As the initial shock of the COVID-19 pandemic recedes, organisations need to focus on long-term strategy for recovery and work through the business and financial impact, writes Peter Deans, founder of 52 Risks.
For many organisations, surveying the business landscape following the COVID-19 pandemic’s rapid spread across the globe will be akin to a homeowner looking out the window the morning after a cyclone has passed. There is widespread destruction impossible to have imagined, an overwhelming sense of loss and despair and the wondering what do we do next.
To date, evidence suggests many businesses have coped as well as can be expected with the COVID-19 pandemic crisis. The immediate business imperatives of ensuring employee safety, ensuring critical business functions and activities continue, and preserving cashflow have been addressed. Unfortunately, many businesses have closed and may never open again. These will be suppliers and customers of many other businesses. Supply chains will have been significantly impacted and many business models are likely to be changed forever.
Where to from here is the challenge for business owners, directors and managers as society moves into the next phase. The progressive lifting of the range of restrictions put in place will need detailed planning sessions on how to progressively return to normal business operations, if possible. Industries such as tourism and aviation will take longer.
Many businesses will be able to reopen and recommence trading over the balance of 2020. In periods following hurricanes, cyclones, flooding and bushfires, the economic health of regions returns to something approaching normal over time. However, the return to normal following this crisis will probably take longer and look different from physical events.
Directors and managers need to turn their minds to the medium to longer-term implications. There should be three distinct areas of focus:
- Assess the business impact — customer, product demand, supply chain and operations impact.
- Assess the financial impact — on a business from the overall short, medium and long-term impact of the COVID-19 crisis on the economy and financial markets.
- Form a longer-term strategic view — looking at the overall business portfolio and, potentially, looking for opportunities.
Business planning always involved dealing with uncertainty. How much will business activity and revenue return to previous levels? What trade-offs do we need to make between financial performance and business resilience? How optimistic should we be?
Through an iterative process, consensus will be formed on key business, economic and financial assumptions. This exercise will probably not be one for unbridled optimism.
A detailed assessment of business impact will need to be undertaken. Businesses will need to make an assessment as to what an extended period of lower demand looks like, compared to pre-crisis. This assessment should also consider scenarios for ongoing operational and/or extended supply chain disruption. Choices will need to be made on interim and future operating models (see scenario planning breakout opposite).
Businesses with operations in Asia, and those heavily reliant on outsourced manufacturing or supply chains in Asia, will have already looked to address potential delays and interruptions to normal activities. There will also be a need to assess the financial impact of the pandemic on outsourced suppliers and business partners more broadly. Organisations may find a supplier or business partner has gone out of business during this period.
Business will also need to be cognisant of changes to their broader operating environment. Some retailers, for example, may choose not to return to the previous operating model, which may have comprised a mix of online and bricks-and-mortar sales. A decision to move permanently to only online sales will impact all those in the commercial real estate value chain — landlords, property management services, logistics groups and labour suppliers.
In periods following hurricanes, cyclones, flooding and bushfires, the economic health of regions returns to something approaching normal over time. However, the return to normal following this crisis will probably take longer and look different from physical events.
Concurrently, an assessment of the financial impact also needs to be undertaken. This will involve detailed financial modelling and scenario analysis to understand the potential impact. This analysis will need to encompass profitability, working capital, cash flow and liquidity. This will not be a time for building an optimistic base case. It is not yet clear what the long-lasting, economic impact of the COVID-19 crisis will be. For a business that has been significantly financially weakened during this period, a realistic and robust base case will need to be developed.
In the short and medium term, business activities will need to be critically assessed for their financial viability and the allocation of potentially scarce financial resources. Many organisations will have already curtailed non-essential capital expenditure. A reassessment of all major projects may need to be undertaken. A strong business case that may have previously existed may no longer meet the investment return hurdle.
For some businesses, a review of the equity and debt structure will be necessary. Financial leverage sustainable before the crisis may no longer be so. Even if there is no immediate liquidity or cashflow crisis, directors and managers need to consider the medium to long-term financial resilience of the business.
Businesses will continue to be exposed to other external shocks, not just pandemic. The ability of financiers, investors and business partners to meet future financial commitments should be assessed. During the global financial crisis there were many examples of the consequential impact on businesses of a key partner getting into financial difficulty and not being able to meet previously pledged commitments. While the action taken by policymakers has been prompt and supportive of the continued flow of credit, over time there may be less credit available for many businesses and industry sectors.
Time will also need to be set aside for a longer-term strategic view to be formed. Levels of business activity may take years to return to pre-pandemic levels. Returns from many business lines may no longer be adequate to warrant the capital invested in them. Organisations may need to make the difficult decision to cease operating in some markets (customer segments, products and/or geographies) resulting in the sale or closure of some businesses.
It can be difficult in these periods to identify opportunities. For many businesses, rebuilding and survival are the sole priorities. There was the temptation for many businesses to make long sought-after acquisitions of competitors and attractive, adjacent businesses during and after the GFC. For financially strong organisations, this can be a successful and profitable strategy in the long run. However, there were many examples during and after the GFC of less than successful opportunistic acquisitions that left the acquirer with significant debts.
For businesses that have seen first-hand the adverse impact of excessive reliance on a particular market, this will also be a catalyst to reassess strategy and potentially reshape their businesses. This episode will be a wake-up call on the need for diversification for many businesses. Now may be the time to sensibly progress strategic initiatives to diversify revenue streams.
Peter Deans is founder of 52 Risks, director of Notwithoutrisk Consulting and The RegTech Association, and a former chief risk officer.
Need for speed
Scenario planning must be done rapidly if companies are to get a handle on the current crisis. By Narelle Hooper MAICD
“Perfection is the enemy of the good. Speed trumps perfection... The greatest error is not to move. The greatest error is to be paralysed by the fear of failure.” World Health Organization executive director Dr Michael J Ryan’s speech, citing lessons learned dealing with Ebola, has become a mantra for many directors.
The need for speed in decision-making has prompted many boards and leadership teams to cut through the usual familiar processes to hold regular virtual meetings during the crisis response. Many chairs report they are checking in daily with CEOs. Boards are also asking management to run scenarios so they can consider the levers potentially needed to help ensure survival or to pivot for opportunity.
Dr Amanda Rischbieth FAICD, chair of the National Blood Authority and a Harvard Advanced Leadership Fellow 2017, who conducted the first of AICD’s COVID-19 webinars, says scenario planning needs to be dynamic to factor in the rapidly changing nature of events and importance of focusing on people’s health and safety. She outlines three scenarios organisations can use to assess the situation.
Best case sees minimal sickness/absenteeism and disruption lasting a few weeks.
Medium case is for disruption lasting several months with 10–20 per cent escalating staff absenteeism and skill loss; reduced productivity; supply chain loss/delay; reduced cashflow/revenue forcing the need to pivot; remote/home worker challenges; data-streaming limitations, psychological impacts and increased anxiety.
Worst case is for four to eight months or longer of business interruption with more dramatic impacts for an extended period. This could mean 20–50 per cent absenteeism, absence of key personnel, downsized teams and pressure on residual workers — plus anxiety and health impacts across the business/within families. There would be reduced productivity; loss of customers/unpredictable markets; cashflow, revenue, liability and solvency pressures. There would be compounding impacts such as IT risks from decreased bandwidth or functionality, and cyber threats if working outside secure systems.
“You need to think about your business,” says Rischbieth. “Is there something you take for granted? And what would happen if it stops — for example, if the power fails, if we lose the internet? What are the things we rely on that we may not have considered?”
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