Stormy Weather: Getting Back to Business After the Worst Hurricane Season Ever
by Paul Sweeney

Hurricane Katrina is likely to stand as an epochal event—a storm for the history books. Long after Mardi Gras returns to The Big Easy and gambling casinos reopen in Mississippi, Hurricane Katrina and the New Orleans Flood of 2005 will likely take their place alongside the Chicago Fire of 1871 and the San Francisco Earthquake of 1906 as legendary U.S. disasters.

While lessons from these calamities may not easily be applied to this one, academic research that addresses business challenges can offer valuable lessons about the repercussions of the hurricane, even as the monumental tasks of cleanup and reconstruction continue in New Orleans and Gulf Coast communities.

The challenges caused by the storm—from dysfunctional organizational behavior by the Federal Emergency Management Agency (FEMA) and faulty supply chain management practices to spiking fuel costs and infrastructure pitfalls—may have opened our eyes to what systems need fixing in the wake of an emergency. The widespread evacuation of Houston and improved cooperation among governmental bodies witnessed during Katrina’s sister hurricanes, Rita and Wilma, showed the seriousness with which people react to these events when memories are raw. In a season that has seen a record-breaking number of storms, researchers at The University of Texas at Austin provide insights into some of these issues.

Confusion Reigned in the First Few Days

For Michael Coatney, BBA ’80, MBA ’84, Katrina’s epic strength was all too real. Coatney is the CEO of Acme Truck Line, a privately held trucking company headquartered in the New Orleans suburb of Harvey. He is still dealing with the effects of the storm—including higher fuel prices, lost business records and displaced employees—several weeks after Katrina rolled ashore.

In the immediate aftermath, confusion about how the city’s telephone, computer and highway systems would be repaired paled alongside the food and housing crisis experienced by thousands of residents, including some of Coatney’s employees, who ended up leaving their homes and their jobs for good. Assistance from FEMA was slow in coming, largely because of confusion and disorganization within and among governmental agencies.

The distrust among organizations that characterized the failures of FEMA to work well with state and local officials during and after Katrina, as well as FEMA’s inability to coordinate with volunteer groups, was not a new phenomenon, according to Janet Dukerich, William H. Artlitt Professor of Management and the department’s chair at the McCombs School of Business.

She observes that the managerial dysfunction shown by FEMA, which paralyzed progress, parallels the difficulty with which the military branches are able to coordinate with each other. A similar communication breakdown occurred between the Federal Bureau of Investigation and the Central Intelligence Agency before the terrorist attacks on the World Trade Center and the Pentagon on Sept. 11, 2001. Even the New York Fire and Police Departments experienced disastrous problems in working together on that fateful day.

“These inter-agency rivalries make it hard for people to share information and they can have disastrous consequences,” says Dukerich, who is an expert in organizational behavior.

“I don’t think it’s that people are stupid, but the fundamental problem is that the agencies don’t have incentives to cooperate.”

Probably the best way for federal, state and local people to work together in a crisis, along with such organizations as the American Red Cross, Dukerich says, is to build personal relationships among the different organizations ahead of time. If not, each group will insist on observing its own procedures, which often results in everyone working at cross-purposes. “That’s why it’s important to have coordination meetings and inter-agency contacts where people can put names to faces. If you can establish enough trust relationships across the agencies, you’ll see more people pulling together,” Dukerich says.

Fuel Prices Take a Toll

The immediate aftermath of the storm saw price spikes for refined fuels—gas prices surpassed $3 a gallon for the first time. But despite these higher costs, the worldwide production of oil remains robust and the U.S. economy is increasingly more fuel-efficient, says Ehud Ronn, finance professor at the McCombs School. “Put me down as a cockeyed optimist,” he says, “but I expect prices of crude oil to come down.”

Because the Gulf Coast accounts for a quarter of U.S. oil-refining capacity, concern that damage to offshore oil rigs and refineries from both Katrina and Rita would cause crude oil prices to continue their precipitous rise dominated headlines for weeks. However, as refineries have come back online, fuel prices have tapered off. Though fuel prices—including heating oil and natural gas—are still much higher than they were a year ago, Ronn believes global factors, such as oil output in the Middle East and Venezuela and demand in China, outweigh what he describes as “short-term uncertainty” occasioned by the storms.

Given the drastic and widespread effects of Hurricane Katrina on the energy industry, Ronn points out one important lesson learned from this storm: “the desirability of diversifying our national reliance on the Gulf as a source of crude and refined products.” Even as this might be a smart move, Ronn is not optimistic that it could happen any time soon—building new facilities takes time and regulatory obstacles may pose an insurmountable challenge.

Supply Chain Breakdown

Following Katrina and during the preparations for Rita, it wasn’t prices so much as the very availability of gasoline that caused problems. Empty gas stations along Rita evacuation routes stranded thousands of Houston-area residents as they tried to get out of Hurricane Rita’s projected path. And FEMA’s purchase of all the available diesel fuel in the days after Katrina hit left one regional grocery chain unable to move goods into supermarkets for several days. Such unexpected bumps in the road can put even the best laid plans to the test.

Among the untold stories were the astute businesses that had prepared for a disaster and had backup systems that could pass the hurricane test. Coatney, for example, acknowledged that contingency planning and backup systems provided some relief and assured his company’s survival even as the communications infrastructure and delivery systems on which his business depended were overwhelmed and disrupted.

