Strong risk management practices can’t stop the spread of the coronavirus. But organisations that have taken steps to plan for unforeseen, extraordinary events are better positioned to recover from a potential economic hit. For lessons on the short- and long-term steps organisations should take in bracing for the full effects of the global outbreak of the coronavirus, hear advice from Mark Beasley, CPA, a professor at North Carolina State University and the director of the university’s Enterprise Risk Management Initiative.
What you’ll learn from this episode:
- A reminder of the need for scenario planning and forecasting in the near term.
- The role of enterprise risk management in planning for unforeseen, extraordinary events.
- How planning for a major weather event could have lessons in preparing for the effects of the coronavirus.
- Whether the coronavirus should be considered a “black swan”.
- Why entities with more robust scenario planning are better positioned to recover faster from a downturn.
- Advice on applying lessons learned for future scenario planning.
Play the episode below or read the edited transcript:
To comment on this podcast or to suggest an idea for another podcast, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.
Neil Amato: Glad to have Mark on. Mark, thank you for joining us. So, in the very short term, this week, as we’re talking, it’s Monday, 2 March, from a finance perspective short term, what are the things that can be done as entities continue to figure out the effect of the coronavirus?
Mark Beasley: Yes, obviously a very difficult challenge is in front of us right now because it’s evolving minute by minute and it’s hard to know the long-term implications, but I think from a finance perspective now is doing some pretty quick forecasting, scenario planning of what could the implications be with different changes and assumptions about how it might impact our sales capabilities as well as getting the supplies in, and could that mean a shutdown in production or slowdown, really trying working with today’s information as best we can, doing a variety of scenario plans and forecasting just to see what are the ranges of potential outcomes we could be facing with these changing assumptions.
And obviously the key is these forecasts and scenario plans, we’re going to have to be revisiting them because I think our assumptions are continually changing, but let’s at least get a sense of based on what we know today, what might that look like for this quarter and for the year if we assume things continue to potentially be challenging to get supplies or to get salespeople out to meet with — to get our sales, given certain markets could be shutting down for a period of time. So I think just trying to get a ballpark of what that might look like, but knowing you’re going to have to recalculate because I think we’re learning something all the time.
Amato: So obviously, as you said, sales, supply chain, factory closing, which I guess can affect supply chain but also if you’re an actual manufacturer, it affects you. There are many aspects to dealing with this virus. Do all those topics fall under the umbrella of enterprise risk management, or ERM?
Beasley: Yeah, absolutely. When I think about this coronavirus experience that we’re in right now, to me, it’s a great example of why we really need to before today have already begun to think about an enterprise risk approach to how we think about risk management. Because I think the coronavirus is a good illustration of a single root-cause event having multiple triggering effects to all kinds of aspects of the enterprise, and so it’s affecting obviously supply chain and being able to get parts into my facilities, say here in the US. It’s affecting the delivery of that.
It’s affecting sales in the sense of certain markets could be shut off, depending on what my product and service is. I may not be able to generate the sales that I have because I can’t sell to that region, or it’s a consumer product and people in certain parts of the world are not even allowed to leave their home, so they’re not buying the product.
And then it’s a talent perspective. As more and more regions start trying to take more of a quarantined approach, schools are closing. Well, the schools closing affects my talent in the sense that I have a workforce that may now need to be home because they have children that can’t be left at home. And so it just has such an enterprise-wide effect. It is very much connected to the ERM process and definitely related to it in a very close way.
Amato: At least in the US, especially where we are in the US East Coast, one of the things that I think organisations around here plan for is severe weather. Maybe it’s in the form of a hurricane. But this seems different than, say, a major weather event. Would you agree with that?
Beasley: I think so, partly because a weather event tends to have a more regional effect. A hurricane is obviously very devastating for the region that’s hit, but outside of that region, suppliers still may be producing products, and I can shift some workforce to other parts of my business if I’m a multi-location kind of entity. So, yeah, I do think it is a bigger effect, although hopefully some of the planning that would have occurred to prepare for a major weather event that could shut down multiple aspects of an enterprise, there are elements of that plan that could be very relevant to this experience, just on a larger scale. But it does seem like this is a bigger impact event because of the global effect it has in shutting down different parts of the world versus just a corner of the US, for example.
Amato: You’ve advocated for ERM to be a key part of an organisation’s strategic planning, tying in risk management with strategy. Why is that even more important I guess today as companies are dealing with the coronavirus?
Beasley: That’s a great question. Yeah, you are correct. We are always trying to beat the drum that ERM and strategy need to be very closely connected because we want an ERM process to really help us see the risk that could emerge that could affect that strategic success. And so I think what we’re observing now with the coronavirus and just its enterprise-wide effect, I think it’s now more clearly people are beginning to see, “Wait a minute. All these risks that are triggered by the root cause of coronavirus, but now I have a talent risk. I have a supply chain risk. I have a sales risk,” and it goes on beyond.
I think people are realising, “Wow, this is really going to hit our business from a strategic perspective. We’re not going to achieve perhaps some performance objectives because of the impact that triggering event has had in triggering all kinds of risk across the enterprise.”
So I think it elevates, hopefully, when things calm down, I would like to think that more organisations now realise the limitations of their existing approach to risk oversight to try to take it to the next level. I do not want to say that ERM would have prevented a strategic challenge because of this. I wouldn’t want to claim that at all, but I would like to think that organisations with more sophisticated and robust enterprise-wide risk oversight techniques, I would like to think they’re in a better position to navigate this particular risk event. For those that have less robust ERM processes, I hope they’re beginning to realise there is value in management taking time to explicitly engage in some fairly robust scenario-planning exercises and worst-case scenarios that, not that we could predict the next coronavirus.
