Measuring the Cost-Effectiveness of Static Economic Resilience

Adam Rose, Ph.D.Principal Investigator

University of Southern California

Noah Dormady, Ph.D.Co-Principal InvestigatorThe Ohio State University

Heather Rosoff, Ph.D. Co-Principal Investigator

University of Southern California

Background• Most studies of the economic consequences of terrorism and natural

disasters focus on property damage (PD)• However, there is increasing attention to business interruption (BI),

typically measured in terms of GDP or employment losses• BI begins when the disaster strikes but extends to the point of recovery• BI has exceeded property damage in recent actual events/simulations

- 9/11: PD = $40B; BI = $175B- Katrina: PD = $100B; BI = $150B- ShakeOut: PD $120; BI $80B

• Resilience is a way to reduce BI by maintaining business continuity and promoting recovery

Background (continued):• Need to help businesses recover from a disaster without wasting money

• Help them manage resilience for their own survival & region’s economy- Estimate the cost-effectiveness of economic resilience (business continuity) tactics- Develop a Business Resilience Calculator to identify/gauge progress on resilience

• Millions of businesses are operating without adequate information about actions they can pursue to most cost-effectively respond to disasters

• No one has attempted to develop a rigorous, evidence-based and tractable metric for assessing the cost-effectiveness of disaster response

Contribution of the Project

• Objective: Derive and apply a rigorous analytical framework to estimate the cost-effectiveness of economic resilience tactics.

• Accomplishments- developed a rigorous theoretical framework- collected primary data through a survey of Sandy and Harvey victims- calculated cost-effectiveness ratios for a dozen resilience tactics- performed statistical analyses- performed case studies (LA/LB Ports, Port Arthur, Boston Transp, USGS)- explored the creation of a Business Resilience Calculator

Economic Resilience Defined

• Static:- General Definition: Ability of a system to maintain function when shocked.- Economic Definition: Efficient use of remaining resources at a given point in

time to maintain production.

• Dynamic:- General: Ability & speed of a system to recover.- Economic: Efficient use of resources over time for investment in

repair/reconstruction, including expediting the process.

Also, resilience is a process – can build capacity ahead of time

Static Resilience Tactics – Customer EmphasisResilience

Tactic Definition (Activities Involved)

Conservation Maintaining intended production or service levels using lower amounts of an input or inputs (e.g. achieving the same level of production using less water, electricity or workers, without substituting other inputs for them).

Resource Isolation Modifying a portion of your business operations to run without a critical input (e.g. an office building could still be operational without water).

Input Substitution Replacing a production input in short supply with another (e.g. replacing electricity by natural gas, water provided by pipeline with bottled or trucked water, employees for tasks previously performed by machinery).

Inventories Continuing business operations even when a critical input is in short supply by using emergency stockpiles and ordinary working supplies of production inputs (e.g., water tanks, canned goods, stockpiled materials in general).

Excess Capacity Using a plant or equipment that was idle in place of a damaged plant and equipment (e.g., bringing on-line physical assets not previously in use; such assets might include computers, equipment, vehicles, and vacant buildings).

Relocation Moving some or all of the business activity to a new location (either temporary or permanent), including shifting data from onsite to “cloud” storage.

Management Effectiveness

Improving the efficiency of your business in the aftermath of a disaster (e.g., allowing for flexibility in business operations/procedures, or offering flexible working hours, minimizing reporting requirements).

Import Substitution Importing some of your needed production inputs when you cannot obtain them from your usual local or regional suppliers, including new contractual arrangements (e.g., buying your materials or supplies from other regions or countries).

Technological Change

Improvising all or part of your production process without requiring a major investment expenditure (e.g., replacing two food preparation kitchens with one, replacing your paper accounting system with an automated one).

Production Recapture Making up for lost production by working overtime or extra shifts.

Resource Pooling/Sharing

Hastening recovery through mechanisms such as bargaining (e.g., renegotiating supply contracts with key suppliers), selective exchange of certain resources (short-term agreements for a defined period of time with other organizations), creating new partnerships (e.g., building relationships with other businesses in order to share information and/or expertise), and resource pooling.

