It’s a mad, mad, mad, mad world

Last month, notwithstanding the rescue of First Republic over the weekend, markets seem to have caught their breath, following a March full of banking crises that threatened to spill over into the real economy. The end of the era of free money and hyper-low inflation, coupled with the impact of COVID, unprecedented government stimulus, and a fracturing world order, was bound to have its casualties. I suspect there are more to come.

A debate rages over whether these crises, and the policy responses, are something new in the world or more of the same. We at AlixPartners have been saying for years that something new is afoot. This is why we began the AlixPartners Disruption Index, which itself was launched at the outbreak of the pandemic in 2020.

Myriad disruptions arise, feed off one another, cascade around the world at an accelerated pace. They upend operations and knock strategies off course. Traditional economic theories are ill-equipped to diagnose and address these challenges. Traditional government policymaking seems not to work. The business playbook must be rewritten.

What does this mean for business leaders? Given the pace of change and the many unknown unknowns, decision-making is more critical. Every day, CEOs are confronted with “when it really matters” moments, when any misstep can prove fatal. This presents a management challenge of precisely how to navigate this environment. It’s also a leadership and psychological one, at both a personal level and for your team.

Last Autumn, I penned an article with my friend and colleague Lisa Donahue that was published in Harvard Business Review. In it, we urged companies to tune up their financial warning systems. This starts with understanding where your revenues are most vulnerable and what scenarios would endanger them. In addition, cash is king again, particularly in an environment of rising interest rates. Building working-capital-management initiatives into your plans is critical.

Recent crises in the banking sector were preventable, caused when banks failed to adjust their holdings to reflect the rise in interest rates. Hindsight is, of course, 20/20, but every CEO should be thinking about how to avoid something similar with their organization—a strategic bet that no longer fits business realities. It might be interest rates or the cost of capital; it might be assumptions about global trade or the availability of raw materials; it might be a bet on consumer behavior. For banks, rising interest rates had second and third order consequences. Adequate scenario planning and risk management could have mitigated many of these risks. What risks are hidden in your balance sheet? Your budget? Your operations?

The banking crisis also underscored the importance of trust—again, for every business, not just those in the financial sector. At a time when social media can turn customer and public opinion on a dime, it has never been more critical to build deep, trusting relationships with suppliers, customers, investors, and employees. In this environment, every CEO needs to be their own CCO, a chief communications officer. One slip, or one poor investor call, can have significant ramifications. The list of CEOs who have learned this lesson the hard way grows daily.

We are in the midst of a seminal rebalancing of the financial system, ushering in a prolonged period of higher interest rates and tighter credit. While banks will benefit from lending at higher rates, they are still sitting on trillions of dollars of unrealized losses. We have seen some of the fallout from that – including everything from fraud to mismanagement to collateral damage. You should prepare for additional fallout.

And the next crisis may not even be financial. Supply chain issues, another global pandemic, political conflict (both domestic and international) are all potential sources of disruption.  

How will you ensure that your organization not only survives those moments but excels during them?