In the long term, the effects of the coronavirus pandemic on business remain unclear. In the short term, company leaders are focused on ensuring the safety of employees and customers, maintaining financial sustainability, and plotting a path to resuming business operations.
Even if that path can’t be seen yet, it is possible to identify the key strategic questions CFOs and other executives will need to address:
- How will the nature of interactions with workers, partners, and customers change?
- How can an organisation increase financial and supply chain resilience in times of stress?
- How should planning and management processes be adapted post-pandemic?
Interactions with employees, partners, and customers
The shutdown of large segments of the global economy, increased working from home, and social-distancing guidelines have changed the nature of almost every human and commercial interaction. China’s economy went from 6.1% growth in 2019 to a 6.8% decline in the first quarter of 2020, the first decline since quarterly numbers were first reported in 1992. US retail sales declined 8.7% in a single month (March 2020), and overall US unemployment increased fivefold in the five-week period to mid-April.
As the economy restarts, companies will need to determine which elements of the behaviour changes during the pandemic will become permanent. Will all personal care/service professionals have to use personal protective equipment? Will social-distancing rules be enforced at large gatherings, retail stores, restaurants, and on airplanes? Will enhanced cleaning regimes become a permanent part of standard operating procedures?
One significant impact of the pandemic has been the increase in working from home. In 2018, according to US Census data, 5.3% of Americans primarily worked from home. In April 2020, Global Workplace Analytics estimated that 25% to 30% of the workforce will be working from home multiple days a week by the end of 2021. If true, organisations will need to address a number of topics, such as ensuring data and communication security across a remote workforce; creating an environment conducive to collaboration; establishing policies for funding work-at-home office set-up and operation; and assessing the impact of reduced on-site staff on real estate requirements.
More significant than the interactions with employees will be changes to the customer engagement model. Will grocery delivery become the norm, or will shoppers return to stores? One supermarket chain in Ohio in the US converted one of its traditional stores to become a delivery fulfilment store only. If that becomes normal practice, what are the implications for store location strategies? Will companies that have added pick-up or delivery options maintain them after the pandemic abates? How will hospitality organisations earn the trust of customers with their hygiene and virus-prevention policies? Is the reduction in oil consumption and prices simply a temporary aberration due to reduced economic activity, or could routines such as working from home continue, triggering an acceleration in the decline in the use of carbon-based fuels?
At first glance, the implications may seem to be negatives in that they increase costs without any commensurate offsets. While that is true in some cases, it is important to consider the overall economics associated with such investments. Organisations that can successfully demonstrate their ability to adapt to a post-coronavirus world are likely to benefit from increased customer trust and confidence, reduced potential for worker absenteeism, and an enhanced ability to attract and retain employees. However, it will take time to develop a sustainable economic model. The US airline industry took six years to return to pre-9/11 performance levels. For strategic planners, a willingness to envision alternatives and identify measures of success to guide decision-making will be increasingly important.
Supply chain resilience
The heavy dependence of global supply chains on China became clear as manufacturing stopped almost overnight, disrupting the flow of goods across the globe. Many organisations went from lean inventory to no inventory in a matter of days. As the virus outbreak moved to Europe and the US, the impact expanded rapidly. The food-processing industry was hurt by shutdowns and absenteeism, and Amazon’s two-day guaranteed delivery became a thing of the past for many deliveries.
However, except for a few notable exceptions, such as for personal protective equipment, ventilators, cleaning supplies, and toilet paper, supply chains have coped remarkably well given the scope and scale of the disruption. We have also seen a number of examples of companies rapidly retooling their business to address supply shortfalls in critical areas such as distilleries making hand sanitiser (see “COVID-19: From Spirits to Hand Sanitiser in Days”) and automotive companies producing ventilators.
Much of this relative success can be attributed to companies working to create more flexible and responsive supply chains. It is unlikely that there will be a significant move away from global supply chains. The benefits of relocating manufacturing operations to cheaper labour markets, outsourcing large elements of customer service and back-office work, and investment in technology to reduce fixed and variable costs have been too significant to abandon. Much more likely is that there will be increased stress-testing of supply chains and potentially some reduction in the concentration of supply on one company, country, or region to create additional flexibility.