Economic Resilience of the 9/11 Terrorist Attack

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• 95% of WTC firms relocated after 9/11

• If all of firms went out of business, direct business interruption (BI) loss = $58.4B

• If all relocation were immediate: BI = 0

• Firms relocated w/in 4 months: BI = $16.1B

• Metric: Avoided Loss ÷ Max Potential Loss$42.3B ÷ $58.4B = 72%

Theoretical Foundation: Production Function

Q = f (A, K, L, N, M, I, V, S, G, B) A = technology K = capitalL = laborN = natural resourcesM = materials (intermediate goods)

• Disasters constrain the inputs• Derive optimal response mix• Examine tradeoffs

I = infrastructureV = inventoriesS = spatial considerations (location)G = managementB = behavior (perceptions, biases)

( )1h

q A K Lρ ρ ρδ δ−

− − = + −

ImageCatGIS/Satellite Imaging Data

• Post-disaster satellite overlay with GIS Data

NJ Tax Assessment Records +

FEMA Damage Database

• Provides damage estimates by street address

Survey Sampling Area

RTi Research

Survey Sampling Technique

Survey Sample:0

510

1520

% N

umbe

r of F

irms

0 10 20 30 40 50 60Time to Recovery (Months)

• Survey administered 60 months after Sandy

• Survey sample of 111 firms that experienced business interruption or property damage (large sample for this type of work)

• Majority of firms recovered <2 years (76.5%)

• Non-trivial proportion of firms report not yet recovered (18.9%)

• 67.5% Reported property damage(average property damage: $1.4 million)

Summary of Firms in Sample

Agriculture, Mining &

Construction

Transportation, Communication

& UtilitiesManufacturing Wholesale &

Retail Trade

Finance, Insurance & Real Estate

Service Sectors

Count of firms by Age5-20 years 5 10 4 12 6 2521-50 years 3 1 8 9 5 1250+ years 2 1 0 1 3 4

Median # of Employees(in FTEs)

Prior to SuperstormSandy

127.5 75 475 55 849.5 56

During Recovery 50 50 350 42.5 580 60Count of firms owning(versus leasing) facilities

8 8 8 7 7 22

Count of firms withMultiple Locations

1 2 6 8 7 15

Count of firms in NewYork*

9 12 11 21 14 35

Count of firms InInundation Zone

9 8 7 12 6 30

Damage and Disruption of Firms

Median Mean St. Dev. Min. Max. N

Property Damage ($) 15,000 928,233 3,760,899 0 25,000,000 111

Total Business Interruption (BI)(Total Sales Revenue Lost During Recovery)

100,000 1,765,768 7,710,101 232 46,576,546 111

Duration of Recovery* (Months) for:

Firms Not Yet Recovered 21

Firms Completely Recovered 6 8.91 10.87 0 54 57

Firms More than Recovered 6 7.21 7.76 0 40 33

Recovery Path:

Steady recovery path in equal steps 58

Slow starting recovery, greater progress later in process 43

Quick starting recovery, tapering off before full recovery 10

Disruption Type Firms Experiencing the Disruption (Percent)

Extent of Business Interruption (BI) Among Firms Experiencing the Disruption (Percent)

Mean St. Dev. Min Max

Employees Unable to Travel to Work 73.87 20.35 18.56 3 100

Employees Moved Away 46.85 13.09 14.82 2 100

Communications Disruption 78.37 19.16 12.69 5 75

Supply Chain Disruption 65.77 18.81 16.83 2 100

Power Outage 81.08 26.10 21.68 5 100

Natural Gas Outage 50.45 13.18 10.28 1 70

Water Outage 47.75 11.85 7.03 2 50

Transportation Disruption 72.97 19.75 18.65 3 100

Other 18.01 19.75 23.89 1 100

Source of Disruption

Losses by Source of Disruption

Disruption TypeMedian

Property Damage

Median BI (November

2012)

Median BI (Term of

Recovery)

