COVID-19: Preparing for what’s next

The coronavirus pandemic rapidly upended a wide range of economic activity, seemingly overnight laying fallow swaths of production, commerce, and consumption globally.

“This was coming in at 100 miles an hour as opposed to 20 miles an hour, and the impact was felt across the different operations and different businesses of a particular organisation,” said Tom Teixeira, who heads the risk advisory practice at Arthur D. Little, an international management consultancy based in Brussels.

Arthur D. Little works with companies heavily dependent on production plants, transportation infrastructure, global supply chains, and skilled, mobile workforces in industries such as pharmaceuticals, utilities, information technology, defense, and oil and energy.

Supply chain and workforce disruptions threatened utilities’ ability to generate power, said Teixeira, a partner in the firm’s London office. Drugmakers had to prioritise clinical testing and production in light of the coronavirus threat as well as consider the development of new treatments aimed at tackling the pandemic. Countrywide lockdowns restricted workforces, for example in the technology sector, which relies heavily on third-party contractors in Southeast Asia to research and develop new products.

As people were ordered to stay home, demand for many products and services plummeted, factories closed, and revenue dropped.

After sickening and killing people around the world for four or five months, the coronavirus’s spread has begun to slow, and recovery is in sight in some countries. The first economies are beginning to reopen gingerly, and companies now face the complex task of figuring out how to resuscitate operations over the next three to six months and emerge from the crisis.

“If they've got assets in a number of different geographies, a number of different regions, how do you ramp up safely and effectively to get to full operating capacity?” Teixeira said. “You can't just turn a switch on and get everything flying again in the air or getting trains up and running again. In some regions the coronavirus rate of infection will be escalating, plateauing, or reducing. These trends and forecasts need to be incorporated into the planning process to ensure assets can be re-activated in a controlled manner. There's going to be some challenges in how to create an effective and efficient ramp-up mechanism.”

Data and predictive analytics improve predictability

As daunting as it may seem to make decisions in a rapidly evolving pandemic, there are ways to help manage the risks, probe the unknowns, and gain a better sense of what may lie ahead.

“There’s a methodology,” Teixeira said, to improve forecasting models by anticipating behaviours based on historical data. This is supported by realistic and pragmatic assumptions.

Companies have access to lots of data, he said. “There is internal and external data. Some of that data is structured, some of that data is unstructured. Some of it is good quality, some of it isn't.”

Data is critical to understanding risk drivers and how they play off each other in coronavirus pandemic scenarios, Teixeira said. Feeding the data into COVID-19 scenarios, running cause-and-effect analyses, and looking at degrees of correlation are all methods that help companies get a handle on which data is most useful to make predictions by building relevant models, he said.

Once the most potent forward indicators have been identified, data tracking them can be fed into predictive analytics platforms, which use artificial intelligence and machine learning to generate algorithms that crunch the data. As new data becomes available and is added, the algorithms adjust their calculations on their own if need be.

“As things change on a very dynamic basis, and even on a day-to-day basis, you will get a different view,” Teixeira said. “From a risk management point of view, you're able to make near real-time decisions based on a forward-looking scenario that's being presented to you.”

A company that has factories in different countries, for example, can use data and predictive analytics to decide when to reopen which factory or ramp up production as lockdown restrictions ease.

“If you get a good understanding of what the scenario is, you get a good understanding of the cause and effects, you can then start to get a more predictive understanding of what this means in terms of financial impact,” Teixeira said. “And in my experience, you get senior management attention when you can put a dollar or a euro or a pound value in front of that exposure. Then you'll get the call for action, and you'll start seeing enhanced mitigation activities being put in place.”

How to prepare for what’s next

Teixeira and his colleagues developed a multistep approach to better manage crises and improve resilience. They’ve used this risk management approach on companies of different sizes and in different industries. It broadly consists of these five components and can be helpful as companies resume their operations and emerge from the pandemic:

• Understand your risk profile. Look at COVID-19-related scenarios to assess the company’s risk profile across all operations. Then use the same approaches and supporting tools and mechanisms to assess, monitor, and manage other key operational risks.
• Assess your risk exposure. Use the lead indicator data to monitor risks and feed it into a predictive analytics platform to get a better understanding of increasing and decreasing risks and the velocity at which they may impact.
• Determine the financial effect. Translate the results of the predictive analyses into financial terms. This makes it easier for you to prioritise capital and other resources to fix and/or prevent certain occurrences.
• Communicate results. Provide the most important results of the predictive analyses to the C- suite in a logical and pragmatic format, so executives can use it to make decisions that allow the company to meet strategic objectives.
• Improve resilience by integrating risk management and business continuity planning. Ensure the same data sets are shared across functions. Stress-test crisis management plans to make sure they remain relevant. Update the plans when the company’s operating model changes. Build a workforce with the right skillset to properly interpret the data.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.

— Sabine Vollmer is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact her at Sabine.Vollmer@aicpa-cima.com.