What Is Crisis Management?

Crisis management is the identification of threats to an organization and its stakeholders, and the methods used by the organization to deal with these threats. Due to the unpredictability of global events, organizations must be able to cope with the potential for drastic changes in the way they conduct business. Crisis management often requires decisions to be made within a short time frame, often after an event has already taken place. In order to reduce uncertainty in the event of a crisis, organizations often create a crisis management plan.

How Crisis Management Works

Any business, large or small, may run into problems that negatively impact its normal course of operations. Crises such as a fire, death of a CEO, terrorist attack, data breach, or natural disasters can lead to tangible and intangible costs to a company in terms of lost sales, customers, and a decrease in the firm’s net income. Businesses that put a continuity plan in place in case of unforeseen contingencies can mitigate the effects of any negative event. The process of having a continuity plan in place in the event of a crisis is known as crisis management.

In order to have a business continuity plan in the aftermath of a crisis, most firms start by conducting risk analysis on their operations. Risk analysis is the process of identifying any adverse events that may occur and the likelihood of the events occurring. By running simulations and random variables with risk models, such as scenario tables, a risk manager can assess the probability of a risk occurring in the future, the best- and worst-case outcome of any negative event, and the damage the company would incur should the risk actually happen. For example, a risk manager may estimate the probability of a flood occurring within a company's area of operation is very high. The worst-case scenario of a flood would be the destruction of the company’s computer systems, thereby, losing pertinent data on customers, suppliers, and ongoing projects.

Once the risk manager knows what they are dealing with in terms of possible risks and impacts, a plan is developed by the crisis management team to contain any emergency should it become reality. For example, the company facing flood risk might create a back-up system for all computer systems. This way, the company would still have a record of its data and work processes. Although business might slow down for a short period while the company purchases new computer equipment, operations would not be completely halted. By having a crisis resolution in place, a company and its stakeholders can prepare and adapt to unexpected and adverse developments.

Key Takeaways

  • Large or small, even the best-managed businesses may be hit by an unexpected public relations crisis.
  • These can be recalls of products, a civil lawsuit, or some other unforeseen disaster.
  • Crisis management is the strategy of dealing with such crises at the corporate level.

Crisis Management vs. Risk Management

Crisis management is not necessarily the same thing as risk management. Unlike risk management, which involves planning for events that might occur in the future, crisis management involves reacting to negative events during and after they have occurred. An oil company for example, may have a plan in place to deal with the possibility of an oil spill, but if such a disaster actually occurs, the magnitude of the spill, the backlash of public opinion, and the cost of cleanup can vary greatly and may exceed expectations.

Types of Crises

Crisis can either be self-inflicted or caused by external forces. Examples of external forces that could affect an organization’s operations include natural disasters, security breaches, or false information about a company that hurts its reputation.

Self-inflicted crises are caused within the organization, such as when an employee smokes in an environment with hazardous chemicals, opens or downloads questionable computer files, offers poor customer service that goes viral online, or an accounting department cooking the books. Internal crisis can be managed, mitigated, or avoided if a company enforces strict compliance guidelines and protocols regarding ethics, policies, rules, and regulations among employees.

Crisis Management Coverage

Crisis management coverage is designed to help a business limit the negative impact of events on its reputation. It is an insurance agreement usually made as part of technology errors and omissions and internet/online property and liability insurance policies. Previously concerned with reputation management, crisis management coverage is increasingly used to cover expenses incurred to restore confidence in the security of the insured's computer systems in the event of a cybersecurity or data breach. It also covers reputational threats such as product contamination or recall, terrorism and political violence, natural disasters, workplace violence, and adverse media exposure.

Large corporations are the most frequent buyers of crisis management coverage, but any business whose profitability is closely linked to its reputation is a potential customer.