No Result
View All Result
SUBSCRIBE | NO FEES, NO PAYWALLS
MANAGE MY SUBSCRIPTION
NEWSLETTER
Corporate Compliance Insights
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
Corporate Compliance Insights
Home Risk

In Case of Fire, Break Glass: Be Prepared for Recessionary Times Using 12-Step Contingency Plan

Planning for the Worst During Good Times Can Help Companies Avoid Rash Decisions

by Jim DeLoach
April 5, 2022
in Risk
In Case of Fire, Break Glass: Be Prepared for Recessionary Times Using 12-Step Contingency Plan

For many industries and companies, 2022 was expected to be a time for recovery and renewal. While the war in Ukraine further stresses an already strained economy, few observers currently envision a recession. Nonetheless, as companies pursue today’s market opportunities, Protiviti’s Jim DeLoach explains how they must also evaluate their contingency plans for dealing with varying degrees of potential economic downturn.

It’s The Economy, Stupid

A fall 2021 global survey conducted by Protiviti and NC State University’s enterprise-wide risk management initiative found that the economy ranks as a top-five risk over the next 12 months and the next 10 years. So, for the 1,453 participating directors, CEOs and other C-suite executives, economic headwinds present a long-term concern. Likely sources of recessionary risk — many of them interrelated — include:

  • Uncertainty over central bank monetary and interest rate policies, driven by gargantuan central bank balance sheets
  • Ballooning government deficits and the specter of lasting structural inflation
  • Further inflationary pressures fueled by tightening labor markets and rising energy costs
  • Unknowns associated with nations’ struggles to transition from fossil fuels to renewables
  • Supply chain uncertainty: How long will it take for congested supply chains to recover; for companies to de-risk their sources of supply then meet recovering market demand?
  • Growing geopolitical tensions — the war in Ukraine — and the potential for regional conflicts and their economic ripple effects
  • Performance of the Chinese and other large markets
  • A lingering pandemic and the risks of future pandemics

Hope for the Best; Plan for the Worst

The point is that no one can say with certainty where the economy is going. The forces of globalization create an interconnected web of dependencies such that one or two dramatic events could set economic activity into a tailspin. There is the adage that there is no better time to prepare for an economic downturn than when the economy is healthy.

No doubt memories of the 2007-08 Great Recession have faded. For this and related reasons, it becomes a good idea to review the organization’s contingency plan so that management is prepared to act decisively on an established game plan if recessionary times are triggered by one or more sudden events.

Entering a distressed environment without a credible contingency plan that has been carefully vetted by executive management and the board can lead to knee-jerk reactions and serious errors in judgment that will reflect poorly on the quality of the organization’s leaders. I wrote on this very topic 19 months before the pandemic hit. But today, as dynamics have changed, I have penned a refresh. Below are 12 suggestions across four areas to consider when formulating a plan to stabilize and preserve the enterprise during an economic downturn:

Margin Management

  • 1. Evaluate headcount and hiring: In a distressed environment, management must focus on retaining the company’s “A” players. Objectively determined workforce reductions and changes to hiring practices (e.g., a hiring freeze) are imperatives. In today’s digital economy, a downturn may present an opportunity to eliminate jobs that can be displaced by technology with the attendant workforce reskilling and upskilling.
  • 2. Adjust compensation, benefit and incentive plans: Temporary revisions to these plans may be necessary to sustain financial health and stabilize operating margins. To engender support for implementing the plan, it helps to explain to key personnel the economic realities of a declining top line and the need for adjustments in the cool of the day before the distress begins.
  • 3. Cut back on selling, general and administrative (SG&A): While there is no one-size-fits-all approach, there are many opportunities to increase efficiencies and reduce these costs. During the pandemic, such cuts were commonplace as technology-enabled virtual environments replaced or reduced in-person meetings.
  • 4. Manage counterparty and strategic partner risk: Credit risk increases during a downturn, requiring management to carefully monitor credit policy, customer relationships and past-due accounts. Suppliers may face distress as well, necessitating attention on that front to address the risk of one or more significant suppliers ceasing operations. For struggling suppliers, management may want to consider the company’s options to enable a quick pivot if this were to happen.
  • 5. Review other options: It may also be tempting to stabilize margins over a given period through hedging raw material prices and locking in sales prices. Management may also consider outsourcing noncore activities that are not strategic to the business, e.g., certain HR support, accounting, manufacturing and transportation activities.

