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The Perfecting Storm

How managing your physical risk will help you make the most of the economic recovery.

Ever since the global economy took the worst dive in recent memory, CEOs have been looking for ways to help their companies endure and, perhaps more important, to figure out how to emerge from the crisis ahead of their competitors. It is not just financial risks and recovery that should concern us, though. We cannot overlook physical risks—especially at a time where natural disasters worldwide are increasingly gaining the spotlight.

Often relegated to the “nonessential” column during budget-cutting periods, a physical risk-management program can offer tangible business benefits, according to a new study conducted by research and analytics company Oxford Metrica and commissioned by FM Global. Data from The FM Global Risk/Earnings Ratio Study indicates that businesses with strong physical risk-management programs produced, on average, earnings that fluctuated by only 18 percent as compared with earnings volatility of more than 30 percent among companies with weak physical risk-management practices.

As Oxford Metrica’s Dr. Deborah Pretty explains, “Resources allocated to control property risks are well-spent, given the demonstrable improvement in earnings stability, a key driver of shareholder value.”

In short, a sound physical risk-management program can help strengthen your company’s position, putting you ahead while your competition is busy putting out fires or recovering from a natural disaster.

Scott Morrison, senior vice president and CFO of Ball, a supplier of metal and plastic consumer packaging products with more than 50 manufacturing plants worldwide, says the correlation is useful data to keep in mind in terms of resource allocations. “Reliability in the performance of our physical assets is a component of our reputation. The way to improve this reliability is to invest in the physical safety and security of our plants…. The more resources a company earmarks toward reducing physical risk, the higher the opportunity for enhanced shareholder value.”

How do you get back to business after an earthquake such as those that recently shut down global companies in Chile and Taiwan? How quickly can you recover from a hurricane like Katrina?

Hit with the double-whammy of devastating physical damages and a slow economic recovery, it may be more difficult than ever for a company to recover, should the worst happen. However, a strong physical risk-management program can help companies get back in business faster and with fewer related costs.

The latest research shows that companies with inferior risk-management practices are more than twice as likely to experience a property loss related to a natural disaster at more than seven times the cost, compared with companies with robust physical risk management.

The bottom line: Just as credit risk has damaged reputation, profitability and shareholder value in the banking industry, physical risk presents similar threats. Proactive planning can present profitable opportunities. Without a doubt, to endure these lean times, comprehensive physical risk management is as important as financial risk management—and is a solid strategy for a strong recovery.

About shivan s. subramaniam