Median Avoided Losses

Median Expenditures on

Resilience Tactics

Employees Unable to Travel to Work

25,000(1,246,023)

40,250(4,170,918)

165,000(2,363,941)

67,000(1,728,209)

650(88,661)

Employees Moved Away 45,000(1,738,471)

90,500(1,340,214)

225,000(2,131,588)

67,000(2,329,088)

17,500(200,756)

Communications Disruption 15,000(1,072,274)

30,000(3,748,856)

100,000(1,882,869)

50,000(1,403,612)

1,300(158,131)

Supply Chain Disruption 15,000(1,228,733)

39,187(1,112,283)

100,000(1,814,241)

50,000(1,803,598)

3,000(-99,068)

Power Outage 17,500(1,126,199)

36,000(3,688,507)

100,000(1,931,669)

50,000(1,479,522)

1,900(170,005)

Natural Gas Outage 52,500(1,568,185)

57,600(5,757,351)

195,000(2,664,610)

50,000(2,079,161)

13,500(314,257)

Water Outage 25,000(1,630,054)

55,800(5,882,749)

100,000(2,541,474)

50,000(2,090,771)

15,000(183,527)

Transportation Disruption 15,000(1,131,210)

33,773(1,031,368)

100,000(1,595,236)

50,000(1,684,848)

1,300(47,834)

Other 35,000(184,550)

19,687.5(630,033)

70,000(1,115,663)

40,000(256,620)

1,250(-61,415)

Results (Cost Curve):• Firms used both Cost-saving and Cost-

incurring tactics

• In total:• Firms avoided $142 million in sales

revenue losses by using tactics• $43 million spent on cost-incurring tactics• $35 million saved on cost-saving tactics• Net expenditure (all firms) $7.6 million

• In total: the average cost-effectiveness of resilience tactics was $18:1• In other words, firms avoided $18 in lost

sales revenue for every dollar spent on resilience actions

Resource SharingManagement Effectiveness

Resource Isolation

ConservationInput Substitution Production Recapture

RelocationImport Substitution

Excess Capacity

Technological Change

Inventories

-$10,000

$0

$10,000

$20,000

$30,000

Cos

t (M

edia

n)

0 20 40 60 80 100% Total Avoided Losses

Tactic Implementation Cost Effectiveness (Avoided Losses) Cost-Effectiveness

Total Cost (Net)* Average Median Total Effectiveness(Net) Average Median Effectiveness/ Marginal

Cost Ratio**

Conservation $1,360,690 $41,233 -$200 $2,125,740 $64,416 $5,000 1.56

Resource Isolation $1,175,165 $47,007 -$5,000 $13,911,932 $556,477 $24,000 11.84

Input Substitution $2,015,750 $100,788 -$500 $9,035,950 $451,798 $13,000 4.48

Inventories $2,433,600 $57,943 $15,000 $20,012,260 $488,104 $15,000 8.22

Excess Capacity $4,712,095 $181,234 $0 $10,107,180 $388,738 $12,250 2.14

Relocation $33,950 $1,213 $4,000 $14,669,410 $543,311 $23,560 432.09

Management Effectiveness -$6,503,700 -$138,377 -$5,000 $19,673,427 $427,683 $20,500 -3.02

Import Substitution $4,356,000 $242,000 $4,500 $1,784,157 $99,120 $16,750 0.41

Technological Change -$3,783,120 -$78,815 $7,500 $28,469,654 $618,906 $25,000 -7.53

Production Recapture $1,116,497 $31,014 $250 $8,853,563 $245,932 $8,750 7.93

Resource Pooling $685,500 $19,586 -$500 $14,164,830 $404,709 $28,000 20.66

Other -$1,000 -$333 $0 $32,400 $10,800 $7,000 -32.40

Cost-Effectiveness by Tactic

Cost-Effectiveness Findings at the Level of the Firm

• The average firm avoided $3.24 for each dollar spent/saved on tactics.

• If we separate out net cost-saving and cost-incurring for each firm we get:

- For firms observing net costs of implementing tactics, for every dollar spent they avoided $3.59.

