The images are seared into memory. A completely dark New
York City skyline, a submerged roller coaster and demolished boardwalk on the
Jersey shore, a lone statue of the Virgin Mary standing amidst the rubble in
the Breezy Point section of Queens, a survivor in Staten Island kayaking on a
river where the street used to be.
Hurricane Sandy, the super storm
that ravaged the mid-Atlantic region last October, was the second costliest
hurricane in US history, knocking out power to more than seven million people
and damaging millions of homes and businesses, and shattering records for wave
height and storm surge at New York City’s Battery Park, and in Sandy Hook, New
Jersey, a thin peninsula that juts into the lower New York harbor pointing
toward New York City. Sandy’s impact is still being felt along the Atlantic
Coast as communities and businesses continue to adjust to a new normal.
When the hurricane hit, Citi was
prepared says Sanjay Vatsa ’89S
(MBA), Managing Director for Citigroup’s global operations. Vatsa is part of a company-wide business
continuity group of senior managers at the corporate and operations levels that
regularly meets, conducts drills, and reviews the plan in the event of a
crisis. “Whenever you run any kind of
business, you have to understand your contingency plan in case the business is
affected in any way,” Vatsa says. “With Hurricane Sandy, power shut down, we
knew that there would be disruptions in the business and that is not acceptable
when we are supporting a global client base. We have to ensure that we have
resiliency and that we can be relied upon to service our clients with minimal
to no impact, and meet our daily deliverables as close to business as usual one
can be.” In the case of Storm Sandy, Citi was recognized by Business Continuity
Institute (BCI) for “Most Effective Recovery of the Year” for its handling of
the crisis.
“When the power went out at our headquarters in New York City, our
business continuity plan kicked in, and a lot of the work shifted to our other
processing centers globally, including here in the United States, to support
the processes that were impacted in the affected area,” Vatsa explains. People
worked from home, and there were multiple conference calls daily to share
information on the current situation so that the plan could be dynamically
adjusted based on the situation. Vatsa notes that communication, transparency,
and up-to-date information are key during a crisis. “The time to plan for a
crisis is not when it’s happening, it is execution time,” he says. “You have to
ensure that you have a good plan and then test it on a regular basis to ensure
that you’re still up to speed so that when the time comes there are minimal
issues, and the plan executes as a well oiled machine and is relentlessly
followed and executed.” Citi tests its plan frequently and multiple times of
the year depending on process changes and the criticality of the process.
“Everyone thinks it will never happen to me or my firm and believes that
someone else has to worry about it. The discipline, urgency, and focus that one
has to have in place is as if the crisis is going to happen and it will impact
you, so you need to be prepared and ready for execution at a moment’s notice,” Vatsa
says. So what do you do before the crisis hits? “It’s all about awareness, focus,
and knowing the execution plan,” he explains. “You need to have the awareness
that disruptive situations may happen and the focus is to ensure that a plan is
in place, is viable, is tested, and is communicated to all of the people who
are supposed to be involved in the process.”
Vatsa has been though his share of
crises. In addition to Hurricane Sandy, he was a senior-level executive at
Merrill Lynch in New York City on 9/11. When a crisis hits, he says it’s all
about the execution of the plan. “Once it happens, you have to have a very
solid execution of the plan, and there will always be things in the plan you
may not have envisioned, so you should be ready to make a decision right on the
spot, to think, ‘No, we’re going to do X versus Y.’ “ On 9/11, Vatsa was part
of the team that quickly created a trading floor in Princeton, New Jersey,
because Merrill’s offices in New York City were out of commission. “We were in
a very difficult situation and things were happening that we didn’t expect,” he
recalls. “That wasn’t what we envisioned, but we knew what we would do in case
it did happen, so we put things in
motion, dedicated a team, we got a person involved who knew how to set up
trading desks, and empowered that person and our team. We were in full
execution mode—in collaboration, no questions asked.”
Vatsa says
Simon prepared him well for handling major crises by giving him the analytical
tools to understand both the small and the big pictures. “Being able to align
the two is very critical,” he says. “You have to think out of the box about
what kind of a solution can help you.” That could mean different solutions for
different firms and learning to adapt the most appropriate solution for a given
situation in a constrained environment is key, for example for small firms,
creating a ‘hub solution’ that can be leveraged by many may be more
appropriate—but then how do you govern it, align it, and create the right
incentive structure to be alert in case of a crisis is what a Simon graduate
does well,” he explains. “Big firms have a lot of resources that small firms do
not, but sustainability of business is required on all fronts for both large
and small firms. Simon graduates are well prepared to create very innovative plans
based on the requirements,” he says.
Uncertainty
associated with weather is something Jay
S. Benet ’76S (MBA), Vice Chairman and Chief Financial Officer of The
Travelers Companies, Inc., considers every day in his work for this Dow 30
company. Benet oversees financial operations for Travelers, a company that
specializes in providing property casualty insurance for businesses and
individuals. “Given the scope of our operations in the United States, whenever
there is a weather-related event of any magnitude, chances are we will be
helping policyholders to recover and move on with their lives,” Benet says.
That was certainly the case in the
aftermath of Storm Sandy, which impacted not only Travelers’ policyholders but
its own operations as well. “Having highly detailed business continuity plans
in place before an event occurs is crucial in our business. Our Claim
Operations positioned tanker trucks in the tri-state area to provide fuel for
vehicles used by our claims adjusters, allowing them to continue to access
damaged sites,” Benet said. “We also were able to quickly and seamlessly
relocate staff from our Morristown, New Jersey, office to a nearby Marriott
that had power and to provide necessary assistance to our agents who had lost
power in their offices.”
