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Business Impact Analysis

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Business Impact Analysis

What is business impact analysis?

All parts of a company’s operations rely on each other. Executives and entrepreneurs use Business Impact Analysis (BIA) to estimate the effects of operational setbacks on their businesses.

Business leaders use BIAs to evaluate a wide range of causes and effects:

  • System Failures
  • Accidents
  • Natural Disasters
  • Human-Caused Catastrophes
  • Legal Costs
  • Financial Setbacks
  • Operational Freezes
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BIA is essential to business continuity planning and facilitate long-term business operation strategies. This analysis examines and builds upon interconnectedness – the idea that all parts of a company’s operations rely on each other.

Analysts use BIAs to reveal companies’ vulnerabilities and help businesses prepare for potential setbacks. They compute the financial and logistical costs of undesirable events and assign probabilities to various scenarios. With this information, corporate leaders can design and implement risk-management strategies.

BIAs for Risk Assessment

Say, for example, you run a tea shop/climbing gym and want to understand your risks. Your customers love to get hyper-caffeinated and push themselves to the limit on your rotating “endless” climbing wall – and you wonder about their safety.

To alleviate your concerns, you ask an analyst to conduct a BIA on your business. She reports a 1 in a million chance of customer illness from caffeine overdose and a 1 in a thousand chance of injury from getting their clothing caught in your climbing wall’s gears and pulleys. Let’s assume both types of injuries have a likely medical/legal cost of $100,000.

Probability x Cost = Risk
(0.000001 x $100k) = $0.10
(0.001 x $100k) = $100

Obviously, you should pay more attention to preventing the more likely event. You can work with your analyst and your insurance agent to balance your liabilities and your insurance costs.

(Of course, real-life analysts consider many more factors than I did in this simple example. They examine a wide range of potential short- and long-range costs – across many potential disasters.)

Why conduct a business impact analysis (BIA)?

Business managers need to prepare for the worst. As I described above, you can use BIAs to identify and rectify your company’s vulnerabilities. However, you can also use BIAs to create emergency recovery plans for optimal operation in difficult situations.

Corporate leaders use BIAs to determine criticality. By knowing exactly how to respond to a calamity, you can allocate resources responsibly – dramatically reducing your human/financial costs.

Say a customer at your tea shop gets stuck in your rotating climbing wall. Would you immediately begin repairs on the unit? Of course not – you’d take care of your customer first. The reputation costs associated with prioritizing a machine over a person far surpass the minor operational losses associated with shutting down your machine.

When you create your BIA (with help from an expert analyst), you’ll develop a wide perspective view of all costs associated with disasters and the disaster-response strategies you choose.

How to create a BIA?

Step #1

Your analyst will gather information on the many aspects of your business and examine all facets of your company’s operations. Then, they’ll calculate the importance and time-sensitivity of each operation. For example, conducting a long-term strategy meeting in the wake of a disaster would be foolish. After a catastrophe, companies should focus on safety and primary operations.

How is this done?

First, your analyst will study your overall business processes by interviewing key individuals, conducting workshops, and providing surveys.

Next, they’ll conduct a Business Impact Analysis to distinguish between your operations, examine potential impacts, and estimate risks/costs.

Finally, they’ll examine the critical element of time. Analysts rank criticality using two criteria:

Recovery Point Objective (RPO)

RPO represents a business’ acceptable loss (as measured in dollars, terabytes, customer interactions, etc.) during the aftermath of a disaster/setback.

Recovery Time Objective (RTO)

RTO describes the amount of time a company has to restore operations after an undesirable event before falling apart (including troubleshooting, recovery, and testing phases).

Step #2

Next, you and your analyst will conduct a resource dependency analysis. You’ll break down your key operations to the nitty-gritty and identify critical resources/tasks. Together, you’ll rate each resource’s criticality level to facilitate prioritization and optimization.

How is this done?

You’ll identify only the most important recovery services and resources for becoming minimally-viable after a setback.

Step #3

Next, you’ll examine your results from Steps 1 and 2, creating an impact assessment. Your analyst will provide a risk rating by combining undesirable events’ probabilities, consequences, and RTO criticalities. You will discern various disasters’ impacts on critical business operations from their effects on tangential systems. With your analyst, you will determine tolerable risk thresholds across many possible situations.

Step #4

Finally, you will create the mitigation segment of your BIA. If a potential system failure surpasses your tolerable risk threshold, you must identify and adopt greater mitigation /strategies. You may need to secure resources to reduce and minimize drastic measures. (For example, your tea/climbing business could benefit by purchasing first aid supplies and training staff members in First Aid/CPR.)

After you address your vulnerabilities, your analyst will calculate your remaining risks. Eventually, you will reach a level of tolerable/manageable risk.

Business Impact Analysis: FAQ

What’s the difference between backup plan and recovery plan?

