Covid-19: The Acid Test of Business Management

It is often believed that the first step towards mitigating any risk is its deliberate and methodical acknowledgement. ‘What cannot be defined cannot be managed’ is a time-honoured prescriptive management axiom. Business organisations often prepare a truckload of “Enterprise-wide-risk-management” spreadsheets, which is a conscious step in this direction. It is often an evolving document, continuously updated by various functions of an organisation, taking into account risks arising from both internal and external environment.

The pandemic of Covid-19, which has catapulted the dynamics of the business world, is an acid test of organisational preparedness for unforeseen events. The effect of the pandemic, and the consequent reaction and response of business houses speaks volumes on how effective the risk frameworks were, in both letter and spirit. It is intuitive that response to one-off events cannot be held as the ultimate yardsticks of measuring managerial competence, because the universe of such events is too small to draw conclusive results from. However, to separate the wheat from the chaff, such events provide rich insights.

Business Continuity Plans must ideally draw references and instincts from risk frameworks. At a bare minimum, these plans must encompass how business continuity can be achieved, even when the internal and external environment may not be the most conducive. Business Continuity Plans are built on the philosophy that pre-visualisation of events aids in effective execution, once adversity hits the entry door. The Covid-19 situation reaffirms the fact that why reality may be a page borrowed from fiction books, and thus, why continuity planning exercise is indispensable, notwithstanding the level of complexity of organisations.

Companies which deal with clients from various countries and those belonging to diverse industries, are ordinarily expected to mitigate concentration risks associated with their client portfolios. A plethora of decisions with respect to pricing, credit policy, maintenance of working capital cycles, deployment of resources, costing and invoicing are viewed as being in extension to the risks so identified and mitigation measures adopted as a crystallised policy. Companies which failed doing this are left in the lurch, with their credit risks magnifying and probability of defaults associated with their customers experiencing peaks. Clogged accounts receivables do not make for a merry sight. While all businesses may not have the luxury of choosing their clients, they can certainly control the controllables.

In a similar vein, procurement departments of organisations must ensure that they have a steady pool of backup vendors, as ideal risk management tools. The depth of fallback options is an essential component of ensuring continued business operations, to the extent practicable. There is a fine line between trust and over-dependence, which needs to be respected. The success of a vendor partnership is also a function how well an organisation attempts to know its vendors. Vendor governance frameworks often also include the softer aspects, which may otherwise slip into the cracks.

The contracts to which an organisation is a signatory to, and the extent to which flexibility is accorded in or outside a contract, also has a major say in determining the potential impacts when the tides turn. The legal team, thus, has to maintain relations with the counterparties, even outside the restricted ambit of contracts. Contracts must not shy away from practicalities and contingencies by brushing them under the carpet. Signed contracts should be viewed only as one of the many means by which mutual understanding and support are established between contracting parties.

The Covid-19 situation also has posed questions with respect to agility and leanness of businesses. Organisations which have honed their ability to adopt faster to the situations which they have find themselves in have emerged as the clear winners. Corporates which are light on their feet, yet deep-rooted with respect to their core expertise have emerged as the shining beacons in times of apparent despair. The virtue of agility is helpful only when it percolates through all functions in a business. A minor bottleneck in one facet can cause adverse ripple effects to the other seemingly deft areas.

In the Covid-19 situation, various organisations have relooked at their business models, and have realigned their theory of business to suit the changed environment. With only minor incremental changes and tweaks, these organisations have managed to turn adversities into great sustainable opportunities for themselves. These decisions can be made, only if an organisation is both self-aware and market ready. While the flavour of spontaneity is the icing on the cake, thinking-on-the-feet, in the first place, requires sound feet to stand on!

In times like these, the maturity of even the sales and marketing functions get tested. Companies usually do not want to sound too pushy at this stage, and yet at the same time, want to ensure that they do not leave their customers hanging. Subtlety of communication thus is of paramount importance. Sales and marketing teams which were well prepared for such situations were the proverbial early birds who caught the worm. Preparedness in this direction yielded rich dividends. Organisations must endeavour to be soft partners for their customers as opposed to being hard vendors.

Covid-19 has also taught that saving for the rainy day is critical. A war-chest can always be handy for minimising the impact of tough situations; the importance of sound liquidity can hardly be over-emphasised. Organisations are now running helter-skelter to extend their cash runways, which in an ideal world scenario, would have been achieved by, inter-alia, stronger internal processes. This pandemic can serve as a very good reflection juncture for businesses. The reconciliation between “what is” and “what could have been” can never be purely arithmetic. Yet, the journey from EBITDA to Corona-adjusted-EBITDA reveals more than it hides. In times of crisis, it is not always feasible to go back to drawing board. Perhaps, that is why, foresight is a necessity and hindsight is a luxury. Isn’t that why risk frameworks are built in the first place?

(Author Urvish Paresh Mehta is a Chartered Accountant by profession, with an equal liking for words and numbers. People and processes have always fascinated him. He currently works as a Strategic Business Advisor and Investment Banker at KNAV, an organisation having presence in six countries worldwide)