We’re not claiming that it would do that, but if we were better prepared to think of broad events that could shut down multiple aspects of my enterprise and that impact on my strategy, hopefully that thinking would really have us pretty well prepared for some other unforeseen cause that could have the same impact.
I don’t know if that makes sense, but basically, I’m not trying to predict coronavirus version 2, but rather I’m just saying something else out there shuts down or slows down global markets, talents, supply chain, now that we’re better prepared, we can navigate that. That’s the idea that I guess I’m hoping that an ERM process with more robustness could really put an entity in a better position for the next big event that we’re likely to face like this.
Amato: So it sounds like if you have that robust plan in place, some of the characteristics you’ve mentioned, that, certainly, you’re not unaffected but maybe you’re just more prepared, and so unfortunately, maybe it’s one of those things that an event like this forces you to be prepared better the next time something similar happens.
Beasley: Exactly. When I think about entities that have a fairly robust process, [it] means they have been talking about risk in the context of their business model and their strategic plans on an ongoing enterprise level, and many of them have management-level risk committees that are meeting very regularly to talk through risk. To me, I would like to think those organisations, because they’ve been engaged and focused and talking about risk as a group for a period of time, their knowledge and base foundation of their enterprise and risk to their current structures, they already have that base knowledge to then forecast, well, now with coronavirus, it’s going to maybe escalate one of those risk events.
Whereas a company that’s not as prepared, they’ve got to catch up. They don’t even know who to talk to because they don’t have a risk committee talking, so they’ve got to first pull together the people. The people have got to get to know each other. They’ve got to understand each other’s role in the business, what are your existing challenges, to begin thinking about how does the coronavirus then make that even more exaggerated.
And so I just feel like less prepared ERM organisations, they’re playing a major catchup position right now compared to those who have more rigour and robustness, because they’re already ahead of them. So I just think a more mature ERM organisation is sitting in a better position to springboard ahead of their competition, quite frankly, and so that’s how I see it.
Amato: So if this coronavirus is a black swan event — well, OK, let me go back. I should probably define the term or have you define it. One, is this a black swan event, and two, what does that mean to you?
Beasley: I think coronavirus sort of is a black swan event. So, I’ll define that first, and then I’ll explain my “sort of” answer. When I think of a black swan event, typically people describe those as very low probability events, but if they were to occur, have a catastrophic impact. So, a lot of people would think of coronavirus as a black swan. However, others would argue with me on that and say, “Mark, we have been talking about pandemics for two decades now. This is just a specific one.”
So that would mean it’s not really something we couldn’t have anticipated. It’s low probability in that its frequency is not happening every other week, but the impact of this one and the reality of it is I think it’s behaving like a black swan for so many organisations. They just didn’t really recognise the likelihood. They treated it as, “Nah, this is not going to happen,” sort of like zero probability, but now they’re realising, “Oh, my. It wasn’t zero and now it’s catastrophic to me.”
So that’s why I say it sort of is a black swan, although again, people would argue with me and say black swan technically is something you didn’t think would ever happen, but I think people thought a pandemic probably was a decent possibility.
Amato: Right. That’s a good point. So in general, on the advice front, if it’s something they didn’t account for and maybe they were blindsided by it. Maybe they heard about it the second, first week of January or so, and were [thinking], “Well, that’s a China issue,” and now suddenly it’s not just a China issue, how do they adjust?
Beasley: Yeah. I’m sure this is what is happening, but I think the adjustment is — well, let me back up. The way I look at ERM, ultimately what an ERM process is hopefully helping us do is pull people together, exchange information, communicate across the enterprise, and look at risk to the strategy and link it to strategy. So if I’m not very far along in the ERM process, one of first things I would say, first steps would be get people together. Just pull them together that represent multiple aspects of the enterprise, multiple functions, get in the same room, get them talking.
Because I think there’s tremendous value if we get the dialogue and conversation going, and then try to structure that dialogue in the context of here is our business model, here are our core drivers, here’s what’s got to go right for those core drivers to continue providing value, ie, I’ve got to keep selling this product, which means I’ve got to get the raw material here to do it. I’ve got to get a sales force out there to sell it.
Look at the key things that must continue to go right and prioritise their thinking about the coronavirus impact as to how it will hit, what must go right for a core driver to stay in play. I know that sounds like a lot of academic speak. Basically, I’m saying figure out what’s most important to your business and then filter the conversation about coronavirus in the context of how it impacts the most important parts of our business. Because otherwise, I think the coronavirus is just this big thing. It’s just big, and it’s affecting everything.
I think we could end up with thousands of risks we could be worried about, and I think the task now is to say I can’t manage a thousand. Let me pinpoint the short list of what I’ve got to focus on first, and I think linking it to what drives my business and what’s got to go right for those drivers, I think considering the risk to those things is the way I’d want to structure the thinking. Because I think otherwise, we would wallpaper rooms of a conference room of all kinds of potential risks of coronavirus, and it can overwhelm us. Right now, we don’t want to get overwhelmed. We want to keep our eye on the most important parts.
Amato: Mark, that’s great. Obviously, it’s a wide-ranging topic. It’s ever-changing. Anything else to add in closing? This has been an excellent conversation.
Beasley: Well, thank you. We are managing a risk as we’re flying the plane, is the way I think about it, and so we are learning as we go, and I think it’ll be a learning experience that — hopefully this is going to calm down soon obviously for people’s lives perspective, but I’m hoping, too, we’ll use this, once it does calm down, as a catalyst to say there is value in how we manage risk, and I think the coronavirus shows us we could learn a lot that would help for the next big event. Because there likely will be some other thing we’re going to be dealing with at some point, so I think let’s look at it from the lessons we can learn as we go.
Amato: Mark, again, thank you very much.
Beasley: Thank you.