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News & Events

Firms measure security against cost of doing business, say Kellogg risk experts

By Kari Richardson and Deborah Leigh Wood

12/1/2004 -

The threat of terrorism has transformed business security from a murky area to a core function that managers are trying to measure to determine how to minimize risk while still running a cost-effective operation, experts reported at the Kellogg School’s Conference on Risk Management Across Value Chains.

Sponsored by the Kellogg School’s Zell Center for Risk Research, the conference was held Nov. 30-Dec. 1 at the James L. Allen Center.

Security used to be “a lot of smoke and mirrors and cloak and dagger,” but since 9/11, “we’ve had to shift a lot of our thinking,” said Mark Lex, director of global security for Abbott Laboratories.

Conference speakers agreed that each industry faces its own set of problems in assessing risk. For example, Align Technology, which manufactures clear alternatives to metal dental braces, abandoned its plans to expand in Pakistan after 9/11 because the company could no longer obtain insurance coverage there and executives felt it was no longer safe for Westerners to travel to the site, said company president and CEO Thomas M. Prescott. So Align Technology moved its operations to Puerto Rico and Costa Rica, where business costs are higher but the risks far less.

The threat of terrorism has caused companies to “think about risk as an identifiable quantity to measure,” said Rick Matty, manager of supply chain strategy and risk management for Cisco Systems. “We’ve had to ask ourselves, ‘What is risk? Is it measured in terms of dollars or lead time?’”

Conference participants described their efforts to measure the financial impact of a terrorist attack, building collapse, natural disaster or other calamity, and then decide how much to spend to ward off or prepare for disaster.

The cost can be high when companies fail to please customers. Research has shown it takes his company about 18 months to gain back business from an unhappy customer, said Vince Lima, vice president of supply chain services for Grainger. “So we take disruption in the supply chain very seriously.” With about $5 billion in sales, Grainger was open for business during the East Coast blackout of 2003, which Lima said allowed sales of key supplies to continue while competitors shut down.

On a larger scale, managing the risks Al Qaeda poses to the United States has taken No. 1 priority at the FBI, said Gary M. Bald, executive assistant director for the agency’s counterterrorism and counterintelligence operations, in a keynote address at the conference.

Al Qaeda represents “our most active threat” because “it wants to establish Islamic rule worldwide, and the United States is its major impediment,” Bald said. “Al Qaeda wants to do to us what it did to the Soviet Union”— dismantle the economy and “bleed us into bankruptcy.”

Through surveillance, photos, the Internet and infiltrators, the international terrorist organization collects key information about U.S. corporations, including numerous details about their office buildings, employees and fiscal circumstances, Bald said.

FBI agents attempt to disrupt the activities of Al Qaeda when its members least expect it, Bald said. The agents also try to stem the flow of recruits to Al Qaeda, which he says has “an uncanny ability to regenerate and replace leaders.”

Bald said the FBI has to be wary of crying wolf in light of the 250 threats it receives each day. “Most are untrue, but aren’t intentionally false,” he said. However, “we get about 10 ‘legitimate’ threats a day that we have to take seriously.”

The FBI faced a “huge burden” in not being able to exchange information with the departments of Defense and Homeland Security, Bald said, but “the passage of the Patriot Act fixed that problem.”