Myth busters: a business continuity statistical mystery solved?

Published: Wednesday, 19 February 2020 09:32

By Geary W. Sikich

We have all heard and/or read the often quoted “40 percent of all businesses experiencing a crisis go out of business within one year…”.  Ever wonder where that statistic came from? For many years a colleague of mine, unfortunately now deceased, searched for the answer; to no avail.  No one could actually cite the source for this statistic.  Many refer to FEMA or the US Small Business Administration:

“According to a report from the Federal Emergency Management Agency (FEMA), 40 percent of businesses do not reopen following a disaster.  On top of that, another 25 percent fail within one year”. 

“United States Small Business Administration found that over 90 percent of companies fail within two years of being struck by a disaster.  “To survive, business owners must prepare for emergencies and take steps to prevent, or minimize, the effect of disasters,” a Chamber 101 report reads”.

I could never find the FEMA study or US Small Business Administration source for the 90 percent figure.  We all know that small businesses are prone to failure within the first year of operation regardless of if they are caught in a disaster or not.  Lack of funding, poor management, bad location, not understanding the market, etc. all contribute to failure.

So, I was surprised, pleasantly so, when I opened an e-mail from Nick Simms of Cornwood Consulting:

Hi Geary,

Just thought you would be interested in my and my father's attempts to trace the origins of the FEMA survival statistics.

In your recent Continuity Central article, you wrote:

"After a major disaster, more than 40 percent of businesses are dead in the water, according to the Federal Emergency Management Agency. They never reopen their doors. And among those that do stay open, their survival is only temporary: roughly 70 percent of them close within two years.

This is why every business needs to take disaster planning seriously. Without a plan in place for preventing a disaster, or responding to it, your organization will become just another statistic.

Really? Does the above ring true? Actually, most business startups don’t last a year – read that as a high rate of failure associated with opening a business; not because of a disaster, because of competition, poor execution of the business plan, underfunding, etc. By the way a colleague of mine decided to check the statistics cited above and it seems that the percentage is a bit of a myth that has been fostered throughout the years. We first heard this percentage in the late 1980s; almost 40 years ago.

I chaired a business continuity conference in the UK about 25 years ago (at London's Natural History Museum as I recall) which included a presentation saying 80 percent of companies that suffer a major disaster go out of business within 2 years.
My father, who had not long retired from the UK Civil Service, and had come along just out of curiosity asked me where this figure had come from. I traced the claim back through Safetynet (a UK AS/400 Disaster Recovery provider, now part of Sungard AS), IBM, Price Waterhouse and the University of Texas in the 1970s but never found any original research.  My father remarked that as a junior scientist at the Fire Research Station he had been involved in a study in the early 1950s which, indeed, had concluded that 80 percent of companies which had suffered a major disaster went out of business within 2 years. However, the major disasters they were researching were fires (and explosions) and that in those days, it was unsurprising companies experiencing that level of trauma went under as most organisations were manufacturers (not service companies) and most only had one factory-cum-warehouse so losing it meant losing everything.  

Nick Simms
Cornwood Consulting

Nick followed up with another e-mail regarding his father: Just to put his career in some type of context: https://www.math.nyu.edu/~crorres/Archimedes/Books/simms.html

Conclusions

So, it appears that a study done in the early 1950s may provide the clue to the 40 percent failure claim. By the way, the 40 percent failure often cites that these entities failed due to the lack of a plan. It seems to me that all the plans in the world would never stand up to a devastating natural disaster, war, etc. Maybe we just got confused and started seeing apples that we called oranges and oranges that we called apples? The mixing of statistical data can often lead to poor conclusions, hype and misinformation.  Will we continue to fall victim to statistics like these, or will we wake up and analyze the information used to create these statistics in a more meaningful way?

Perhaps we are better served by differentiating the types of disasters into categories that make sense; especially when we are applying statistics to engage our audiences. We should also err on the conservative side and realize that having a plan is no guarantee of success in a disaster. This is not to downplay the value of contingency planning, business continuity planning, disaster recovery planning, emergency planning and related risk management activities. Rather, by being able to focus on why continuity is important we may find statistics to be less alarming. 

Here are some questions that may be more useful than quoting statistics:

The author

Geary Sikich: entrepreneur, consultant, author and business lecturer

Geary Sikich is a seasoned risk management professional who advises private and public sector executives to develop risk buffering strategies. With a M.Ed. in Counseling and Guidance, his focus is human capital: what people think, who they are, what they need and how they communicate. With over 30 years in management consulting as a trusted advisor, crisis manager, senior executive and educator, he brings unprecedented value to clients worldwide. Well-versed in contingency planning, risk management, human resource development, ‘war gaming,’ as well as competitive intelligence, issues analysis, global strategy and identification of transparent vulnerabilities. He has developed more than 4,000 plans and conducted over 4,500 simulations from tabletops to full scale integrated exercises. He began his career as an officer in the US Army after completing his BS in Criminology. As a thought leader, Geary leverages his skills in client attraction and the tools of LinkedIn, social media and publishing to help executives in decision analysis, strategy development and risk buffering. He is the author of over 475 published articles and four books, his latest being “Protecting Your Business in Pandemic,” published in June 2008 (available on Amazon.com).

Contact G.Sikich@att.net or gsikich@logicalmanagement.com

References

Dennis L. Simms

Biographical information: D.L. Simms was born on 3 September 1926 in London, England. He had degrees in Physics and Mathematics from the University of London.  His career in The British Scientific Civil Service fell into three quite distinct parts. He spent 15 years carrying out research into the ignition and spread of fires, obtaining a Ph.D. for his work on the ignition of materials by radiation in 1963. He had a two-year break at the Office of the Minister for Science where he edited a report on Irrigation in Great Britain.  He then spent a decade investigating management problems in Government Departments, with a year out as the Gwilym Gibbon Research Fellow, Nuffield College, Oxford, contemplating the results.  From 1972 he took part in a number of international and national attempts to control pollution. He was Secretary-General of the London Dumping Conference 1972; led the UK Delegation on Marine Pollution at the U.N. 3rd Law of the Sea Conference and was Secretary to the Interim Paris Commission (Land Pollution of the Sea). At home, he was responsible for developing, and publishing papers on, the Scientific Bases for Environmental Regulations (risk analysis, effects of toxic metals, contaminated land). He chaired the European Community’s Co-ordinating and Management Committee for Environment Protection, Climatology and Technological Hazards before in retirement getting down to serious research in the history of science and technology.  Dr. Simms died on 14 November 2010 in his home in London at age 84.