July 2020 Issue
Business resilience has perhaps never been more important. It allows companies to adapt quickly to disruptions, maintain continuous business operations and safeguard people, assets and brand equity. Resilient organisations are best placed to survive an economic slowdown and ride out uncertainty.
With a bleak economic outlook, many companies have realised that having a resilience plan in place can help shore up cash flow and protect the balance sheet, as well as set them apart from competitors.
While business resilience is often confused or conflated with business continuity, it requires companies to take a holistic approach to the risks they face and devise ways of removing or mitigating them. It should encompass a host of important areas, including business continuity, cyber security, crisis management and disaster recovery. Business resilience aims to break the siloed mentality that has traditionally separated these areas and bring them together for the greater good of the company.
The toughest test
Of course, the importance of business resilience has been brought into even sharper focus by the COVID-19 outbreak. The pandemic has had a catastrophic effect on people, businesses and economies around the world.
In Q1 2020, the US economy contracted at its fastest rate since the financial crisis over a decade ago. As personal spending fell, exports declined and companies slashed investments, US gross domestic product (GDP) dropped at an annualised rate of -4.8 percent, according to the Bureau of Economic Analysis, worse than the 4 percent anticipated. That means GDP contracted by roughly 1.2 percent on a quarter-on-quarter basis. Q2 is expected to see the economy shrink by 35 percent.
And with almost half the global workforce – 1.6 billion people – in “immediate danger of having their livelihoods destroyed” by the economic impact of COVID-19, according to the International Labour Organisation, it is clear that the operational and business resilience of many companies will be challenged drastically in the coming months, and beyond.
Whether companies can weather the storm caused by COVID-19 will depend largely on business resilience planning and execution. A strategic, systematic approach to strengthening the resilience of a company’s business model is key. Financial resilience is critical, of course, but endurance also depends on an organisation’s governance, culture, strategy, risk and crisis management posture.
Ultimately, resilient companies increase their chance of survival during COVID-19 – which will test to the limit their ability to maintain operations – and also gain an advantage in the post-crisis economy.
According to Morgan Swink, professor, Eunice and James L. West Chair of Supply Chain Management at TCU Neeley Business School, the value of resilience planning for a global economic slowdown, like the one induced by COVID-19, varies tremendously across industries. “If you look at the last recession, industries that produce durable goods and discretionary items, such as cars and hotels, suffered much more than industries producing staple goods, such as food,” he says. “The same is happening now. If a firm’s demand is highly tied to disposable income, or a firm’s cost structure is highly fixed, then resilience planning is extra important.”
As in any crisis, preparedness and planning is essential in order to respond effectively. But businesses across most industries appear ill-equipped to deal with COVID-19 conditions and have been forced to play catch up.
“Financial resilience is critical, of course, but endurance also depends on an organisation’s governance, culture, strategy, risk and crisis management posture.”
The COVID-19 crisis has disrupted global supply chains which, given the interconnected nature of today’s business environment, has resulted in significant loss of revenues. Comprehensive business resilience strategies require detailed planning and consideration, something which many companies have overlooked. “My belief is that few businesses have invested in supply chain mapping, scenario planning or other resiliency planning activities,” says Professor Swink. “It is hard for many of them to justify the resource investments given the large uncertainties involved.”
“Exacerbating the problem is the dominant move toward ‘lean’ supply chains over the last three decades,” he continues. “Companies have consistently sought to link and synchronise process up and down the supply chain, and to drive out excess capacity in the name of efficiency. The challenge with building such lean structures is that they lack flexibility. In particular, it is very difficult to scale operations up and down because of the dedicated and integrated resources and processes a lean approach demands.”
COVID-19 changes and lessons learned
The unprecedented nature of the COVID-19 outbreak, and the speed at which it spread, caught many companies off guard and left their response initiatives wanting. Historically, companies have been primarily concerned with the ‘here and now’, and thus overlooked resilience planning. Such efforts may be considered a drain on their resources, an added expense that rarely provides adequate return on investment (ROI). In light of the human and economic losses caused by COVID-19, this may change, particularly in the short term.
Prior to the COVID-19 outbreak, it was relatively difficult to attain buy-in at the C-suite level – and in turn secure the necessary funding – for business continuity and resilience planning. The ROI for such initiatives is hard to measure and almost by definition has no set timeline to prove its worth.
Although COVID-19 may shock companies into enhancing business resilience, the financial requirements may see them revert to short-sightedness in the long run. “I expect that there will be an increase in demand for resilience planning services once things return to normal,” believes Professor Swink. “But I doubt that demand will ever stay strong due to the perceptions regarding ROI.”
However, by calculating the overall cost of a business resilience programme, the probability of a disruptive event occurring and the amount of revenue at risk, companies can attempt to win the support of the C-suite and change perceptions around resilience and continuity, helping executives to reframe it as an investment rather than a speculative shot in the dark.
Though it may be easy to be wise after the fact, the way companies responded to the COVID-19 outbreak will yield valuable insights. While no two crises are the same, there will be lessons to learn which will stand companies in good stead for future disruptive events. “Hopefully, companies will learn about the value of scalability, flexible organisational structures and reconfigurable resources,” says Professor Swink. “These are more expensive than alternatives but provide option value in that they inherently create more resilient operations.
