Rethinking your plans in light of the unthinkable
To call these times turbulent is an understatement. Obviously reducing the risk to lives is paramount, but the unprecedented threat of the Covid-19 virus and the necessary response are already wreaking havoc across the economy, with some second and third order effects that may be felt for years. Yet, as bad as things are, it will be behind us one day. The actions companies take today can have a huge impact on how quickly they recover and how they are positioned to succeed when that day comes.
Many companies plan on an annual cycle and then, once plans are finalized, operate as if the goal is ‘make the plan at all costs.’ This is rarely a sufficient operating ethic (as Enron found out), but extreme circumstances really expose its flaws. A plan is only as good as the assumptions it is based on, and when those assumptions change, the plan needs to adapt.
Unfortunately, this ‘re-planning’ often occurs without the research, preparation and thoughtful cross-functional deliberation that characterize a good planning process. Blunt tools, like across the board cuts, treat the symptoms but rarely address the root causes. ‘We need to do something’ may be true, but this bias towards action can create long-term problems.
So, as companies prepare for the ‘new normal’ whenever it arrives, what can they do? From our experience there are a few things that every company should keep in mind:
- Don’t plan based on a point estimate of the future. Plan around a range of inputs and understand the impact of the drivers that are the most critical. This will allow you to have contingency plans in place for many circumstances (admittedly, maybe not a global pandemic) and enable a more rapid and targeted response.
We recall a client in the summer of 2008, where a CEO kicked off their strategic planning process with the advice: “Oil is at $140 per barrel and the experts say it will only go up. I want all your strategic plans to reflect the impact of $200 per barrel oil.” Needless to say, this turned out to be horrible advice. Oil prices fell to a low of about $54 per barrel in December of 2008, hovered around $100 per barrel for several years, then fell again into the $40 per barrel range in 2016, and now with both the softening of global demand and the disagreements at OPEC, oil is at $25 per barrel as of this writing. Worse yet, many of the same experts who said oil prices could ‘only go up’ are now projecting that they will fall further, with at least one expert suggesting oil prices could actually fall below zero: https://www.foxbusiness.com/markets/oil-price-could-fall-below-zero-analyst.
- Make tactical decisions with an eye to strategy. Clearly a crisis of this magnitude requires immediate action – much of it unpleasant. Across broad sectors of the economy, we are seeing facilities closed and employees laid off. But even as you make these difficult decisions, you should not abandon your strategy. If you have a clear understanding of your strategic priorities and core differentiating capabilities , for example, you might make different decisions on what investments to maintain, even as you are forced to cut costs elsewhere. Across the board cuts in ‘discretionary’ spending may meet your short-term needs to control costs, but they are rarely the right answer – if this spending was really discretionary, then why were you planning on it in the first place? A better way to think about this spending is to get to the root causes: why did we think it was a good idea when we budgeted for it and how have those assumptions changed?
- Sort out the permanent change from the temporary. The worst will be behind us one day, but whatever world we return to will not be exactly like the one we left. Some of the actions taking place in this crisis will lead to permanent changes, and not all of these are easy to anticipate. In a mild example, some companies may change their work from home policies after learning how to leverage web and video conferencing out of necessity. And who knows what the long-term implications are of ‘social distancing.’ In a more tangible example, hospitals may change their policies about stockpiling critical protective gear and medical equipment.
We are reminded of the disruptions to air travel following the September 11 tragedy. Most analysts assumed that once Americans regained confidence in airport security that air travel would return to pre-9/11 levels. But they missed the fact that the new security procedures changed how at least some air travelers made trade-offs. As a consultant living in Cleveland at the time, I traveled frequently to Detroit. Prior to September 11th, the way to minimize door-to-door time was to fly, especially for an experienced traveler who was comfortable showing up at the airport after boarding had started. After September 11, longer and less predictable security lines required arriving at the airport significantly earlier. As a result, those of us minimizing the door-to-door time now chose to drive rather than fly. And while overall air travel miles did recover to pre-9/11 levels, this reduction in volume on routes that are a 4-5 hour drive became permanent. Being thoughtful about what might change coming out of the current situation will allow you to plan for the future that will be, not the past that was.
- Understand the option value of flexibility. Too often, managers are rewarded, often implicitly, for displaying confidence. But the truth is that the future is always full of uncertainty. Acknowledging this should lead to a preference for actions that maintain or expand our options in the future over those that lock us into a course of action. In the 2008-2009 recession, for example, Honeywell made a corporate decision to manage through the downturn with furloughs, forced unpaid vacations and wage freezes rather than lay-offs. While lots of employees grumbled about the pay cuts at the time, this allowed Honeywell to rebound more quickly than other companies when the recovery occurred, as they did not have to hire or train employees. Understanding that the impact of decisions you make today is not just their short-term financial impact, but the value of the options that they create and/or close-out is critical to crafting your response to this crisis
Obviously, we don’t have all the answers. Every company faces a different situation and the near-term imperative to keep our employees and our communities safe outweighs any financial consideration. But make no mistake, the decisions you are making now have a long-term impact. Making those decisions in the right context and from the right perspective could make all the difference in how you are positioned for the recovery that will come.