Natural Entrepreneur: Face Your Risks, Now

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RISK COMES IN DIFFERENT FORMS

In many respects, the risks that emerging technology firms face are not very different from those of other companies. Fires, floods, hurricanes and equipment failures can affect any type of business. Too often, however, fast-growing technology companies are living on the edge. Some may be so concerned with finishing one project and snagging the next that they may overlook the need to take common-sense steps to reduce their vulnerability to costly and potentially devastating mishaps.

One of the worst risks a young company faces is an interruption in business resulting from a physical event, such as a fire or a natural disaster.

An office fire can wipe out months of data in a matter of hours. Last year, a cleaning crew stole property from a small West Coast software company and other tenants in the same building. When the thieves realized security cameras had captured them on videotape, they set the building on fire. While insurance paid the technology company $100,000 for the property that had been lost and covered a portion of its lost business income while it struggled to get the business going again, much of the firm’s existing projects and intellectual property was lost and its reputation with customers was damaged.

Stolen hardware is another common risk technology companies face. The cost to replace stolen hardware costs technology companies almost $250 million a year, according to a study conducted by RAND, the nonprofit research institution. When RAND calculated indirect costs—including subsequent increased security efforts and missed sales—losses swelled by another $1 billion.

The RAND study found that 70 percent of reported hardware losses occurred while technology equipment was in transit. Manufacturers and assemblers of computers, computer peripherals and other communications equipment may be especially vulnerable to losses during shipping but, in fact, all emerging technology companies face this risk. Consider the example of a software firm in the Southwest that shipped a $100,000 server to a third party to be upgraded. The server never made it; it was lost in transit.

Stolen laptop computers continue to be a thriving trade. Today’s thieves are just as interested in the information stored on the laptops as in the hardware itself. While laptops are often stolen one at a time, more devastating losses occur when multiple laptops are stolen right off the desks of employees. This carelessness translates to financial loss for firms: according to the 2002 Computer Security Institute/FBI Computer Crime and Security Survey, companies lost an average $89,000 due to laptop theft. While the physical loss of computers and laptops can create a financial hardship, cyber crimes caused even greater financial losses. Companies reported losing on average $283,000 as a result of attacks by computer viruses.

In addition to physical losses, emerging technology companies are vulnerable to claims of “technology malpractice.” Frustrated with what they perceive as unmet promises, disgruntled customers of technology companies are increasingly turning to the legal system for compensation to cover financial losses incurred due to missed deadlines by their IT contractor and/or disappointing product performance. Such disputes, often resulting in lawsuits, typically claim negligence in maintaining acceptable professional standards or breach of contract for failing to perform services within the time frame and terms of the contract.

In one example last year, the customer of a small Internet service provider (ISP) claimed that it lost the right to its Internet domain name because the ISP failed to properly handle the transfer of its name and Web address. The customer sued for $50,000, a stunning blow for an ISP with annual revenues of only $300,000.

Technology errors and omissions claims and litigation is a growing problem for companies large and small, but emerging technology companies seem particularly vulnerable to certain traps. Smaller companies hungry for a lucrative contract may oversell their capabilities or underestimate the complexity of the projects they are bidding on. On Web sites, in brochures and during sales presentations, a sales representative may overstate the firm’s experience, capabilities or ability to complete projects better, faster and for less money than its competitors. Such puffery can come back to haunt a company when a project doesn’t meet the client’s expectations.

Finally, emerging technology firms often work with clients who are many times larger then they are—giving the client the upper hand in negotiations. In such instances, some emerging technology companies may be willing to sign a customer’s contract instead of their own standard contract. And, too often, they do so without first consulting their own lawyer to make sure their company’s interests are adequately represented. In one example, an emerging technology company signed its customer’s contract, which assigned all responsibility and liability for any problems to the small company—putting it in a compromising position.

In Part 2, we will discuss what actions you can take to protect your physical assets.

Sandy Page is a Senior Account Executive at USI Insurance Brokerage in Manchester, NH. Sandy can be reached via email at Sandy.Page@usi.biz
Direct phone: 603-665-6139 or 800-639-4761 Ext. 6139. www.usi.biz

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