“There are also many implications for supply chains,” he continues. “I think companies will adjust their calculus regarding global sourcing, investment in fixed assets and types of labour development. They will also probably look to analytics to provide earlier detection and warning of future events. This may mark a real turning point in positivity toward the value of resilience planning, or executives might fall back into complacency, especially if things recover fairly rapidly. We will see.”
Naturally, business resilience varies from company to company. Some can survive in adverse conditions by leaning into their essential status, hiring more employees and expanding their operations. Supermarkets and delivery services, for example, have found themselves in this category during COVID-19. Technology providers have also benefited by providing software or hardware to support the mass migration to remote working as a result of lockdowns imposed in numerous countries.
Other companies, such as manufacturers, have been able to pivot and produce essential products, such as hand sanitiser, ventilators or personal protective equipment for frontline health workers, by converting their production lines and reapplying their skills accordingly. Companies in the food service and hospitality sector have had to reinvent themselves during the crisis, with many now operating on a delivery-only basis, or selling directly to consumers.
Building operational resilience for a post-COVID world
A business resilience plan can provide companies with powerful tools to reduce harm caused by adverse events. It is vital that companies take appropriate action to protect as much of the business as possible and swiftly begin the process of recovery. The plan should coordinate different elements of the company’s operations to ensure personnel can respond to the crisis, preserve ongoing workflow and resume any disrupted productivity processes. This goes far beyond simply having cash reserves on hand.
“Conventional resilience planning typically addresses potential disruptions or shocks to specific areas of a supply chain or specific market,” notes Professor Swink. “This is because most disruptions are envisioned as fairly localised events, such as natural disasters, weather related events or labour actions, that have ripple effects. Some planning addresses economic cycles, such as the last big recession, but mostly companies have simply hoarded cash and limited their capital expenditures. These moves have created buffer resources but have done little to actually create ‘resilient’ organisation and resource structures.”
Even in normal circumstances companies need to overcome challenges when designing resilience plans. It can be difficult to justify dedicating resources to building capabilities that might never be needed, when investments in research and development (R&D), marketing and brand building, for example, appear to promise much better returns.
One starting point is to conduct a business impact analysis, whereby companies seek to define and understand how, and the extent to which, an external disruptive event, like a pandemic or natural disaster, may negatively impact everyday business operations. The analysis should lead to a clear outline of action items the business can implement in response to disruptive events, including ‘black swans’. In conjunction with a risk assessment, a business impact analysis can directly inform business continuity planning.
A lasting influence
Undoubtedly, COVID-19 will influence business resilience planning going forward. For a start, there is a strong argument to suggest that future pandemics are inevitable.
Companies should look to establish pandemic planning and coordination units within their enterprise risk management (ERM) departments. The unit should be able to call on medical, communications, IT, telecommunications and security expertise to kickstart a company’s pandemic response. It should also identify the various risks relating to employees, processes, systems, operations, supply chains, technology, and so on, that the company is likely to face, with action points on how to overcome them. Pandemic planning should focus on maintaining core business operations, ensuring knowledgeable, competent and trained staff are available and able to keep the firm afloat.
Another expected legacy of the outbreak is its role in accelerating digitalisation across organisations. According to McKinsey, although these processes were already underway for many companies, they are likely to pick up pace post-COVID-19. “We expect digital technologies to be at the core of the next normal, enabling organisations to better meet the needs of their customers, and improving the agility and responsiveness of operations without increasing their costs,” says McKinsey. “Research by the World Economic Forum, in collaboration with McKinsey, shows that companies often achieve significant and simultaneous improvements across multiple performance measures when they integrate advanced digital technologies across the value chain.”
Throughout the lockdown period, some organisations have been able to circumvent staff shortages by adopting automation processes or developing self-service systems for customers. These processes can reduce errors, increase productivity and boost enterprise value, and are largely popular with customers. Given the upsides, certain processes may be retained in the post-lockdown ‘new normal’.
Companies are also developing lockdown exit strategies to help them restart operations once governments relax or lift restrictions. Companies will need to deal with the aftermath and continue to prioritise staff wellbeing. This will include deciding if and how staff can return to offices, conducting site visits and ensuring social distancing protocols can be observed. It is unlikely that many businesses will resume where they left off with the same working habits and customer service practices. Going forward, companies must be more agile and flexible if they are to tackle post-lockdown challenges.
McKinsey also suggests that the crisis will shift focus toward retraining staff and transitioning them to other business areas. The lockdown has already seen some companies expand the skill sets of their employees and encourage people “not fully occupied by the crisis response to participate in remote learning and coaching programs. Postcrisis, organisations will need to ramp up their reskilling and upskilling programs significantly to develop a workforce with the capabilities needed to run their next-normal operations”.
Given the nature of the COVID-19 crisis, we will not know the full impact on human life or the global economy for some time. Until a vaccine is readily available and life begins to return to normal, companies must be prepared for the worst. In the meantime, they should develop emergency response protocols and map their risk and operational awareness in preparation for the next crisis.
Business resilience planning enables companies to adapt to a ‘new normal’ when disruptions occur, maintaining business operations while protecting their employees, data, revenues and reputation. Ultimately, however, it is best done in calmer times. It is not ideal to examine risks and develop contingencies in the middle of a crisis, when companies should be relying on them. Survival may depend on advance preparation.
© Financier Worldwide
BY
Richard Summerfield