Benet indicated that Travelers
invests a significant amount of time and effort in analyzing extremely detailed
data related to catastrophes, both natural and man-made, using highly
sophisticated computer models to estimate potential losses and their
probabilities. While he noted the enormous strides predictive modeling has made
in recent years, he cautioned that loss estimates will never be totally precise
nor will the models say where or when the next event will occur. “Events happen
all the time and you know the models are imperfect, so you constantly update
and refine them based upon new information, examining what they then say about
pricing, product structure and risk management going forward,” he says. “For
example, flooding in lower Manhattan caused by Storm Sandy led to some minor
refinements in our underwriting. According to FEMA maps, while office buildings
may be on the opposite side of the street from a flood zone, basements in these
buildings, which often contain the mechanicals, may still be impacted by storm
surges.”
Travelers is constantly combining data and
observations from past events with factors related to more recent severe
weather trends to better understand the risks it is taking. “A storm like Sandy
was in our playbook,” Benet says, “but hopefully we will not see a storm like
that every year.” The company also dedicates a great deal of resources to
educate policyholders on how best to prepare for and prevent damage from the
next big storm or other major disaster. “We are in the business of managing risk,
and we have been helping customers for 160 years,” he concludes.
Risk is something that David Khani ’93S (MBA) deals with every
day in his job as CFO of CONSOL Energy Inc., the Pittsburgh-based natural gas
and coal producer. CONSOL Energy is the largest United States underground miner
of coal, a leading producer of shale and CBM gas and liquids in the Marcellus
Shale, and is transitioning its active exploration program into development
mode in the Utica Shale. Khani, who
joined CONSOL Energy in September 2011, spent nearly 20 years in investment
banking, with his most recent position being the Director of Research at FBR
Capital Markets. Both of these
businesses operate with above-average risk. “When you think about the inherent
risks, particularly in underground coal mining, we are faced with business-continuity
issues on a regular basis,” Khani says; in fact, he notes, his industry faces three
main risks: operational, commodity, and regulatory. “While we focus on
controlling the operational risk through our core values of safety and
compliance, managing through commodity price volatility swings of 50 to 100
percent is very challenging. In June, we woke up to the Obama Administration
pushing again to regulate greenhouse gas emissions. To invest large capital
dollars in the face of this risk is challenging, especially when the rules and
landscape can change on a dime.”
Add to that
the strategic objective of growth and, Khani believes, that makes it even more
challenging. CONSOL Energy manages operational risk and promotes business
continuity by adhering to its core values of safety and compliance. “Safety and
compliance start with our senior management team and set the tone for our
strategic development. We determine our incentives for management and employees
based on their performance against these core values. Second, we empower our
employees to stop operations if they feel things are unsafe. Third, we spent
about $1.2 billion of capital over the past six years to improve safety and compliance,
which ultimately provides a positive return above our capital to our
shareholders,” Khani says.
Khani says
you also learn from the mistakes of your competitors. “We have strengthened our
internal forecasting capability to help us weather commodity price volatility,”
he explains. “The quantitative and problem solving aspects I learned at Simon
helped me to develop strong forecasting expertise as a natural resources
analyst. CONSOL Energy has recently avoided a very large pitfall that has
clipped about two-thirds of the nearly $2 trillion global natural resources
companies. Over the past two years, many companies have made large acquisitions
near the top of the commodity cycle and used cheap short-term debt to fund it.
As a result, many of our peers are under extra duress to pay for these
acquisitions as well as refinance their debt at the highest risk premium
portion of the current commodity down cycle. To preserve our balance sheet in
the downturn and to maintain our organic growth, CONSOL Energy opted to sell
certain non-core assets and added partners with our shale assets—as opposed to
many companies who opted to purchase assets at inopportune times.”
In the
event of a crisis, CONSOL Energy’s senior management and senior operations
teams come together and handle it. “If it’s a gas issue, we’ll have our gas
team; if it’s our coal operations, it’s our coal team, plus our core set of
executives,” Khani says. “We adjust to the situation.” One of the keys to
success is to communicate well within the organization and to continually
challenge the status quo.
In addition
to the company’s 9,000 employees, CONSOL Energy hires thousands of third-party
contractors and vendors to work on their operational sites. “This adds another
layer of risk to the equation when our vendors do not share the same core
values that we do,” Khani explains. “So instead of accepting this, we take more
control by enforcing our standards and hosting training summits. We also
incorporate contractor safety into our employee incentive compensation
structure.”
Khani’s
advice for dealing with crises is based on his own experience, not only at
CONSOL Energy, but also at FBR. The 2008 financial crisis happened while he the
Director of Research overseeing 100 employees. He watched as Bear Stearns,
which cleared many of the industry’s market trades, collapsed. “Our business
could’ve been interrupted for a while if the government hadn’t assisted
JPMorgan in buying Bear Stearns,” Khani recalls. “A lot of market activity
would’ve imploded if that hadn’t happened.” With over $100 million worth of
trading activity at risk, Khani says it was a scary moment working toward
getting a second clearing company. Being down for an extended period of time
could have resulted in a lot of lost revenue.
“At FBR, we anticipated the financial crisis and were much better
prepared than most in the downturn,” he says.
The Simon
education prepared him well for the historic shift in landscape within the
commodity and financial markets. “I’ve come across many processes and schools
of thought that were in place for a long time and for good reason. However, to
be able to predict the future properly and then convince people to maneuver off
these has to be done through analysis and critical thinking. My Simon education
has provided me with these tools, and my experience has taught me to avoid the
status quo,” Khani explains.
By Charla Stevens Kucko
This comment has been removed by the author.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteThis comment has been removed by a blog administrator.
ReplyDelete