In the current crisis finance professionals are in high demand. They are involved in business continuity efforts and in crisis response teams dealing with vital tasks such as cash management, business forecasting, and cost management. While this contribution is of utmost importance, we should also think about the longer-term implications of the current crisis.
Finance professionals in post-coronavirus times will need to make sure that crisis preparedness and resilience are finally accorded the priority they deserve in an increasingly global and volatile world. This constitutes a major opportunity and a big challenge at the same time.
Empirical evidence from the WHU Controller Panel in Germany, a joint initiative between the Institute of Management Accounting and Control and the International Association of Controllers (ICV) nicely supports the point: Companies with effective crisis management are both more focused on seizing opportunities during the crisis and better prepared for the crisis. I want to focus on the second point: What can finance professionals do to ensure crisis preparedness and to enhance the resilience of companies?
Balance short-term efficiency and slack
Resilience requires a fit body, but this shouldn’t be confused with — to use the same image — minimising body weight or with maximising efficiency. Rather, what matters is striking the right balance and ensuring that there is enough slack to get through a lean period with as little outside assistance as possible. Production and supply chains need to develop parallel structures so that they can cope with the loss of individual links in the chain, even if this means sacrificing short-term efficiency. A company must not find itself dependent on particular suppliers or production facilities come what may.
But what is all this going to cost? How much parallel structure and safety stock can I afford? Here, financial professionals come into play.
Re-invent risk management
Too often, risk management is pared down to risk reporting and compliance, and treated as a routine, box-ticking exercise, which tends to be delegated to risk managers and receives only limited attention from senior management. The management of strategic risks, ie, risks arising directly from the business model, is frequently neglected, and preparedness for external shocks like the coronavirus and the associated systemic risks, even more so. Here, too, finance professionals can contribute a lot through their expertise, for example, by ensuring that scenario analyses and stress tests worthy of the name are given sufficient priority.
Help managers learn how to deal with an uncertain future
However, scenario analyses and stress tests are often misunderstood. They are not intended to predict exactly what will happen in the future and therefore what action will need to be taken. Nor are they about supporting an upcoming business decision by providing additional input on best- and worst-case scenarios. Rather, the aim of the exercise is to train people in how to deal with unlikely circumstances and/or system interruptions and how to draw up the necessary emergency plans. Management should learn to consciously question apparently self-evident relationships and not get caught up in the false sense of security regularly provided by planning and forecasting. This is no easy task, and, even for many finance professionals, dealing with such strategic issues may be uncharted territory.
Promote flexible structures and processes
Training finance professionals and managers in techniques such as scenario analyses and stress tests is important but will not be enough to ensure the adaptiveness needed for effective crisis prevention.
Alongside mindsets, company processes and structures must also become more flexible. This is where traditional bureaucratic organisations rapidly reach their limits, so businesses need to be more open to agile forms of organisation as well as informal coordination mechanisms at a team level.
This in turn will not succeed without a culture geared towards transparency, open exchange of information, goal orientation, individual accountability, and, last but not least, the power of the better argument. Without the right culture, any attempt to boost an organisation’s long-term flexibility will likely fail. And this is where finance professionals need to play their part in crisis prevention, by exemplifying and promoting a culture that is — or should be — tailor-made for them.
Agile forms of organisation have long been a topic of discussion and are well entrenched in startups, smaller companies, and niche areas within large corporations. In addition, the Beyond Budgeting community has been investigating ways to enhance companies’ adaptiveness for over 20 years.
However, both concepts are normally considered potentially beneficial to corporate change processes and noncore areas such as software development but are hardly suitable for managing entire corporations. This is probably a correct viewpoint in a stable environment with little risk of systemic crises but likely a fatal misstep in a world of global networks that is turning ever faster.
Companies wanting to rise to the challenge posed by systemic crises must therefore continue their agility-boosting initiatives rolled out over the past few years. Those companies that combine any organisational flexibility thus gained with the necessarily flexible mindset of key actors and a sufficient degree of organisational slack will be better equipped for the next systemic crisis.
Accelerate the digital transformation in finance and beyond
At the same time, we are seeing how the coronavirus crisis is giving an unexpected boost to the digitalisation of workflows, internal communication processes, and business models. Rather than being rendered obsolete by the pandemic, digitalisation initiatives launched in myriad businesses are more important than ever. As such, once businesses’ survival is ensured and the current crisis overcome, they will need to build on this momentum and push ahead with the shift towards agility and digitalisation with even more determination than before. However, rather than booking all the associated efficiency gains as profit, companies wanting to boost their crisis resilience should instead invest at least some of these gains into resilience.
To summarise: If companies want to be better prepared for future crises, they will need to rebalance seeking short-term efficiency on one hand and investments in flexibility and transformation on the other. For finance professionals the five action points I described might take them out of their comfort zone here and there. If they accept the challenges, they can contribute substantially to making companies more resilient and better prepared for the next crisis — and live up to the role profile of a business partner.
For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.
— Utz Schäffer, Ph.D., is director of the Institute of Management Accounting and Control (IMC) at WHU–Otto Beisheim School of Management in Germany. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.