Coatney’s Acme Truck Line, which earns $118 million in annual sales revenue, depends on the Internet to connect independent, short-haul truckers with customers. When the levees broke and deluged the Bell South computers on which Acme relies, however, that knocked the company’s nationwide information systems out of commission for several days.

To restore the Internet hook-up, the company’s information technology team hopped a plane to Philadelphia where its backup computer network was located. But while their software got the system up and running again, the data lagged the company’s actual state-of-play by a week.

“We had a system that backed up our records weekly,” Coatney said. “Now we’re paying extra money to get everything backed up hourly.”

When it comes to catastrophic events, “there’s only so much you can plan for,” notes Doug Morrice, an expert in supply-chain management and professor of information, risk, and operations management at the McCombs School. A case in point: high water also swamped the U.S. Postal Service, submerging some $6 million in paper checks owed to Coatney’s company, many of which are lost forever. “Even when you have processes in place,” says Morrice, “there are going to be things you don’t foresee. Sometimes you just have to take a hit.”

The success of companies like Wal-Mart and Frito-Lay, which own and operate their own in-house trucking fleets and are known for their state-of-the-art warehouse and distribution systems, puts a solid dent in the popular view that companies should outsource all but their “core competencies.” Such “asset-light” companies, especially popular in the era of the Internet, often found themselves depending on the kindness of strangers, while Wal-Mart, Frito-Lay and others who maintain robust supply-chain operations “didn’t leave anything to chance,” Morrice says. “This gave them a competitive advantage.”

Permanent Evacuations

Perfect plans and quick systems recovery may not be enough for all area businesses to get back on their feet. Many of the people who make businesses run—both workers and customers—have largely left the New Orleans area. Acme Truck Lines is no exception: everyone at Coatney’s Jefferson Parish company is safe (most evacuated temporarily), but many employees are essentially homeless, living in temporary quarters, much of it supplied by the company. And about 10 staff members of Acme’s 70-person headquarters work force are not coming back.

“People who went to Missouri, Oklahoma and other states said to me, ‘My house is gone, my kids can’t go to school and I don’t want to deal with storms any more,’” he says.

But as time passes and communities rebuild, people are returning, echoing a broad consensus among experts that New Orleans itself remains a key cog in the U.S. and global economies—“its ports are critical suppliers of bulk oil, chemicals and grains,” explains Danny Reible, the Bettie Margaret Smith Chair in Environmental Health Engineering at UT Austin—and that it is imperative that both the city and the region not just survive but prosper.

Kara Kockelman, an associate professor of transportation engineering, adamantly advocates that New Orleans be rebuilt and hopes that the Army Corps of Engineers and others in charge of rebuilding learn from other disasters. “I hope the city comes back a lot smarter,” she says. “We know a lot more about (siting the) location of structures and how to build today than we did 150 years ago, when a lot of the city’s housing went up. So zoning and permitting of buildings is going to have to change radically in that city.”

Lessons Learned and Moving Forward

An estimated $250 billion of taxpayers’ money will ultimately be spent in the reconstruction effort by the federal government. Key to drawing displaced people back to the city and returning luster to New Orleans, argues economist Michael Brandl, a lecturer in the McCombs Department of Finance, is for political and business leaders to practice far-sightedness and practicality.

That means not only taking a longer-term perspective in rebuilding New Orleans’ infrastructure—a fundamental necessity if there is to be sustainable economic development—but also steering clear of grandiose conceits. His worst-case scenario: any attempt to transform New Orleans into a glitzy “Hollywood South.” Under this scenario, young and highly educated people would flock to the city to work in a budding film, television and entertainment industry.

But past experience, Brandl says, shows that such ambitious schemes are most often non-starters. Instead, Brandl advocates longer-term planning and emphasis on “unexciting—but extremely necessary—things,” such as safe streets, clean water, sound primary education, access to technical training, well-maintained streets and highways, corruption-free public services, efficient government bureaucracy, relatively low taxation levels and some form of public transportation.

“Often, those communities that are economically successful,” he adds, “are the ones that do the best job at providing basic public services. It’s not very sexy, but that’s also what we depend on in emergencies.”

Yet New Orleans remains an endangered city. As Danny Reible, the Bettie Margaret Smith Chair in Environmental Health Engineering at UT Austin, sees it, the city’s very survival depends on a reconstruction plan that also embraces both sensible development and environmental preservation. Rescuing the city and the region, however, will entail “significant redirection of much of the sediment that currently flows out of the Mississippi River,” he asserts. “Southern Louisiana is sinking by 0.5 centimeters per year, on average. The failure or inability to restore wetlands and barrier islands and stabilize land subsidence will mean that all of Southern Louisiana will effectively disappear within 75 to 100 years—even without any storms.”

Daniel Hamermesh, the Bernard Rapaport Professor of Economics, acknowledges that we’re fortunate not to be living in the 19th or early 20th centuries. For all of the errors and snafus, “it’s a much different world today,” he says. “Our transportation and mobility is high and we have far greater ease of communications. We should be able to fix things.”

Even if New Orleans is remembered in the same breath as the Great Chicago Fire or the San Francisco Earthquake, Coatney knows that life—and business—keeps going in the calm after the storm.

Although several customers went out of business, Acme’s truckers are rolling at top speed—ferrying urgently needed materials for surviving suppliers to the battered petroleum industry. “If we can make it through this,” he says, “we can make it through anything.”