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