percent for non-recoverers.

However, for the recoverers, those companies that responded quickly and effectively, both operationally and with good internal and external communications, their report found that by the 50th trading day after the crisis struck, the average shareholder value had rebounded to the "plus" side by five-percent.

The companies that did not manage the crisis or their communications well suffered a net negative cumulative impact of almost 15-percent up to one year after the crisis hit.

If you are working for a non-profit or privately held company, you can translate their findings to your situation. Financial support will drop off dramatically for the non-profits and sales and bank support will go in the toilet if you do not respond with a good action plan and an effective communication plan.

Do you have a crisis operations plan? A crisis communication plan? A business recovery plan?

You need all three, and in the best of all worlds, these three plans should be integrated into one good and tested crisis plan.


  1. Here's another example of pain threshold. Peanut Corporation of America had one product -- peanuts -- and just three processing facilities. Setton Farms, the target of the pistachio recall, also produces other nuts, dried fruit, edible seed, chocolate, and candy, but has just two locatons. Its primary business is pistachios, but it does have something to fall back on. Watch this story as it unfolds to see if the pistachio recall exceeds Setton's pain threshold.

  2. With more on the pistachio crisis go to ICM Senior Consultant Dan Hicks' blog site

  3. Dan has also written about the contaminated peanut crisis, so look for those posts, as well.

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