Balance Sheet Management

  • 6. Evaluate asset divestitures: Company assets should be categorized – underperforming versus high performing, strategic versus nonstrategic — and a plan developed for each asset category. Diverse, capital-intensive companies with underperforming assets or divisions can sell them to minimize or avoid losses, reduce debt and generate liquidity and working capital. High-performing, nonstrategic assets can also be sold to raise capital. The timing and immediate/long-term financial impact of asset sales should be considered along with the impact of restrictive debt covenants. Timing is a critical factor, as valuations diminish once the market is depressed.
  • 7. Focus on liquidity: Reduced cost structures and improved balance sheet health increase capacity to weather the storm. Cash is king. Monitoring and maximizing cash flow is a powerful differentiator in how a company emerges from recession relative to its competitors. Inventory levels should be monitored closely. McKinsey found that while revenue profiles of both resilient and non-resilient companies are not much different during a recession, the former report margin improvements whereas margins decline for the latter. Proactive cost cutting and a strong focus on leverage lead resilient companies into a superior liquidity position and support investments for a springboard recovery once the downturn ends.

Plan Execution

  • 8. Develop a hierarchy for cost-savings initiatives: The plan should offer a menu of cost-saving initiatives that could be implemented in the event of a downturn, with targeted cost savings in the current and subsequent projection year(s). Each initiative should be prioritized to create a scalable plan. Depending on the severity of the downturn, some or all the initiatives can be implemented. Initiatives might include reductions in headcount, marketing spend, expansion initiatives, consulting fees, bonus and benefit programs, travel costs, community support, charitable giving and auto allowances. They also might include discontinuing underperforming operations.
  • 9. Preserve relationships: Tough times call for focused efforts to sustain customer loyalty. Major customers require personal attention, more frequent communications and — most important — empathy. Account executives should be tasked with the responsibility to formulate personalized plans considering each customer’s financial health and specific needs. Strategic supplier relationships are important, too. Procurement may need to function differently as key suppliers deal with the effects of the downturn. Straight talk and forging mutuality of interests in the relationship with an eye toward regaining normalcy during the recovery may work best in achieving the “win-win” that will sustain the relationship. Working closely with customers and suppliers during challenging times establishes trust and gives the company an edge in sustaining valued relationships during the recovery.
  • 10. Communicate with the workforce: In times of economic uncertainty, employees like to know where they stand as they and the organization navigate the downturn. Straight talk and transparent communications preserve morale in tough times, as no news does not necessarily mean good news.

Recovery

  • 11. Sustain strategic investments: It is important to sustain key on-strategy investments during the downturn to preserve market image and branding and foster a strong recovery when the economy bounces back. Viewing market-facing expenditures as a pure cost can lead to deep cuts that undermine the strategy. It may make more sense to focus marketing on sustaining brand awareness during the recession. Investments in new technologies and research and development may also be necessary to drive innovation and sustain competitive position, particularly if there is exposure to digital disruption.
  • 12. Turn the lights back on: Postponing planned and discretionary investments in the face of significant uncertainty is an oft-used management prerogative, especially when the dark clouds of a downturn threaten. But as the recession nears its end, management needs to quickly ratchet investments back up as waiting too long can weaken the recovery.

Be Explicit

The above are a start. But to be truly effective, a contingency plan should sequence, prioritize and group actionable steps by function and operating units to establish clear ownership, authorities and accountabilities. It should determine key metrics to be managed against specified targets. Such metrics may include net operating income percentage, gross margin percentage, acceptable variance from budget, earnings per share, minimum cash balance and maximum debt level.

With targets identified, a financial forecast over an appropriate interval should be developed to establish a baseline. Different scenarios — revenue declines of, say, 10 percent and 20 percent — should be selected for applying the costs and expected benefits from the above suggestions to determine specific actions management and the board should take. This way, a playbook is created for each scenario.

Once the plan is completed, it should be reviewed and approved by the board of directors. Moreover, management should review the plan periodically — say, annually — to ensure it remains current, briefing the board following such reviews. When it is necessary to put the plan in play, its implementation should be supported by a project management office (PMO). The PMO can then monitor achievement of the assigned initiatives and provide status reports to executive management and the board.

