What are you going to remember most about 2020? Will it be the unexpected joy of working from home; the stress of repeatedly having to communicate bad news to your colleagues or the depths you had to dig to summon up the willpower to deal with the second wave? I guess it all depends on which sector you are working in and financial strength of your organisation before it all hit the fan.
One thing is for sure though. Risk management will rocket up the corporate agenda and rather than just focusing on operational disaster recovery, addressing regulatory changes and responding to disruptive competitors, this time around it will embrace the unthinkable and how best to deal with it. Business leaders will want to build the capability to quickly and incisively respond to crises, so they can get their organisation back to an optimal and sustainable level of performance, that gives them a springboard for future growth once the threat has passed. Business gurus are increasingly calling this capability ‘resilience’ and it’s all about bouncing back after taking a hit.
For the global consultancy McKinsey, a resilience capability goes beyond normal business-as-usual processes, such as developing strategy, planning and routine management. It also covers standard risk mitigation procedures, such as disaster recovery and business continuity. Regardless of what caused it, when an organisation is in full-blown crisis, such as navigating the impact of lockdown, McKinsey say boards and business leaders need to make quick and incisive decisions, have better insight into the downside risk of the choices that face them, and access to a playbook that gives them 360° visibility of how the organisation’s resources, cash flow and capital, might need to be shored up across multiple time horizons.
McKinsey suspected that companies with better developed resilience capabilities could make more appropriate and timely responses to crises and would therefore deliver a superior total shareholder return. Their experience of working within such companies also led the team at McKinsey to believe that normally conservative company boards felt safer and better able to support strategies, such as growth through mergers and acquisitions, when the CEO and their teams had developed resilience capabilities that gave better insight into potential downside risks.
Analysing a subset of 12,000 largest listed companies in the world, where reliable data of their financial performance through a number of economic cycles was available, showed that companies that were resilient throughout downturns were typically early responders and often planned for potential slumps or economic crises, well ahead of their peers. But although companies that had built a resilience capability undoubtedly had a better way of making decisions, some of McKinsey’s findings were quite counterintuitive. For instance, resilient companies typically disposed of assets and restructured their balance sheets very early in a downturn. They also reduced costs more aggressively and promptly slashed investment in revenue growth, again well ahead of their peers. Companies that took such bold actions protected their short term profitability, and were better able to scale up again as they came out of the cycle.
McKinsey found that many resilient companies have a nerve centre or war room, where all the relevant information is shared with the sole purpose of making incisive decisions much faster, and possess analytic capabilities far in excess of everyday strategic planning processes. Naturally the CFO and their teams are centre stage when it comes to crisis planning as they are best placed to understand the financial impact of potential actions. However McKinsey and others, such as EY, suggest they would be abnegating their responsibilities if they do not take the lead in adopting the analytic capabilities and technologies that underpin, what they call, a resilience playbook.
Christian Mertin of EY writes that, ‘The pandemic has also exposed shortcomings in analytics, scenario modelling and planning, leaving some CFOs struggling to answer questions about the severity of the situation and how to best respond’, and stresses that the finance function needs to quickly harnesses technology that helps their business to manage uncertainty with fact-based decision-making, by providing the ability to dynamically model complex scenarios and present the results to the senior team in a timely fashion.
Mertin notes finance teams that have already adopted cloud-based solutions and in-memory technology, such as that of our software partner Anaplan, have fared better than those with legacy on-premise infrastructure, but stresses that the slow and cautious approach that many CFO’s take to new technology may no longer be appropriate.
Given where we are today, finance needs to accelerate the transformation journey. Few would disagree with that sentiment so we will examine some of the key building blocks of that journey in the next few articles. First, we will explore how best to deliver the type of scenario analysis that is critical to any resilience playbook. Then we will review the role that recently announced additions to the Anaplan platform, such as artificial intelligence and machine learning, play in financial transformation. Until then, stay safe.
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References: [i] 'Resilience and value: A CFO tool kit for withstanding shocks’, McKinsey podcast, September 9, 2019. [ii] ‘COVID-19: How CFOs can drive resilience and value in an evolved role’, Christian Mertin, EY 4 minute read, 24 August 2020.