The what and how to corporate risk management in an unpredictable and volatile world- Part 1
This is the first blog post of a two-part series that investigates how to kick off corporate resilience during times of unpredictability/ crisis and volatility.
We live in an unpredictable and volatile world where resilience is a critical prerequisite for corporates.
The recent Ukraine invasion and sanctions imposed; COVID-19 pandemic has created shock waves to the NHS and other with dire consequences. The crisis has demonstrated the sensitivity of the UK to demand shocks as well as industry vulnerabilities to supply chain disruptions. Moreover, the pandemic spread in an environment defined by accelerating climate change and the increasingly urgent demand to reduce greenhouse-gas emissions. To add further insult to injury, business challenges, Brexit, societal uncertainties and geopolitical tensions have been added to the mix. Lastly, disruptive events include the spiralling cost of living, digitisation, cyberthreats, inflation and interest rate rise. The pace of change has made disruptions hard to predict as they grow in severity and frequency. Companies in all industries thus need to plan for the unexpected and build up their response capabilities in advance.
“Like many crises, the pandemic revealed hidden vulnerabilities and weaknesses in their response capabilities.”
Examples of resilient responses I have witnessed and been involved in from a senior finance perceptive to the immediate pandemic driven challenges include ¹:
Operational and supply chain
Many companies enabled digital solutions, including advanced analytic, to supply chain issues from the beginning of the crisis. A client of mine improved the reliability of its supply chain by moving toward predictive maintenance of its assets (worth £6bn); another applied RPA technology to monitor and identify unusual sales ordering patterns. As the crisis evolved, cargo demand surged and ports became congested. Another client took bold measures by shifting some of its operations from their shipping and bulk carriers to lease their own containers and charter ships.
Technological
Cyberattackers have been taking advantage of security vulnerabilities created in the shift to work from-home during the pandemic. In response, many corporates have strengthened defences by eliminating gaps before hackers can compromise networks. One client made significant investments in their capabilities, hiring experts; whilst corporate tech giants have also acquired smaller cybersecurity entities.
Organisational
At the beginning of the crisis, remote-working arrangements needed to be scaled and implemented for office work, while on-site workers needed appropriate safety measures, including testing and protective equipment. The remote workforce required a new cyber strategy, extending the security shield into the remote endpoints in employee homes and new locations. CxO’s then explored avenues to prevent the fragmentation of culture, maintain high performance and support the health and well-being of the remote workforce.
Beyond these actions, few companies have adopted a comprehensive strategic plan to meet the challenges of the next disruption over the horizon. Whilst this is what needs to be done, if they need to counter-balance crises and accelerate into the new crisis-defined scenarios. The maneuverer must be proactive, based on a business perspective, exceeds a reactive stance as a second line-of-defence approach to unpredictability. Building resilience into strategic decision making, needs leaders to develop certain cross-functional capabilities and strengthen resilience in several strategic areas and enlisting the help of external senior advice and help ².
The following variable factors, obvious, which should not be overlooked¹ and deliberated on to create resilience.
Financial
We must balance short and longer-term financial aims. A solid capital position and sufficient liquidity enable companies to mitigate drops in revenue, increased cost and credit issues. Resilient companies can achieve higher margins by increasing revenue more than controlling costs. Again, the levers need to be understood well and explored.
Operational
Maintaining robust production capacity that can balance to meet changes in demand or remain stable in the face of operational disruption all without sacrificing quality is a worthy point to mention. Embracing both supply chains and delivery mechanics to maintain operational capacity and the provision of goods and services to customers, even from failures of individual suppliers or distributors to natural catastrophes and geopolitical events, should not be forgotten.
Technological
Invest in strong, secure, and flexible infrastructure to manage cyberthreats and avoid technology breakdowns. This will maintain and make use of high-quality data in ways that respect privacy and avoid biases, compliant with all regulatory requirements. Implementing IT projects both large and small—at high quality, on time, in budget, and without breakdowns—to keep pace with customer needs, competitive demands and regulatory requirements. If something goes wrong, they maintain robust business continuity and disaster recovery capability, avoiding service disruptions for customers and internal operations.
Organisational
Resilient firms can attract and develop talent in areas critical to their future growth; where many others fail, they find a way to secure sought-after interim talent with scare skills¹. Such organisations foster a diverse workforce where everyone feels included and can perform at their best. They deliberately recruit the best talent, develop that talent equitably, and upskill or reskill flexibly and fast. They implement strong people processes that are free of bias and maintain robust succession plans throughout the organisation. Culture and desired behaviour are mutually reinforcing, supported by thoughtful rules and standards that promote fast and agile decision making.
Reputational
Align values with actions and words. A wide range of stakeholders—employees, customers, regulators, investors and public —are holding firms accountable for their actions, brand promise and stance on environmental, social and governance (ESG) issues. Resilience demands a strong target operating model, mission, values and purpose that guide actions. It also requires flexibility and openness in listening to and communicating with stakeholders, anticipating and addressing societal expectations and genuinely responding to criticism of corporate behaviours.
Target Operating Business-Model
Business models that can adapt to significant shifts in customer demand, the competitive landscape, technological evolution and the regulatory landscape is particularly important. I have during times of crises helped organisations to implement their target operating business models for a dynamic and uncertain environment. The approach adopted was to build resilience that catapults the organisation from a narrow focus on risk, controls, governance and reporting to a longer-term strategic view of the total environment. Rather than hunting for blind spots, important aspect of the comprehensive approach I have used involved using scenarios testing for resilience in a downturn. Accordingly, foresight capabilities wase used to develop the scenarios; scenario-based/ nowcasting modelling can then pressure-test strategies and business models through future volatile environments, i.e., defined by economic downturns, rising geopolitical tensions, disruptions in the terrain as well as technological. Such an approach has helped my clients to move beyond resilience capability assessments to active strategic thinking to find and seek out new opportunities and shape new business models and ideas.
In my second blog post (soon) I will examine the design, planning and implementation of strategic resilience, using a lean-agile techniques that is tired and field tested.
Dee Singh Kothari is a senior partner in Kothari Partners
¹ Ideas expressed in this article are solely of the authors. The author nor Kothari Partner’s accept any liability for the incorrect application of these ideas either used by companies, employees or other individuals alike.
² At Kothari Partners, we have worked with various UK and overseas listed and PE-backed clients across various industries to consider how their business and finance services can bring them both cost reductions and performance improvement.
Our approach is to help our clients understand their current situation, identify the value and decide on the scope, vision and set of strategies for what they could achieve for their business. We help plan their implementation and support them and deliver the solution/ change needed, so it is properly and permanently embedded in their organisation.
We aim to help past and future clients by delivering high-quality work to their organisation, generate real efficiencies and free up time to support better business decisions.
For a confidential discussion please free to contact us, via our corporate website: https://dipakagkothari.wixsite.com/website