Act Now: Develop Your Plan — Before Crisis Hits

Regardless of expectations for the economy over the next 12 to 24 months, it is both practical and prudent for executive management and directors to insist on developing a response plan to deal with a severe economic recession. Do this now, in the cool of the day. Because when crisis hits, time is of the essence. Formulating a contingency plan is simply a smart play. It equips the chief executive with a stronger narrative to share with the street and enables the board to demonstrate due care in discharging its oversight responsibilities to address a credible threat. The resulting decisiveness under fire will convey competence and rational business judgment to the company’s stakeholders.

 


Tags: Business Continuity PlanningCrisis Management
Previous Post

Stress Happens. Have You Checked on Your Well-Being?

Next Post

Market Data Provider London Stock Exchange Group to Acquire Digital Identity Verification Firm Global Data Consortium

Jim DeLoach

Jim DeLoach

Jim DeLoach, a founding Protiviti managing director, has over 35 years of experience in advising boards and C-suite executives on a variety of matters, including the evaluation of responses to government mandates, shareholder demands and changing markets in a cost-effective and sustainable manner. He assists companies in integrating risk and risk management with strategy setting and performance management. Jim has been appointed to the NACD Directorship 100 list from 2012 to 2018.

Related Posts

ACGS-strikes-riots-civil-commotion-report-2023_f

Strikes, Riots & Civil Commotion 2023 Report

by Corporate Compliance Insights
March 1, 2023

Is your business prepared for permacrisis? Drivers of Civil Unrest Strikes, Riots & Protests Expected to Test Business Resilience What’s...

The 16th ACES Compliance Summit

The 16th ACES Compliance Summit

by Aarti Maharaj
March 1, 2023

Lean-in and actively engage with today's most innovative and experienced trade compliance professionals during this 3 in 1 event. Featuring...

shifting sands risk

Shifting Sands: Leaders Are Feeling the Pressure of an Uncertain, Dynamic Risk Landscape

by Jim DeLoach
February 22, 2023

The global risk landscape has rarely been more unsettled over the past half-century than it is right now, and a...

jen colts

Football, Pain & Failing Upwards

by Jennifer L. Gaskin
February 8, 2023

This isn’t a story about business, third-party risk management, the DOJ or any of the other topics we normally cover...

Next Post
acquisition lseg gdc

Market Data Provider London Stock Exchange Group to Acquire Digital Identity Verification Firm Global Data Consortium

Compliance Job Interview Q&A

Jump to a Topic

AML Anti-Bribery Anti-Corruption Artificial Intelligence (AI) Automation Banking Board of Directors Board Risk Oversight Business Continuity Planning California Consumer Privacy Act (CCPA) Code of Conduct Communications Management Corporate Culture COVID-19 Cryptocurrency Culture of Ethics Cybercrime Cyber Risk Data Analytics Data Breach Data Governance DOJ Download Due Diligence Enterprise Risk Management (ERM) ESG FCPA Enforcement Actions Financial Crime Financial Crimes Enforcement Network (FinCEN) GDPR HIPAA Know Your Customer (KYC) Machine Learning Monitoring RegTech Reputation Risk Risk Assessment SEC Social Media Risk Supply Chain Technology Third Party Risk Management Tone at the Top Training Whistleblowing
No Result
View All Result

Privacy Policy

Founded in 2010, CCI is the web’s premier global independent news source for compliance, ethics, risk and information security. 

Got a news tip? Get in touch. Want a weekly round-up in your inbox? Sign up for free. No subscription fees, no paywalls. 

Follow Us

Browse Topics:

  • CCI Press
  • Compliance
  • Compliance Podcasts
  • Cybersecurity
  • Data Privacy
  • eBooks Published by CCI
  • Ethics
  • FCPA
  • Featured
  • Financial Services
  • Fraud
  • Governance
  • GRC Vendor News
  • HR Compliance
  • Internal Audit
  • Leadership and Career
  • On Demand Webinars
  • Opinion
  • Resource Library
  • Risk
  • Uncategorized
  • Videos
  • Webinars
  • Well-Being
  • Whitepapers

© 2022 Corporate Compliance Insights

No Result
View All Result
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe

© 2022 Corporate Compliance Insights

Welcome to CCI. This site uses cookies. Please click OK to accept. Privacy Policy
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT