Of late, the business world is undergoing a metamorphosis – a series of black swan events (rare, unforeseen developments). Who thought that Covid would attack mankind, resulting in over seven million deaths? Who thought that the USA (the creator of the United Nations for global harmonious living) would bombard Iran without any strategic intent, leading to serious supply chain issues throughout the globe? Who expected that the US could levy import duties upwards of 50 per cent on certain countries, including India?
All these significant events were neither planned for nor anticipated. Business after business has been caught off-guard. Uncertainty is now the new certainty.
Crisis and Risk Management
There are two terms which need to be taken cognisance of: One, crisis; and the other, risk.
‘Crisis’ management involves systematic processes to prepare, respond and recover from sudden, disruptive events.
‘Risk’ management identifies threats, analyses impact, mitigates risks and monitors action plans.
While crisis management addresses unforeseen events, risk management seeks to predict and mitigate potential problems.
What Should Businesses Do Now?
Risks of a possible inferno may escalate into a crisis that requires bringing out all available tools to douse the flames.
Eight possible tools to fight blazes are:
· Cash is king: Nothing like having money in the till for managing unforeseen events. It is a good plan to keep six months of funds accessible, assuming the unit must survive for half a year with little or no cash inflows if a catastrophe hits. Keep headroom in your borrowing power; raise some equity funding, if you can. Optimise working capital – reduce inventory and recover debtors. Please note that bad times never last; good times do come in sooner than later.
· War room: This chamber is not to fight a real war, but to quench the fire of crisis arising out of numerous possible unforeseen developments. Raw materials may not arrive on time; customers may go bankrupt; forex rates may fluctuate wildly; and possibilities are endless. A team should be formed, ideally under the CFO's leadership, to address daily business disruptions and a survival plan for the next few days.
· Spread supply chain: Around 80 per cent of the oil and 90 per cent of the gas that usually pass through the Strait of Hormuz are bound for Asian markets. The war is creating perhaps the biggest supply chain disruption ever in this part of the globe. As a businessperson, risk mitigation against supply chain disruption is very critical. Do not rely on a single source or vendor for your supplies. Spread supply chain, be it vendors, logistics or customers. It is unlikely that the entire world will be on fire at the same time. Hence, spreading risks is one of the most effective risk mitigation strategies.
· Energy emergency: The price of oil is unlikely to dip to the pre-war era of USD 70 per barrel. It is only fair to expect the price to remain high for some time to come, even if the war ends. Post war, a projection of USD 100 per barrel will not be too conservative. With oil and gas prices up, coal prices will not be left untouched due to concomitant higher demand. An immediate action plan to broaden energy sources would be the sanest step. Wind and solar investments will become more attractive.
· Hedge risks through forex hedging: Global uncertainties affect foreign currency rates adversely, especially for India. With country imports significantly higher than exports, the rupee will be biased towards depreciation. It's obviously good news for exporters and horrific times for importers. So, what should you do? Hedge foreign currency exposures. How much? Fifty per cent minimum. Calculate the difference between imports and exports on a monthly basis. Hedge the difference. Why only fifty per cent? As the rupee is likely to fluctuate based on good and bad news, the unhedged portion can offer some upside opportunities.
· Cyberattacks: When times are tough, many try to earn through upsetting the internet system – malware, ransomware, phishing, Distributed Denial-of-Service (DDoS) attack, SQL injection (where attackers inject malicious code to manipulate databases), financial espionage or credential harvesting.
Businesses can mitigate these risks through identity and access management, data security and loss prevention, network controls and monitoring, and vulnerability management. A sound IT system and process are a must.
· Insurance: Insure against all risks (definite, measurable, accidental and non-catastrophic). Review all policies and take actions to mitigate potential losses. Don’t forget to take cyber-insurance.
· People power: Last but not least: your employees. You are as good as your people. If they have the fire in their belly and use common sense, most unforeseen developments can be addressed satisfactorily. Hence, please focus on having your employees ‘engaged’ (motivated, enthusiastic and emotionally involved). Disengaged employees are a value destroyer.
Last Few Words
Uncertainty is now the new constant. The world of business will not be free from sudden and unplanned developments.
Risk and crisis management have become part of a routine exercise for business managers. Ignoring it will be at one's own peril.
While the bad news is that unforeseen events in business will keep occurring, the good news is that tough times do not last, but tough people do.
