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An Aversion to Dispersion

As the drive toward dispersing workers and physical property wanes, firms favor alternatives like business continuity planning and outsourcing.

By Bill Stoneman

September 15, 2003

SIn the wake of the terrorist attacks on the World Trade Center and the Pentagon on Sept. 11, 2001, there was a lot of thought about mitigating the risk borne by corporate employers by splitting up employees among multiple locations. But two years later few firms have actually acted on those thoughts.

"Right after Sept. 11th, 2001, we saw a lot of companies talk about dispersed locations or redundant locations for their computer centers," said Clark Gore, an executive vice president with Holder Properties in Atlanta, a developer of office buildings, data centers and call centers. "A number of companies seemed to be going down the path of trying to get a redundant location or two." But the drive waned over time, Gore said.

"When it was time to put their money where their mouth was," he said, "it became difficult to justify the capital layout." This perspective is supported by the Conference Board, a New York-based business research group. When the organization asked 52 corporate risk managers last fall and winter if their companies intended to disperse people for security reasons, 3.8 percent gave a definite yes. A total of 5.8 percent said their companies were actively considering such a move, and 11.5 percent were talking about the idea, but with less certainty about where those talks would lead.

Business Continuity Planning

Perhaps that's because companies are instead bolstering their business continuity capabilities with measures that stop short of dispersing their people and offices. Take, for example, Keefe, Bruyette & Woods Inc., an investment banking company specializing in the financial services industry that suffered grave losses on September 11. Located on the 88th and 89th floors of Tower 2, the company lost 67 out of 220 people it then employed, including a co-chief executive officer.

Though the company now has more people in its new main office than it had in the World Trade Center, about 200 at 787 Seventh Ave. in New York, it's far less vulnerable to a disaster than it was two years ago, said Robert Giambrone, its chief administrative officer. The company has beefed up capabilities of nine smaller offices across the country to house critical operations on an emergency basis, he said.

The company trades stocks that are listed on the major securities exchanges in its Boston office in addition to in New York. In a pinch, the Boston office could also handle over-the-counter stock trading, Giambrone said. It also built up the capacity of its branch offices, in most cases, by installing point-to-point communications systems designed to handle specific functions. Such investments, he said, were generally folded into office upgrades and expansions that would have occurred anyway. The rationale for breaking up large concentrations of people is easy enough to see. The prospects for getting an organization back up and running quickly after a disaster are better if fewer key functions are disrupted, regardless of whether the disruption is caused by weather, an accident that severs power or telecommunications lines or terrorism. On top of that, insurance companies are viewing concentrations of people and business assets much more harshly than they did before September 11, driving up the cost of doing business for many companies.

"Underwriters have started asking some very pointed questions about how many people are at an individual location," said Timothy Brady, a managing director in the casualty practice for insurance broker Marsh Inc., "so they can compute the financial risk they are accepting."

Simply put, 3,000 people in one location represents a $3 billion workers' compensation exposure in a state that puts a $1 million price tag on a life, he said. And that's more than most insurance companies want to cover in one policy. No wonder then that workers' comp premiums have skyrocketed in the past two years for businesses with big pools of workers in a single building, Brady said. Property insurance rates have also risen steeply, especially for owners of and tenants in prominent office buildings, several sources said.

Breaking up business installations and moving pieces to new locations, of course, is no easy matter. And it isn't the only means of addressing the risk of having too many people and operations too close together.

Outsourcing

Many companies are mitigating the risk to their central nervous systems by outsourcing a portion of their computer operations.

"Companies are taking their information technology out to the Internet," said Bobby Patrick, chief marketing officer for Digex Inc., a Laurel, Md.-based provider of computer system hosting services. Digex and more well-known competitors like IBM and Electronic Data Systems Corp. can put client data on their computers at multiple locations, thereby achieving far greater protection than most businesses could by building a redundant data system on their own, Patrick said. With the Internet, data is easily accessible to the client and from almost anywhere.

More practical than relocating business units for many companies, said Philip Jan Rothstein, president of Rothstein Associates Inc., a risk management consultant in Brookfield, Conn., is to use facilities as backup locations for one another. He said that a manufacturing and distribution client of his had been in the process of consolidating 10 locations into one to cut costs. But it decided after September 11 to keep three sites operating, each with capacity to handle a portion of the work normally done at the other two.

"That kind of action can be quite expensive," he said, adding, "A lot of companies are facing rather painful financial decisions."

It's not surprising then, given perceived levels of risk and the nature of different businesses that the urgency of dispersing people and offices and computer systems is very different in New York than in the heartland.

While Rothstein and other risk management consultants say businesses across the country have been rethinking decisions over many years to concentrate large numbers of employees in single locations, the people who help those businesses relocate departments or groups of people see little evidence outside of New York that they acted on those thoughts.

Security

Though risk management consultants said businesses outside of New York are also considering breaking up large concentrations of people and assets, they said it's on a more modest scale and companies are not eager to draw attention to such moves. Moreover, they said companies are at least as likely to manage the risk of concentration by beefing up security and building backup and redundant facilities.

Interest in dispersing people and offices also varies widely by type of business, likely explaining in part the difference between New York and other parts of the country. The smattering of companies that told the Conference Board that they are dispersing people or might do so are all in industries deemed by the U.S. Department of Homeland Security to be part of the nation's critical infrastructure, said Tom Cavanagh, author of a report for the organization about corporate security management since September 11.

Critical industries include agriculture and food, telecommunications, energy, transportation and financial services.

Business isn't alone, of course, in running large operations and shouldering the attendant risk of concentration. The federal government acknowledged the same risk Morgan Stanley and others face, ironically, just months before the Sept. 11 terrorist attacks.

Many companies that had big offices in and around the World Trade Center have subsequently opted for two or three smaller locations in the New York areas, but not necessarily in Manhattan, said M. Myers Mermel, chief executive officer of TenantWise, a New York City commercial real estate broker.

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