A recovery plan provides a more comprehensive and proactive approach than a backup plan. Companies use recovery plans specify/implement robust systems for withstanding operational failures and other setbacks. In certain situations, recovery plans involve automatic systems that literally reboot a company after a disruption.

What events can be considered business disruption/process failure?

Almost any setback can create a business disruption. An earthquake could destroy an office building, a flood could do water damage to network computers, and a PR crisis could dramatically decrease demand. Anything that causes a financial, legal, regulatory, safety or reputational disruption counts as a business disruption.

Events that cause process failures fall into two general categories:

1. Natural Disasters

Tornadoes, earthquakes, hurricanes, fires, storms, tsunamis, forest fires, etc. count as natural disasters.

These events may demolish part (or all) of a company’s facilities, cause power outages, and shut down computer networks. Depending on your location, climate, and type of business, naturally-occurring events can impact businesses in many ways – large and small.

2. Human-Caused Events

Computer viruses, IT failures, theft, embezzlement, fraud, market decline, property destruction, etc. count as human-caused events. Both internal personnel and outside individuals can instigate events that negatively affect companies. The severity of these events’ impacts varies widely, making detailed prediction and planning a must.

What is disaster recovery planning?

After creating BIAs, business leaders often build a Disaster Recovery Plan (DRP). Experts sometimes refer to this process as Recovery Strategy Development (RSD). Executives combine BIAs and DRPs to create comprehensive Business Continuity Plans.

Disaster Recovery Planning (DRP) involves returning your operations back to their original states. DRPs describe the “hows” of Business Continuity Plans. They dictate how to solve problems, who will take part, and how to best recover operations.

How can BIA help in disaster recovery planning?

Leaders use BIAs to evaluate and acknowledge the risks associated with potential disasters – and plan for a secure future.

Experts identify three key components of a DRP: Response, recovery, and restoration. Use your BIA data to kick these DRP phases into gear.

What is Maximum Tolerable Downtime?

Executives typically use the phrase Maximum Tolerable Downtime (MTD) when calculating risk. MTD represents the maximum amount of time a business has to return a highly critical process or component to normal operations before experiencing irreparable damage.

BIA vs Risk Assessment

Though you need both Business Impact Analysis (BIA) and Risk Assessment to complete a Business Continuity Plan, they are rather different from each other.

When an analyst conducts a risk assessment, they evaluate the different potential hazards to a business and its operations (including safety concerns). However, you can use a BIA to do much more: develop a systematic strategy for overcoming all undesirable situations your company may face.

In a Business Continuity Plan, the risk assessment comes before the BIA.

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Business Continuity Plan

What is a business continuity plan?

A business continuity plan describes procedures for maintaining (at least some of) a business after a major setback.

These predetermined procedures involve intensive evaluation and strategy and allow businesses to continue delivering products/services as much as possible after a disaster.

A business continuity plan breaks down into five segments:

1. Risk Assessment:

Business leaders estimate risk by evaluating potential hazards to their companies’ personnel, facilities, reputations, etc.

2. Business Impact Analysis:

While taking their risk assessments into account, executives create a BIA by evaluating the effects of various business disruptions and studying the best ways to mitigate these setbacks.

3. Plan Development & Execution:

Next, planners get specific and develop a recovery plan. They create continuity plans with exact instructions for the recovery process. By digging into the details of virtually all possible events, managers will know how to handle crises if/when they arise.

4. Plan Test & Maintenance:

Business strategists consistently develop and evolve their continuity plans. As a business changes over time, its emergency/recovery plans must follow suit. Furthermore, executives must repeatedly analyze and test their recovery plans to ensure security.

5. Probability

Analysts rely heavily on probability when calculating risk. By multiplying occurrence probabilities and costs/impacts, they can create risk scores.

Before calculating an event’s probability, analysts must conduct threat and vulnerability analysis. They represent probability as the number of times they expect an event to happen each year. Actuaries call this number Annual Rate of Occurrence (ARO).

Business Continuity Plan vs Impact Analysis Process

A Business Continuity Plan (BCP) is a large document that describes five different processes. Business Impact Analysis (BIA) is but one of these five components.

Executives use impact analysis to evaluate and prepare for potential risks. They use continuity plans to define a large set of processes for maintaining business operations after major setbacks.

BIA and Efficient Time Management

Corporate leaders use BIAs to minimize the time it takes to recover from business setbacks. Team leaders (and members) use similar methods to optimize their schedules.

On most workdays, unpredictable events disrupt even the best-planned schedules. Instead of letting your team get distracted, you can get your day/week back on time quickly. With Toggl Track's cloud based time tracking data, you get back on your feet in no time – after any setback.

When using Toggl Track to reschedule after an interruption, you can easily identify your most important tasks and times of day - based on previous reports. By prioritizing your most time-sensitive projects and communicating this information to your team members, you can get back on track – fast!

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