Risk Management in Uncertain Times: Navigating an Economic Downturn
Matt Kunkel | March 26, 2020
When COVID-19 made landfall in the United States, it brought economic turmoil unlike the country has ever experienced.
It took just four weeks for U.S. stocks to complete the 30% nosedive that matches the median loss of the last 10 bear markets. The median time it took the earlier episodes to sink that far? One and a half years.
In the wake of such market volatility, conversations concerning the risk of a recession have shifted rapidly from whether one will happen to how long this downturn will last.
In the decade-long bull market that followed the financial crisis, risk managers got used to managing localized risks within their third party supply chains, information security, and other operations—always against a backdrop of economic growth and optimism. All of a sudden, they need to manage all those same issues in a much less certain economic climate. Companies need to have plans in place to help them do so.
Even if the recession never materializes, a contingency plan still makes good business sense. Beyond pandemics, smart organizations develop contingency plans to address a host of disruptive events that might include natural disasters, cybersecurity breaches, terrorist attacks, fraud, or embezzlement. Moreover, a credible plan also protects executives and directors against lawsuits for failure to exercise due care.
In this article, we’ll examine the ways in which companies can prepare for the worst.
Steps to Take Now
1. Empower Your Risk Committee
During any crisis, decision-making needs to be fast, nimble, and informed. This is best accomplished when trust and power are vested in a few senior executives with the authority to take decisive action. The committee should also be responsible for keeping communications timely, transparent, and consistent—vital to preserving morale. A sound and clearly-communicated strategy will go a long way toward keeping the entire company aligned towards its objectives, even in the face of headwinds.
2. Assess Your Workforce
Salaries and wages are often among a company’s largest expenses. They’re also among the simplest to control—which isn’t to say it’s easy. Layoff, retention, and compensation decisions are among the most important, and most emotionally stressful, decisions a company has to make when an economic downturn looms. Management must take care to retain its most critical personnel, and to analyze hiring freezes and workforce reductions through a strategic lens.
3. Prioritize Ruthlessly
A recession is a good time to refocus on priorities and move costly and/or distracting initiatives to the back burner. Management should have a clear-eyed picture of what activities are mission-critical, what can be reduced, and what can be cut completely. They can begin by categorizing the company’s assets—underperforming versus high-performing, strategic versus nonstrategic—so that a plan can be developed for each asset category.
The goal in the near-term is to cut costs while generating liquidity and working capital. Increased pressure on budgets will make it all the more important to select lower-cost materials and service providers, and divest underperforming assets. Cost-saving initiatives might include reductions in headcount, marketing spend, and charitable giving, as well as outsourcing of noncore functions such as accounting or HR. Depending on the severity of the downturn, some or all of the initiatives can be implemented.
4. Take Stock of Your Relationships
Economic downturns put every company and consumer on uncertain footing, not just yours. This is why it’s important to identify vulnerable customers, vendors, and service providers and make whatever changes are necessary to protect yourself. In a recession, everything is on the table: from contract changes to finding replacements.
5. Keep Your Cool
Finally, it’s important to keep a level head. Booms and busts come and go. The United States was overdue for a market correction, according to the National Bureau of Economic Research, and COVID-19 just happened to be the thing that tipped the scales. In these times it’s best to stay calm, trust in your business continuity plan, and weather the storm.
If almost 200 years of economic history are any indication, this won’t be the last recession we’ll encounter in our lifetimes. LogicGate’s view is that the best time to prepare for a downturn is when a company is operating in a healthy, stable economic climate—not while it is in distress.
However, if you’re heading into this impending recession without a Business Continuity Plan in place, we can help. LogicGate’s Business Continuity Management solution can help ease the burden of putting a disaster-response plan in place, so you're ready to respond quickly and effectively. Contact us or reach out to your account executive for more information.