A global recession in Q2 2020, driven by the coronavirus pandemic is a virtual certainty according to economic experts. What’s unknown is its severity and duration. Managing the extraordinary challenges ahead will place unprecedented demands on leadership, from today’s crisis response through the long-term, strategic impact.
The human, economic and business repercussions are so massive that it’s easy to become overwhelmed. Nevertheless, now is the time for robust leadership and use of established risk management principles.
A Framework for Managing Five Principal Coronavirus Crisis Risks
To help leadership manage the crisis today and going forward, The Hackett Group has developed a risk management framework that recognizes five principle risks (see image below) and related imperatives.
The Coronavirus Crisis Five Major Risk Areas
People: First and foremost, the coronavirus pandemic poses a health risk to employees and management. Within this risk area, there are six related imperatives for the crisis leadership team to consider:
- Maintain employee health: Establish and enforce policies following official guidelines, mandatory directives and emerging best practices
- Review employee paid time-off policies: Adapt absence and PTO policies to recognize the unique challenges presented by the coronavirus
- Expand virtual work: Provide any additional tool support and work-from-home guides/tutorials needed to work productively from home
- Provide backup for key people and skills: Assess the criticality of roles and put in place contingency plans in case key people are incapacitated
- Develop a leadership continuity plan: Identify of the top five to 10 critical leadership roles and ensuring successors are named for these roles.
- Establish return-to-work policies: Establish policies for people returning to work to ensure individual employee safety and mitigate company risk
Liquidity: Liquidity risk (the potential for running out of cash and inability to continue operations) should come second only to people in terms of risk priorities. This broader category can be further refined by addressing the following imperatives:
- Adapt cashflow forecasting models and processes (frequently update forecasting parameters to reflect the unfolding impact of the crisis)
- Update working capital management policies and practices (update and actively manage for all working capital components (payables, receivables and inventory)
- Maximize cash on hand (explore lines of credit, conversion of short-term assets, emergency borrowing facilities)
- Review capital expenditure budgets and commitments (triage short-term expenditures based on immediate liquidity impact. Evaluate medium- to longer-term projects that are currently underway.
- Develop liquidity crisis contingency plans (consider drastic and rapid downsizing, default, deferred payments, accessing emergency funding access and asset sales options)
Supply chain: The crisis has exposed companies to unprecedented levels of supply chain risks, including the potential for severely disrupted logistics. The five top supply chain risk management imperatives are:
- Improve visibility across the supply chain (Including product and component availability of first- and second-tier suppliers)
- Analyze and secure supply (identify and prioritize the largest disruption issues and develop contingency plans)
- Upgrade supplier risk monitoring, policies and models (update risk profiles of individual suppliers)
- Build supply chain agility (strengthen operational agility with for example surge capacity, process automation and optimized inventories)
- Adjust to demand shocks (define a realistic set of demand scenarios and plan operations adjustments to maintain financial and operational viability)
Recession: First-quarter growth may well be negative, and Q2 is projected to see the largest GDP collapse in history – and a quick Q3 recovery is unlikely. Worst-case scenarios account for a deep and long recession or even a depression. To prepare, management must recognize the following imperatives:
- Develop or update recession scenarios (including update of contingency plans and triggers in order to be able to shift direction and execute strategies as conditions unfold)
- Adapt planning models and processes (incorporate new assumption, planning horizons for financial forecasting, S&OP etc.)
- Update cost takeout plans (align with insight gained into the immediate-, medium- and long-term economic impacts)
- Reduce costs intelligently (minimize impact on longer term competitiveness and strategy execution capability)
- Review and update strategic investment plans (tie to recession scenarios)
Business Continuity: Combined, the perfect storm of risk to people, liquidity, supply chain, and recession brings the prospect of tremendous disruption of day-to-day operations. Companies need to update their business continuity plans for the immediate, near-term and medium- longer-term scenarios. The following four imperatives offer guidance:
- Fortify infrastructure (including sustaining remote workforce and moving applications and data into the cloud)
- Ensure continuity of provision of business services (e.g. GBS, finance, HR, IT, procurement)
- Update disaster recovery plan (account for new risks emanating from the pandemic and its fallout)
- Assess and mitigate BPO/ITO (including review of service providers’ disaster recovery plans)
In the months ahead, some companies will fail due to poor crisis management, lack of operational agility, weak balance sheets or forces beyond their control. But others may emerge stronger for precisely the opposite reasons: decisive and insightful crisis management, operational agility, robust balance sheets and forces working in their favor. No one knows how the future will unfold, making the ability to adapt and respond with speed of critical importance. With over a month of experience with this global crisis under their belts, senior executives should adopt a comprehensive approach that incorporates major risk areas and develop specific strategies to address their various imperatives, across all planning horizons.
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