- For firms observing net savings of implementing tactics, for every dollar saved, they avoided $2.84.

• Los Angeles Department of Water and Power (Craig Davis, Water System Resilience Program Mgr) • Has been provided with background papers, studies, and analyses to inform policy, practice and has

encouraged future interaction. Engaged through discussions, reviewing each others’ work, submitting joint proposals for funding. Will recommend our BRC to customers.

• Center for the Middle Market (Previously a GE Capital Center)• Committed to continued engagement, continues to appreciate conference papers and published works from

team, post them on their website, connect research with members of their larger national business community• Highly engaged with research and team, funded PI-Dormady in related experimental work on resilience

decision-making of firms, indicative of high engagement and willingness to support research outputs more broadly

• Business Executives for National Security (BENS) (Tom Tennant, Vice President for Policy) – established a working relationship through Soft Target Countermeasure (Spillover) Study

• Los Angeles Emergency Preparedness Foundation (Brent Woodworth, President and CEO)– establishing a working relationship with business oriented public-private partnership

Customers:

From Operational Metric to Decision-Support Tool• Use survey results to build a resilience index for typical business

- not just effectiveness, but cost-effectiveness- also able to specify the thorny issue of weights

• Results serve as checklist for individual businesses on resilience tactics- can serve as default and best-practice values until self-assessment is done- firms set targets for resilience

• Business use the Resilience Calculator to gauge progress- use guidelines from survey and case studies for self-improvement- identify ways gov’t can help (e.g., deregulation, subsidies)

Client Logo

The BRC is a software tool that helps businesses learn from previous disasters and prepare to recover from new ones in a cost-effective manner

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Disaster Resilience concept facilitates awareness of the Business Resilience Calculator as a viable product

Functionality

• Evaluates an inventory of tactics to reduce future losses

• Fills the gaps in user data with default values from previous research

• Provides a resilience score based on an evaluation of the business in the face of threats

• Improves productivity by optimizing the use of remaining resources after disasters

Introduction to the BRC• A decision support software system for

companies• Based on detailed survey of businesses that

have gone through disasters• Focuses on the cost-effectiveness of individual

resilience tactics and the formulation of strategies

Disaster Resilience defined:The ability of an organization to resist, absorb, recover from and adapt to business disruption in an ever changing environment.

Layers of ResiliencePeople

Process

Infrastructure

Leadership

Culture

Gartner | CIRI Business Resilience Calculator Slides | World Economic Forum

Business Resilience Calculator (Transition Product)

Resilience Score 2018: Actual (Cost-Effectiveness)

Product 1 Product 2 Product 3

Your Score Sector Avg Your Score Sector Avg Your Score Sector Avg

Conservation -1.5 -2.1 -1.8 -2.5 -1.0 -2.1

Resource Isolation 16.3 10.2 n.a. n.a. 25.5 8.0

Input Substitution 8.1 6.2 20.3 9.1 12.4 12.4

Inventories 5.4 4.3 5.4 4.3 8.3 7.0

Excess Capacity 2.1 1.5 2.6 1.8 2.1 1.5

Relocation 4.6 2.9 4.6 3.5 4.6 3.8

.

.

.

Production Recapture 15.1 18.0 16.2 20.5 16.4 20.2

Research Implications

• Many cost-effective (post-disaster) resilience tactics exist

• Customers have less costly & more resilience options than suppliers

• Established a primary data set over a wide cross-section of businesses

• Inform businesses about best practices

• Provide businesses with a practical tool to guide their progress

• Help gov’t identify ways to avoid undercutting/ways to support resilience

Impact• Provides businesses with an inventory of resilience tactics to help reduce

future losses• Provides businesses with estimates of the cost and effectiveness of

each tactic

• BRC will help businesses gauge current state of resilience to disasters and help them improve it

• Research is of use to DHS Policy Office, S & T Critical Infrastructure Program, NPPD, FEMA

• Research is of use to government agencies outside of DHS at all levels