The COVID crisis is significantly challenging companies’ resilience i.e. their ability to face the crisis. It largely depends on their level of preparation. Although current issues management is the priority, a post-mortem analysis should drive to review and reinforce the company’s risk management policies.
FP&A teams should be highly involved in such review or be in the driver seat. This can lead to several actions:
- Potentially widening and redefining the risks that the company may face
- Strengthening the associated risks indicators or dashboard
- Reviewing and strengthening the actions and contingency plans
- Revisiting the ability to survive a given level of crisis impacts and then defining the thresholds that shall trigger the different plans including chapter 11 (or worse) type.
The events mentioned in this article are outside the range of events that would be typically managed through scenarios planning i.e. defining a few different outcomes from business as usual in uncertain conditions.
As exemplified by the current crisis, the level of preparation is key in order to timely take the relevant decisions and actions and to limit the potential consequences. The cultural agility of a company is obviously a huge factor in managing a crisis - nevertheless, it is still better to be prepared than to be reacting. Although this is a top management responsibility, FP&A plays a key role in defining and implementing such policies and plans.
In this article, risk and crisis are considered as the result of any event that (would) generate impacts on revenues, profits or cash. The origin of such events may be industry/company-specific or due to environmental, regulatory, political or sanitary circumstances. It may be direct impacts or coming indirectly through events that impacts customers or suppliers.
Each type of the risk needs to be correctly identified even if its eventuality and amplitude are unclear or unknown at this point.
Risks indicators or dashboard:
A company should track information that is relevant to its different risks and build indicators and dashboards that are reviewed on a regular basis. This shall be an integral part of the company competitive and business intelligence research. It may be more or less sophisticated depending on the type of risk.
When an indicator turns from “green” to “orange” then “red”, this would trigger changes in the frequency and details of the reviews in order to precise the potential importance and timing of the risk’s impacts.
Actions and contingency plans: What if ... happens?
Preparing actions and contingencies plans for each risk identified is too often considered to be a waste of resources. If a risk indicator is “green”, low or distant, this creates a false sense of security. Unfortunately, in this case, companies tend to override caution and deny the need to prepare a plan.
Therefore, plans should be defined even if the risks are not truly active. In fact, if for each risk those plans need to identify potential consequences and reactions, in most cases they come to the same what-if questions. What if an event …
- triggers a major drop of revenues?
- causes a major drop of margin/profit?
- leads to a major drop of financing and cash?
- hinders the ability to obtain strategic supplies?
- negatively impacts the ability to produce and/or deliver my services or products?
- hinders the ability to function?
Those different “what-ifs” may be cumulative (i.e. happen together) or not. They can be modelized around few companies and industry-specific meaningful level and duration.
It shall be kept in mind that a crisis may generate opportunities. Not all companies are “losing” in the current crisis. There are also companies that consider it as a big opportunity (pharma, home working features but not only) or a way to mitigate their risks through temporally redirecting their productions (masks and other items are in high demand due to the crisis).
Ability to survive and thresholds:
Sensitivity to crisis depends on two factors:
- The expected impacts that are a combination of the duration of the crisis or risk impacts and their importance.
- The maneuver margin of the company i.e. its resilience. For a given level of impact, not all companies are equals. Depending on their financial strength companies have different abilities to survive potentially taking benefits from a crisis.
FP&A should keep a permanent assessment of this resilience and potentially promote plans to improve it. Unfortunately, the push to maximise profit and optimise resources utilisation in order to develop shareholders values have fragilized many companies and largely reduced their ability to face major crisis (regardless of its origin). Even companies that can be considered as strong in a business-as-usual environment can be extremely fragile in front of major crises (e.g. financial sector in 2008 or airlines and tourism currently).
The industry type is of course a component of it. High price competition in high capital-intensive industries are naturally more exposed (lower resilience) than low price competition in low capital-intensive industries (higher resilience). Yet, company history and financial structure also largely condition its situation.
FP&A shall be in position to determine few thresholds that will trigger the importance of the plans to be put in place to ensure company survival or potentially determine when chapter 11 type actions shall be taken.
In conclusion, on top to the current digital and process transformation, FP&A teams are facing a large post-mortem activity when the crisis intensity decreases in order to prepare their company for the next crisis to come. The post-mortem analysis covers assessing the company's resilience situation post-crisis, defining and implementing plans to improve it as well as reviewing and improving risk management policies and plans.
Wherever the next major crisis comes from, it will happen in the next 10-15 years and probably one or two less material ones will take place in the meantime. Get prepared.