The answer is not to abandon lean principles and simply increase stock levels across the board to provide a cushion against supply disruptions. By using more granular demand and supply data, focusing on both near-term and long-term signals of market and customer behaviour and incorporating rational scenarioplanning capabilities, organisations can add resilience and flexibility to already efficient processes. (See the sidebar, “Scenario-Planning Checklist”.)
Planning and management processes
“Static”, “detailed”, and “wrong” define the results of most organisations’ planning and budgeting processes. Months of crunching numbers in spreadsheets yields a single, fixed view of the future that has little or no basis in reality and rarely contemplates that the future may not turn out exactly as expected. This is true even in the absence of major global events.
Since the Great Recession of 2007–2009, organisations have adopted techniques that better accommodate uncertainty and ambiguity: rolling forecasts, driver-based plans, scenario planning, machine learning, and advanced analytics. However, progress has been fragmented and disjointed. Few organisations can boast a holistic, integrated, and dynamic planning and performance management process that fully leverages the increasingly rich datasets that are available. Organisations need to move from piecemeal projects that improve parts of the process to prioritising an integrated performance management architecture that encompasses five attributes:
- Integrated. Seamless integration between strategic planning, tactical planning, budgeting, forecasting, and reporting processes.
- Scenario-based. Consistent use of scenario planning for long-term strategic evaluations and sensitivity analysis for shorter-term analysis.
- Data driven. Transition from calendar-driven cycles (annual plans, quarterly forecasts, monthly reports) to data-driven cycles that are triggered by changes in market, operational, or financial data at a granular level.
- Analytic. Use of advanced analytics (artificial intelligence, machine learning, cognitive computing, and the like) to run large-scale simulations at speed to inform decision-making.
- Collaborative. Collaborative planning that goes beyond finance, beyond cross-functional teams to embrace an organisation’s entire economic ecosystem including customers, suppliers, employees, advisers, and regulators.
The bottom line
Within days of the pandemic spreading across the globe, corporate cash piles diminished, credit facilities were drawn down, loan and rent payments were missed, and unprecedented government fiscal support was provided. It can be argued that all were prudent and expedient actions given the unprecedented nature of events. However, there should be some questioning of the effectiveness of corporate governance, financing, and shareholder principles in the light of recent events as it relates to cash and capital utilisation.
From 2017 to 2019, S&P 500 share buybacks exceeded $2 trillion, according to data from Yardeni Research Inc. In the year to March 2019, share buybacks exceeded free cash flow generation for the first time in more than a decade. While the pandemic’s events are clearly unusual, can companies continue to distribute so much cash to shareholders and then plead for government relief when the unexpected happens
No organisation will ever be able to fully prepare for events of the magnitude of COVID-19. Yet it is a certainty, not a probability, that another seismic global economic event will occur in the future. It could be triggered by another virus or a protracted timeline combating the current virus; a communications, power, water, or other system outage; a cyber or biological attack; a climate event; or other natural disaster. The best strategists will be able to model the impact of such events, develop rational mitigation strategies, and, most importantly, position their organisation to emerge in a stronger competitive position when growth returns.
Consultant and author David A. J. Axson is a retired partner from Accenture, a co-founder of The Hackett Group, and former head of corporate planning at Bank of America. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.
Identify scenarios that could have a material impact on your business and could reasonably occur as long-term consequences of the COVID-19 pandemic. Examples to consider could include:
- Work from home increases to almost 40% of the workforce with a commensurate reduction in local travel.
- Videoconferencing becomes the norm, reducing business travel and expense by 30% and credit card volumes by 20%.
- Gatherings of more than 50 people are not feasible until 2022.
- Increased grocery sales and reduced dining out continue well after the pandemic ends.
- Some elements of social distancing become the norm.
- Contactless payment increases; cash usage is almost eliminated to reduce spreading risks; ATM networks disappear.
- Large corporations significantly reduce their dependence upon China or other markets.
- Stress-testing akin to that applied to financial institutions after the financial crisis is instituted across industry sectors where significant weaknesses were exposed.
- Only 50% of lost oil demand reappears over the next five years.
- New coronavirus strains emerge in two of the next five years with 80% of the impact of COVID-19.