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Sharpen business continuity’s link to financial resilience

Better analytics can help weather the COVID-19 storm

Risk & Analytics|Corporate Risk Tools and Technology|Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Marc Hindman and Sean B. Rider | May 4, 2020

Developing or refining and executing a recovery action plan now is essential to your company’s future success.

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

With the spread of COVID-19, many companies are finding that their business continuity plans are outdated, badly designed or otherwise inadequate. Many companies simply hadn’t considered a pandemic as a threat on the same level as cyber risk, supply chain disruption or a natural catastrophe, despite the warning signs of viral outbreaks over the last decade.

Shortcomings of most business continuity plans

Forrester Research, in January, noted another problem: Companies don’t often test their business continuity plans. The research firm says that “one large simulation per year is typical,” and even then the annual test of a business continuity plan is unlikely to focus on a pandemic.

To these shortcomings, we would add others:

  • Many business continuity plans are missing key performance indicators that would quickly reveal the impact of business disruption on financial and operational resilience.
  • Spur-of-the-moment business and cash-management decisions can have unintended consequences on cash flow and working capital.
  • Many business continuity plans are written with the assumption that human resource capacity will be there when needed. That assumption falls apart as the virus spreads, requiring most organizations to seek creative ways of doing business and maintaining market share in this environment.

COVID-19 is too grave a threat and too widespread for second-guessing at this stage. The immediate focus on keeping the business viable is the clear priority. However, it shouldn’t be the only priority. Decisions made today, in the heat of battle, may create new long-term threats that should be considered within the context of business continuity.

To paraphrase a famous Chicago politician, “Never let a serious crisis go to waste.” As you work your way through the pandemic, identify the action steps that are most helpful to your business and modify your business continuity plan accordingly.

Business continuity ties operations and finance

Business continuity plans should serve as the script for how your organization responds to a variety of scenarios that might include changes in the competitive environment and supply/demand swings as well as natural catastrophes and, yes, pandemics.

Historically, business continuity plans have focused on operational issues, emergency response procedures and crisis communications with a focus on client retention, employee safety and the continued operation of facilities and production lines. Operational resiliency has been and will remain paramount to the short-term viability of the company.

However, as COVID-19 reveals, financial resilience has become at least as important as operational sustainability. As the longer-term impact of COVID-19 unfolds, it is vital to have an early-warning system in place to gauge when and whether financial damage approaches unacceptable levels.

Working with operational, finance, risk and human resources managers, chief financial officers (CFOs) should be leading the effort to ensure that business continuity plans are effective over the short-, mid- and long-term. The goal is not only to ensure operations remain intact, but also to ensure that proper analysis and decision support have been leveraged in determining which financial levers should be deployed, and in which sequence, as the COVID-19 crisis continues.

The role of analytics

Effective analytics can provide a particularly useful bridge between business continuity plans and critical financial decision making that can mean the success or failure of a company during and after an event. Financial stress testing, a rigorous understanding of risk tolerance and strong predictive analytics for downside risk can help organizations better prepare for material fluctuations in financial performance.

Decision-support analytics platforms enable CFOs to ensure that short-term liquidity measurements remain within predetermined tolerance limits. If a company does not have adequate analytics in place, it’s not too late to develop them, perhaps with third-party partnerships. These platforms, like the full business continuity plan, will need to be reviewed regularly and adjusted as the situation continues to evolve.

We have seen this approach, from a finance perspective, allow organizations to be nimble and change plans to repurchase shares, engage in M&A activity, maintain or adjust dividends, or expand into new businesses or territories once their liquidity and cash flows stabilize.

Operational impact

In tandem with operations, financial decision support can identify when and at what level a company should consider actions to adjust operating expenses. These actions may include facility utilization or labor cost reduction by implementing hiring freezes or putting existing employees on furlough.

At the same time, decision-support analytics can help identify how some actions may trigger risks in unexpected ways, such as an increase in workers compensation claims, potential supply shortages, confusion over the compensability/liability of claims and the myriad of challenges resulting from employees working from home, not the least of which is cyber risk.

Reassuring the investment community

Data-backed financial management can help reassure the investment community too. The investment community draws heavily on corporate earnings and guidance when making investment decisions. As demonstrated by recent extreme market volatility, substantial investor uncertainty regarding the severity and duration of COVID-19 remains a critical factor in the psyche of institutional and individual investors alike.

CFOs routinely revisit recent company guidance, and COVID-19 will add a big variable because of its impact on performance and outlook. Advanced analytics can assist CFOs in identifying trends and using predictive models to either confirm or modify the anticipated impact on working capital, current ratios, quick ratios and other financial benchmarks.

The ripple effect of actions you take today

The bottom line is that actions you are taking now to maintain liquidity and bolster the balance sheet (e.g., operational changes, furloughs, remote working) have associated risks, and the immediate consequences you see now (supply shortages, decreased revenue, and the like) could have long-term financial effects on your organization. Understanding the ripple effect of your actions is another key to long-term resilience.

This also may be the time to take a more holistic view of nonfinancial risks that threaten business continuity – including cyber and operational risks that will remain long after COVID-19 is brought under control.

Business leaders should act now to conduct worst-case forecasting based upon historical business models, supply chain dependencies and the impact of pandemic development over the next eight to 12 months. Their focus must include supplier resiliency and key human resource retention if the enterprise is to remain financially viable through the COVID-19 storm.

Now more than ever, business leaders should identify the facets of their business that are most critical from a financial perspective. Developing or refining and executing a recovery action plan now is essential to future success. An effective recovery plan cannot be developed without this mission-critical determination. Survival is the objective and survival can only be possible if financial viability is secured.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

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Risk Control and Claim Advocacy Practice Leader

Senior Director,
Head of Client Development – North America
Risk & Analytics

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