Managing in uncertain times

This article is extracted from the longer piece that I wrote that can be found at https://www.crowe.com/uk/insights/non-profits-managing-in-uncertain-times

Uncertainty is ever present and its management sometimes becomes routine. At other times uncertainty creates a real crisis that requires immediate attention. Threats can be existential and circumstances are unprecedented and the scale and impact of risks and challenges make them different to routine challenges. The speed at which events unfold, change and impact does not allow time to interpret them using the usual approaches. The only certainty is that there will be even more change in the future and that this will continue to impact in a number of ways many of which will be new and unprecedented.?This means that whilst the immediate need may be issues such as protecting people and survival of the organisation there will be need to consider both the near term as organisations develop coping and stabilisation strategies and also longer term strategies to optimise their position post recovery.

Many organisations learned how to adapt and manage turbulent times during the downturn in 2008 to 2009. There was recognition that emotional stress had to be factored in and this is even more important now.

The continued uncertainty and volatility of income, instability in markets along?with new cost considerations?has dramatically increased the exposure to liquidity risk; underlining how vital it is to have robust assumptions behind forecasts.?When it is unclear how long a cash crisis may last it is important to consider needs for both now and later. Some reserves are inevitable held on the stock markets and as investment income and market values fall the challenges are even greater.?It may be better to borrow against the investments rather than crystallise them in a downturn but this needs careful consideration of loan covenants and other factors that could cause problems in the future.

When times get hard non profits that have free reserves will need to consider if, when and how they use them. If free reserves are seen to be the umbrella for a rainy day then the decision is do we stay indoors when it’s raining or do we use the umbrella. It’s also important to think how long it’s going to rain for and how many umbrellas are available.??

The extent of uncertainty differs, at one end many of the perceived unknowns are in fact “knowable” and at the other there can be massive almost total uncertainty. In between lies the more common state of uncertainty where there are a number of possible alternatives that can be planned for.??

?Strategy must be able to deal with uncertainty and at a time when predicting the probable is difficult to say the least, strategies and tactics have to be developed on the premise that several different outcomes are possible.?If there is total uncertainty which can happen when many issues interact it becomes virtually impossible to predict or even identify all the possible outcomes. In such cases strategy and planning is focused on recognising that this stage of total uncertainty is often transitory and whilst firefighting and dealing with the present it is also important to try to identify triggers and trends and be ready to act decisively at the right time.

?In times of existential threats there is need to review and perhaps change plans at very short notice – sometimes daily. Whilst the short term is important it is also important to consider the longer term and to think hard about indirect as well as direct implications of unfolding events. There is need to take into account events both beyond the typical planning horizon and events that are unfolding in real time.

Organisations have developed action plans for different scenarios by setting and monitoring trigger points along with trend analyses. These make it possible for the organisation to decide when plan A or plan B needs to be implemented. For example, ‘if income looks like it is going to drop by X we will do Y…’

A focus on high impact risk is important, but one should not forget how a lower significance risk can escalate to a very high impact risk because of risk dependencies. An isolated concentration on value at risk can sometimes result in not spotting ‘risk contagion’ – in other words where one low impact risk leads to another and another so that the cumulative impact is catastrophic. Many studies have shown that most business failures are the result of a series of small, linked events rather than a single large event. If organisations only look at the big risks they can often end up lethally ill-prepared to face the interaction of separate adverse events.

Since risks invariably interact it is important to think about them in clusters rather than individual risks.?This is particularly relevant in times of uncertainty. Some risks are obvious as possibly having a direct and often immediate impact whilst others have and indirect impact and it is important not to dismiss these.

Traditional risk registers and heat maps have less relevance in times of great uncertainty and it is important for decision makers to carefully consider implications and actions and what estimates and assumptions are being used, their limitations and how they might need to change. There needs to be discussion about triggers and early warnings, how actions need to be prioritised, what risks can be mitigated, which need to be accepted and how they will be managed.

Many think that, in times of grave uncertainty where the risks are too difficult to identify, risk management has little value. They refer to the unknown unknowns but in reality there are many known unknowns and effective risk management helps organisations manage the known unknowns whilst recognising that there are unknown unknowns. It also puts organisations into a better position to manage the unknown when it becomes known and should also help earlier identification of direct and indirect risks.

There is always benefit in taking a good hard look at how efficiently activities are carried out and services are delivered.?Ways of working have necessarily changed and will continue to evolve. leaders must act as catalysts for change when it is needed and be ready to take difficult decisions.

Organisations often do all these things but seem to be averse to looking at the fundamental business model and considering how fit for purpose it is. As income streams change and cost structures evolve it is important to consider whether the fundamental operating model can be improved. Strategic alliances, collaborative working and mergers need to be on the agenda. There are no stereotype answers but try and avoid dismissing things based on previous and sometimes biased analyses. New times require new responses.

Organisations need to avoid knee jerk reactions whilst recognising that change is inevitable. It is important to act decisively balancing the need to consider hypotheses and options with the urgency that may be required. There is a need to ensure that the response is flexible enough and can be adapted as the environment changes whilst also recognising that responses may need to be urgent and immediate. There are a number of steps before launching into responses. Simplistically this can be broken into three key areas:

Early and quick thinking stage – This requires identifying the right people to think about the key uncertainties that can impact the organisation. We have seen organisations set up effective “nerve centres” that consider what is needed to keep on track.?Remember to consider direct and indirect drivers and short and long term implications.?Avoid group think and be ready to look beyond the obvious identifying both risks and opportunities.

Consider the strategic choices – This requires revisiting earlier strategic plans and tactics. Consider the different scenarios and the strategic choices and options for action. Are the right structures, resources and procedures in place to first make the right choices and then to capitalise on them. There need to be triggers for actions as scenarios become reality and ways of identifying warning signs and alerts. This stage requires analyses and interpretation of the choices that are available and the resources needed to make them.

Taking action – As the organisation implements its plan and tactics there will be need to have in place a strong change enablement framework that considers both the organisational and people transitions that may be necessary. There is a need to remain nimble and flexible and recognise that the first two stages may not have come up with the right answers and that the options and actions may need to change accordingly. As organisations have their resilience tested they will focus on what is nice to have and what they must have. Areas seen as discretionary spend such as training, marketing and service development are often the first to be cut but it is important not to forget the importance of ensuring that organisations are well positioned for the period of recovery and to recognise that there will be yet another new normal.

As difficult as it may seem during a crisis – situations improve and the organisations that will be best placed are those that make the right decisions through the periods of uncertainty.?The key is to think carefully about the future and be ready to face challenges and respond to the opportunities as they arise.