Few companies have made preparing for a potential influenza pandemic a top priority. Perhaps more of them should.

The World Economic Forum earlier this year put the adverse economic impact of an influenza pandemic at around $500 billion. That was before the recent outbreak of swine flu sickened more than 28,000 people world-wide, leading the World Health Organization on June 11 to declare its first pandemic in 41 years. While WHO officials emphasized that most of the people infected so far have experienced mild symptoms and recovered quickly, they say the outbreak could become more serious.

Much of the cost associated with a pandemic involving a more virulent strain of flu would stem from employee absenteeism. It is estimated that 15% to 30% of employees would stay home during such a pandemic due to illness, family-care responsibilities and fear of being infected at work. The result would be to cripple operations and disrupt global supply chains. As in the credit crisis, the fallout likely would spread rapidly because of how connected the world’s economies are.



Competitive Advantage

There are many benefits associated with pandemic preparedness.

The companies that can prevent absenteeism during a pandemic will be well-positioned to take market share from those that can’t—a situation that may be hard to reverse once the panic subsides. They also may enjoy higher stock prices and cheaper credit because financial markets tend to reward firms with steady profits and cash flows.

Even if a pandemic never occurs, suppliers with a reputation for being prepared may have a competitive edge. Customers care about reliability and will value a supplier with a plan for weathering an economic shock.

Being unprepared carries potential risks, even legal ones. The Sarbanes-Oxley Act requires managers and directors to manage identified risks as part of adequate corporate governance of public corporations. To the extent that identifying and assessing pandemic risk becomes a generally accepted practice within the corporate community, those who are unprepared may be found to be negligent, and therefore liable to stakeholders, in the event a pandemic occurs.

Managers can make a case for pandemic preparedness using cost-benefit analysis and such performance measures as net present value, internal rate of return and payback, or the number of years within which an investment can be recouped from net annual cash-flow savings.

Doing the Math

The benefit of pandemic preparedness is simply the earnings before interest, taxes, depreciation and amortization, or Ebitda, that are preserved because employees aren’t absent. To figure this, managers must establish the contribution employees make to profits. Some of these calculations can get complex (because costs and benefits may occur in different years), but they are relatively manageable and should be evaluated by senior management.

If the probability of a pandemic is significant and the adverse impact can be alleviated, why aren’t more companies racing to prepare?

To some, pandemic preparedness may seem like an overwhelming exercise, with legal, regulatory, ethical, logistical and economic issues in ordering, storing and dispensing prescription medication. Other firms may be experiencing a liquidity crunch because of the credit crisis, while still others may have a shortage of employees with the know-how to come up with a plan for weathering a health crisis.

Some companies may think the entire industry will suffer equally when a pandemic strikes. That’s a risky assumption, given that some businesses are known to have contingency plans in place already.

Senior managers can’t afford to ignore the issue of pandemic preparedness. Considering that employees are the key profit drivers in most companies, managers must take leadership on issues related to disruptions of labor supply.